Canada–U.S. Softwood Lumber Trade Revisited: Substitution Bias in the Context of a Spatial Price Equilibrium Framework
Abstract:Softwood lumber trade between Canada and the United States has been characterized by various trade restrictions. Many studies have attempted to quantify the effects of such sanctions, modeling softwood lumber as a single, homogenous commodity, although recent research suggests that this may be a misleading assumption because softwood lumber products vary. In this article, we address the problem of “substitution bias” in estimates of the effects of trade restricting policies. A spatial price equilibrium model is used to examine the effects of import duties on Canadian lumber, comparing these with the effects of an export tax and quota. By controlling for substitution bias, our estimates indicate that a larger share of the tariff burden is placed on U.S. consumers, with Canadian producers suffering less injury compared to estimates based on the traditional assumption of a homogenous product. In addition, by comparing the net impact associated with the alternative policy regimes, a policy equivalence is found. Results suggest that the short-run impact of a trade restriction is largely independent of the policy regime incorporated, with the collection of quota rents or tax revenues determining overall winners and losers.
Document Type: Research Article
Publication date: 2006-08-01
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