Lumber tariff could put squeeze on builders

The Scotsman Guide - Victor Whitman - 28 April 2017

The Trump administration's decision this past week to slap a duty on Canadian softwood lumber could dampen the pace of U.S. homebuilding even as country faces a shortage of homes.

"It [the tariff] will probably cost over the course of 2017 a little more than 8,200 jobs in terms of reduced construction activity and the spillover it has on downstream sectors," Robert Dietz, the National Association of  Home Builders (NAHB) chief economist, told Scotsman Guide News.

Canadian lumber accounts for about a third of all lumber consumed in the U.S., and most of it is used to build American homes. The Commerce Department announced it would impose an average 20 percent duty on Canadian softwood. According to NAHB, the average cost of a newly built home will rise by around $3,000.

NAHB estimates that Canadian imports will be reduced by 1.2 billion board feet annually. American producers would be expected to increase by 830 million board feet, thus creating a shortfall that will boost the costs by around 6 percent for consumers.

NAHB has estimated that an additional $1,000 cost on a home disqualifies 150,000 buyers from obtaining a mortgage. This would mean that less homes were built, particularly lower-end homes that economists say are badly needed to address a tight housing market, but which are less profitable to build.

Builders are already facing rising labor costs and a shortage of available building lots, which have eaten into their profit margins.

An uneven playing field?

The impact of the tariff is a matter of dispute, however. Mill producers say that Canada’s subsidized industry has flooded the U.S. market for years to the detriment of U.S. producers. The lumber industry also says that the costs will rise negligibly, about $150 to $350 per home, and almost all that cost will be absorbed by the builders.

"We just fundamentally reject the idea that we should put at risk some 360,000 forestry workers and their communities just because the home builders are complaining about possibly a $150 to $350 cost increase to build a home," said Zoltan van Heyningen, the executive director of the U.S. Lumber Coalition.

American producers have long complained that Canada's system puts American producers at a disadvantage. In Canada, the provincial governments typically own the standing trees, and the producers pay royalties to the provincial governments for the fiber rights. American producers have claimed for years that Canada keeps the royalty payments artificially low, and overproduces even in hard times, as a means to support the forestry industry and create jobs in Canada. The Canadian system is not bad per se, van Heyningen said, but does put American producers at a great disadvantage. In America, the producers typically own their logs and must price and produce according to market conditions.

The latest dispute traces back to the expiration of the 2006-2015 U.S.-Canada Softwood Lumber Trade Agreement. The U.S. and Canada attempted to negotiate a settlement during the last year of the Obama Administration, which failed. Since the end of the agreement, the Canadian market share increased 3.6 percentage points to 34.1 percent, according to the U.S Lumber Coalition. Mill owners petitioned the Commerce Department in November, which initiated the duty.

"The objective here is allow our industry to operate on a level playing field," van Heyningen said. "It means they will produce more lumber because they will not suffer the weight of unfair trade. You will see a shift of more U.S. workers making more U.S. wood to build U.S. homes, but the availability doesn't change."