Article / 25 April 2017 at 12:57 GMT

Trump slaps troublesome tariff on Canadian lumber

Managing Partner / Spotlight Group
United Kingdom
  • Trump administration imposes 20% tariff on Canadian softwood lumber imports to US
  • Canadian dollar has fallen against USD by 0.52% since Friday
  • Lumber futures gained 1.2% on Monday after the tariff news
  • Lumber a key material for home building

Lumber
 US officials say Canada unfairly subsidies its 
timber producers. Photo: Shutterstock
 

By Stephen Pope

US commerce secretary Wilbur Ross said on Monday that the US will impose duties averaging 20% on imports of Canadian softwood lumber. The measure is a response to long-running claims by the Americans that Canada has been unfairly subsidising it domestic lumber producers.

This step will affect about $5.7 billion worth of imports of the construction material and comes as the US, Canada and Mexico prepare to renegotiate the 23-year-old North American Free Trade Agreement known as Nafta.

News of the tariff triggered a swift drop in the Canadian dollar against the USD, with CAD losing 0.52% from levels seen on Friday.
USDCAD
Source: www.investing.com , Spotlight Ideas 

Secretary Ross told Reuters that the Canadian authorities were retaliating against the US well before the decision to impose the lumber duties was taken as they had moved to place a quota on imports of highly filtered milk protein products from the US used by cheesemakers. Indeed, last week president Donald Trump labelled Canada 's dairy protections unfair.

The US administration has reported that several Wisconsin dairy producers faced the loss of their farms as a direct result of the Canadian restrictions. There have reportedly been episodes of Canadian operators looking to scalp US farmers by offering to buy the affected farm equipment for 5 cents on the dollar.

Trade in trees turns testy

Lumber producers in the US petitioned the Commerce Department in November, while president Barack Obama was in office, to investigate subsidies paid to Canadian competitors who procure timber from government lands at prices far cheaper than US companies pay. American lumber producers typically operate on private land.

The Canadians, of course, are not taking these accusations lying down. Natural resources minister Jim Carr and foreign minister Chrystia Freeland issued a joint statement calling the accusations from the US commerce department "baseless and unfounded" and saying the duties would simply serve to raise US home construction costs.

The chart below captures the general trend that has seen lumber prices rise over 20% in the year to date as many in the market had anticipated that Trump's election would lead to a trade dispute. Lumber certainly has found new momentum over the past few days.
Lumber
Source: www.investing.com , Spotlight Ideas

Lumber futures should continue to rise, but the US announcement had been anticipated, so do not be surprised if the momentum starts to fade as the week progresses. (See a related trade view here.)

Average losses from housing shares tend to be small when lumber prices rise because a jump in the material prices frequently stems from increasing housing demand. That, however, is not the case this time. If home builders import their lumber from Canada, this will likely hit their bottom lines directly.

Short-term spikes in the lumber price have weighed on housing shares in the past, so any sense that the power behind lumber futures is fizzling, or of a resolution to the dispute, one could be tempted to look at oversold home builders as a short-term buying opportunity.

Stacked timber
 The last time the US imposed tariffs on Canadian lumber, in 2006, 
Canada tripled its exports to China. Photo: Shutterstock

Ross said the need for the lumber duties and Canada 's dairy restriction was "not our idea of a properly functioning free trade agreement."

One reason this is a problem is that Nafta never dealt with the softwood lumber issue or Canada's largely closed dairy market. However, a central pillar of the Trump election campaign was to review and renegotiate Nafta in a way that would reduce America’s goods trade deficits of $63 billion with Mexico and $11 billion with Canada last year.

Clearly this dispute needs to be resolved though the US, as the largest partner in Nafta, is unlikely to yield any ground, given the rhetoric from the new administration.

However, one should be cautious as the last time the US imposed tariffs on Canadian lumber in 2006 Canada’s response was to triple its exports to China. The US will be hoping that won't be an option for Canada this time as the Chinese economy is not growing at the gangbusters rate seen in the past. Certainly the Canadian government must tread carefully as only 4.3% of its exports go to China versus 75.9% to the US.

Ice-hockey referee
 Who's gonna stop this fight? Photo: Shutterstock


— Edited by John Acher

Stephen Pope is managing partner at Spotlight Ideas


2y
Michael O'Neill Michael O'Neill
First come the trees then the milk and eggs.Now Trump can prove he is the Fair Trade -Not Free Trade Champion . He figures that picking on two rather small trade items with Canada, he will scare China

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