The Law of One Price in the Trade of Forest Products: Co-Integration Tests for U.S. Exports of Pulp and Paper

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Abstract:

According to the law of one price, the export price of a well-defined commodity should be the same, regardless of destination, and the import price should be independent of the country of origin. This law has been used as a maintained hypothesis in several models of the international trade of forest products. Here, the law was tested with data on United States exports of pulp and paper, which represented 54% of the value of all forest product exports in 1988. The test was done with co-integration methods and with data from January 1978 to December 1988, for six European countries and Japan. The law of one price could not be rejected in 52 of the 56 pairs of price series analyzed. Thus, markets for United States pulp and paper exports were generally competitive, so that prices tended to converge in the long run. Consequently, spatial equilibrium models that do not distinguish between exports to different countries could be used in this context. Furthermore, the 1992 European unification should not affect markedly the prices obtained by United States exporters in different countries. Finally, the incomplete pass-through of exchange rates to export prices found in previous studies is likely to be due to demand and supply shifts induced by exchange rate realignments, and not to monopolistic forces. For. Sci. 38(3):539-553.

Keywords: Europe; International trade; Japan; competition; forest products; markets; price discrimination

Document Type: Journal Article

Affiliations: Research Specialist, Pellervo Economic Research Institute, Revontulentie 8A, 02100 Espoo, Finland

Publication date: August 1, 1992

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