1*1 - library and archives canadacollectionscanada.gc.ca/obj/s4/f2/dsk3/ftp04/nq25051.pdf ·...
TRANSCRIPT
National Library 1*1 of Canada üiiliath&que naibnale du Canada
Acquisitions and Acquisitions et Bibliographic Services services bibliographiques
395 Weilington Street 395, RH) Wellington Ottawa ON K I A ON4 W w a O N K l A W Canada carda
The author has granted a non- exclusive licence allowing the National Library of Canada to reproduce, loan, disûi'bute or sell copies of this thesis in microfurm, paper or electronic formats.
The author retains ownenhip of the copyright in this thesis. Neither the thesis nor substantial extracts fkom it may be printed or otherwise reproduced without the author's permission.
L'auteur a accordé une licence non exclusive permettant a la Bibliothèque nationale du Canada de reproduire, prêter, distri'buer ou vendre des copies de cette thèse sous la fonne de microfiche/^ de reproduction sur papier ou sur format électronique.
L'auteur conserve la propriété du droit d'auteur qui protège cette thèse. Ni la thèse ni des extraits substantiels de celle-ci ne doivent être imprimés ou autrement reproduits sans son autorisation.
Gaston Abstract Page ii
Abstract
This thesis investigates the Japanese demand for wood by product type, by country
of origin, and by species, over the period 1965 to 1993. The product types include
softwood and hardwood logs, softwood and hardwood lumber, and wood-based panel
products (plywood, fibreboard and particle board). In addition to estimating the own-price
effects on quantity demanded for individual wood product imports, substitution effects
within these product categories are documented to the degree possible, including
Japanese substitution with domestic product and non-wood alternatives.
The research makes two important contributions. The first is to offer Japanese
demand descriptors at a level of wood product detail which is not found in the existing
literature. The second is to review and critique the existing methodologies available for
investigating substitution effects among disaggregated products (such as softwood lumber
by species). As it was discovered that the available approaches are inadequate for
properly dealing with product detail, strong recommendations for further research are made
for improving Our ability to document cross-price effects.
The primary conclusion of the study is that individual wood products, by product
type, by country of origin, or by species, behave as distinct economic units. This suggests
that studies which aggregate wood products into broad categories such as "softwood
lumbef risk obscuring important dimensions of both forest products' trade and forest
policy.
Gaston Table of Contents Page iii
TABLE OF CONTENTS
ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE OF CONTENTS iii
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIST OF TABLES v
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIST OF FIGURES vi
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACKNOWLEDGEMENTS vii
INTRODUCTION
1.1 Motivation for the Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Background 3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 ScopeoftheResearch 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 The Research Problem - 8
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Objectives 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 Hypotheses 10
1.4 Organization of Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
LITERATURE REVIEW ON LOG AND LUMBER SUBSTITUTIONS AND IMPLICATIONS FOR FURTHER RESEARCH
2.1 The Econometric Estimates of the Pnce Elasticity of Demand . . . . . . . . . . . . . . . 12 2.1.1 Estimates of Wood for Wood Substitutes . . . . . . . . . . . . . . . . . . . . . . . . 12 2.1.2 Estimates of Non-Wood for Wood Substitutes . . . . . . . . . . . . . . . . . . . . 16
2.2 Parametfic Demand Elasticity Estimation Techniques . . . . . . . . . . . . . . . . . . . . . 20 2.3 Implications for the Present Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
THE MARKET FOR WOOD PRODUCTS IN JAPAN
3.1 The Japanese Domestic Timber Resource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.2 The Use of Japanese Domestic Timber Production . . . . . . . . . . . . . . . . . . . . . . . 44 3.3 lrnports of Wood Products into Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.4 Japanese Processing of Domestic and lmported Logs . . . . . . . . . . . . . . . . . . . . . 57 3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
THEORET CAL FOUNDATIONS AND IMPLICATIONS FOR THE EMPIRICAL
Gaston Table of Contents Page iv
ANALYSIS OF THE JAPANESE DEMAND FOR WOOD PRODUCTS
4.1 Theoretical Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.2 The Empirical Model . . ............................................ -71
. . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Data Sources Used in the Empirical Analysis 73
5.0 EMPIRICAL RESULTS
5.1 Direct Estimation of Japanese Price Elasticities of Demand for Wood lmports . . 85 5.2 Estimation of the Amington Two-Stage Model of the Japanese Demand
for Total Wood lrnports ......................................... -93 5.3 Cornparison of the Two-Stage and Direct Estimates of the Own-Price
Elasticities of Oemand for Wood Product lmports in Japan .............. 100 5.4 Non-Wood Substitution in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Sumrnary 105
6.0 DISCUSSION OF RESULTS
6.1 Japanese Wood Product Imports . Aggregated by Product Type . . . . . . . . . . . . 108 6.2 Japanese Softwaod Lumber lmports. Aggregated by Source . . . . . . . . . . . . . . . 112 6.3 Japanese Softwood Lumber lmports from Canada. Aggtegated by Species . . . 116 6.4 Japanese Softwood Lumber lmports from Non-Canadian Sources .
Aggregated by Species . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 6.5 Japanese Softwood Log. Aggregated by Source . . . . . . . . . . . . . . . . . . . . . . . . 127 6.6 Japanese Softwood Log. Aggregated by Species . . . . . . . . . . . . . . . . . . . . . . . . 130 6.7 Japanese Hardwood Lumber and Log Imports. Aggregated by Source . . . . . . . 134 6.8 Japanese Panel Product Imparts. Aggregated by Source . . . . . . . . . . . . . . . . . . 136
7.0 CONTRIBUTIONS. LIMITATIONS AND IMPLICATIONS FOR FURTHER RESEARCH
7.1 Research Contributions and Implications for the BC Forest lndustry . . . . . . . . . 141 7.1.1 Summary of the Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
. . . . . . . 7.1.2 Implications of the Research for BC Wood Product Marketing 144 . . . . . . . . . . . . . . . . 7.1.3 Implications of the Research for BC Forest Policy 150
7.2 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 7.3 Implications for Further Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Gaston List of Tables Page v
Table 2.1 Table 2.2 Table 2.3 Table 2.4
Table 2.5
Table 2.6 Table 2.7
Table 2.8
Table 2.9
Table 4.1 Table 4.2 Table 5.1 Table 5.2
Table 5.3
Table 5.4 Table 5.5
Table 5.6
Table 5.7
Table 5.8
Table 5.9
Table 7.1
LIST OF TABLES
Own-Price Elasticity of Demand for Softwood Lumber in N.A. . . . . . . . . . . . . . 13 Cross-Price Elasticity of Demand for Similar Lumber in Dfferent Regions . . . . 15 Cross-Price Elasticity of Demand for Different Cumber . . . . . . . . . . . ....... 16 Own-Price and Cross-Price Demand Elasticities for Construction Materials:
McKillop. et a l . . . . . . . . . . . . ................................ 17 Own-Price and Cross-Price Demand Elasticities for Construction Materials:
Rockel and Buongiorno . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Own-Price and Cross-Price Demand Elasticities for US Softwood Lumber ... 19 Own-Price and Cross-Price Demand Elasticities for Selected
Canadian Construction Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Elasticities of ûemand of US Hardwood Plywood lmports
....................................... by Country of Origin 33 Elasticities of Demand of US Softwood Lumber lmports from Canada
BySpecies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Japan Tariff Association Data. Converted Codes . . . . . . . . . . . . . . . . . . . . . . -75 B.C. Offshore Lumber Exports Relative to the Whole of Canada (000s m3) . . -83 Estimates of the Japanese Demand for Aggregated Wood Imports ........ -86 Estimates of the Japanese Demand for Selected Disaggregated
WoodProducts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Estimates of the Constant Elasticity of Substitution Over Varying Degrees
of Wood lmport Aggregation. Correcting for Serial Correlation . . . . . . . 94 Calculated Constant Elasticity of Substitution Weights from Table 5.3. . . . . . . 96 Cochrane-Orcutt Estimates of the Japanese Demand for Selected Aggregations of Wood Imports. Utilizing CES Quantity and Price Indices . . . . . . . . . . . . . . . 96 Calculated Own- and Cross-Price Elasticities of Demand for the Japanese
lmports of al1 Wood Products by Type . . . . . . . . . . . . . . . . . . . . . . . . . 98 Calculated Own- and Cross-Price E lasticities of Dernand for the Japanese
lmports of Softwood Lumber by Country of Origin . . . . . . . . . . . . . . . -99 Calculated Own- and Cross-Price Elasticities of Demand for the Japanese
lmports of Canadian Sohood Lumber by Species . . . . . . . . . . . . . . 100 Cochrane-Orcutt Estimates of the Japanese Demand for Aggregated Wood
Imports. With the Inclusion of a Non-Wood Regressor . . . . . . . . . . . . 105 Destination of Canadian Softwood Lumber and Log Exports. 1992 . . . . . . . . 146
Gaston List of Figures Page vi
Figure 1.1 Figure 1.2 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Figure 3.5 Figure 3.6 Figure 3.7 Figure 3.8 Figure 3.9 Figure 3.10 Figure 3.11 Figure 3.12 Figure 3.13 Figure 3.14 Figure 3.15 Figure 4.1
Figure 4.2
Figure 4.3 Figure 5.1
Figure 5.2 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Figure 6.5 Figure 6.6 Figure 6.7 Figure 6.8 Figure 6.9 Figure 6.10 Figure 6.1 1 Figure 6.1 2 Figure 6.13 Figure 6.14 Figure 6.15
LIST OF FIGURES
Random Lengths S-P-F Lumber Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 PNW Douglas Fir Lumber Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
................. Distribution of Man-Made Forest by Age Class (Japan) - 4 2 Japanese Domestic Log Production by Species . . . . . . . . . . . . . . . . . . . . . . -43 Japanese Domestic Log Production by Ownership ..................... 44 Japanese Domestic Log Supply by Utilization . . . . . . . . . ................ 46 Japanese Housing Starts by Number ................................ 48 Japanese Housing StartsbyArea .................................. 48 Japanese lndustrial Wood Supply ................................. -49 Japanese Self-Sufiiciency in Logs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Japanese Self-Sufficiency in Lumber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53 Japanese Self-Sufficiency in Panel Products . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Japanese lmports of Softwood Lumber and Logs. 1993 . . . . . . . . . . . . . . . . . 55
. . . . . . . . . . . . . . . . . Japanese lmports of Softwood Lumber and Logs. 1965 55
. . . . . . . . . . . . . . . . . Japanese lmports of Hardwood Lumber and Logs. 1993 56
. . . . . . . . . . . . . . . . . Japanese lmports of Hardwood Lumber and Logs. 1965 56 Japanese Lumber Shipments by Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58 Nominal Price of Japanese lmports of Canadian Sitka Spruce
Lumber. BySize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Nominal Price of Japanese lmports of Canadian Yellow Cedar
Lumber. BySize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Non-wood Housing Starts in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Obsewed versus Predicted Values of Quantity Demanded of Aggregated SoftwoodLumberlmportsbyJapan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Number of Non-Wood Housing Starts in Japan . . . . . . . . . . . . . . . . . . . . . . . 104 Japanese lmports of Wood Products by Major Product Types . . . . . . . . . . . . 108 Japanese lmports of Softwood Lumber by Source . . . . . . . . . . . . . . . . . . . . . 113
. . . . . . . . . . . . Japanese lmports of Canadian Softwood Lumber by Species 117 Japanese lmports of US Softwood Lumber by Species . . . . . . . . . . . . . . . . . 123 Japanese lmports of Former USSR Softwood Lumber by Species . . . . . . . . 125 Japanese lmports of N X h i l e Softwood Lumber by Species . . . . . . . . . . . . . 126
. . . . . . . . . . . . . . Japanese lmports of "Other" Softwood Lumber by Species 128 Japanese lmports of Softwood Logs by Source . . . . . . . . . . . . . . . . . . . . . . . 129 Japanese lmports of US Softwood Logs by Species . . . . . . . . . . . . . . . . . . . . 131 Japanese lmports of Former USSR Softwood Logs by Species . . . . . . . . . . 133 Japanese lmports of Hardwood Lumber by Source . . . . . . . . . . . . . . . . . . . . 135 Japanese lmports of Hardwood Logs by Source . . . . . . . . . . . . . . . . . . . . . . 137 Japanese lmports of Veneer Sheets by Source . . . . . . . . . . . . . . . . . . . . . . . 138 Japanese lmports of Plywood by Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
. . . . . . . . . . . . . . . . . . . Japanese lmports of Particle Board and Fibreboard 140
Gaston Acknowledgments Page vil
I gratefully acknowledge Dr. David Haley as my supervisor, for his continued guidance, encouragement and support. As a side, special appreciation is extended for Dr. Haley's faith in rny teaching abilities, arranging for me to instruct FRST 31 9 (Forestry Economics) while he was on sabbatical.
I would also like to express my appreciation to the members of my advisory cornmittee, being Dr. Clark Binkley, Dr. David Cohen and Dr. Russell Uhler.
Special thanks are also due to Dr. llan Vertinsky and Dr. Casey Van Koonten at the Forest Economics and Policy Research Unit (FEPA), Dr. William Stanbury at the Faculty of Commerce and Business Administration, and Dr. Bill Wilson at the Canadian Forest Service for their comments and advice on many aspects of my research.
As for the many friends and colleagues that have helped make the long process of doing a Ph.0. bearable, I can only Say that I could never have done it without your moral support. Although the people that I have had the pleasure to get to know over the years are too numerous to mention, I wish to single out two individuals which have made particularly strong impressions on me, both in a professional and a friendship capacity. Ramvir Singh and Paul Mitchell-Banks, I thank you!
I am more than grateful for the financial assistance 1 have received to reduce the burden of doing a graduate degree. Appreciation goes to the University of BC for the Donald S. McPhee Fellowship, to FEPA for the Forest Economics and Policy Analysis Research Grant, and for the Canadian Forest Service for the FRDA Research Grant.
Finally, I wish to express my strongest appreciation of al1 to rny parents, Lloyd and Suzanne. Without their love, support and encouragement, 1 would never have drearned of such an ambitious undertaking.
Gaston Chapter One Page 1
Chapter 1 Introduction
This thesis investigates an aspect of Pacific Rim log and lumber trade which has
received surprisingly little attention to date: factor demand estimation with recognition that
wood inputs are irnperfect substitutes in production. While there have been many studies
which have estimated demand parameters for w o d inputs, virtually al1 of them have used
highly aggregated trade data (such as "soffwood lumber"). The present study investigates
demand substitution by pmduct, by mgion, and by species.
1 1 Motivation for the Research
Hiding wood characteristics through data aggregation tends to obscure important
dimensions of both forest products' trade and forest policy.
A good example of this problem is illustrated by US allegations that BC export
restraints on softwood logs constitute a subsidy for BC sawmills. By aggregating al1
softwood logs, there is a danger of obscuring the log export pattern which might exist in
the absence of export restrictions. Kalt's (1994) submission to the US Department of
Commerce in the Canadalus sofhivood lurnber countervail case offers a good example of
how to improve trade analysis with less aggregated data. He argues that British Columbia
(BC) export restraints, which primarily affect coastal logs, including a significant proportion
of logs from which clear and merchantable grade lumber can be extracted, do not
constitute a subsidy for interior sawmills producing mostly lower grade construction lumber.
Another example is offered by the determination of allowable annual cuts within the
Gaston Chapter One Page 2
context of BC's sustained yield policy. Haley and Luckert (1 994) and van Kooten (1 993),
for example, argue that meeting the objectives of sustained yield does not simultaneously
meet the objectives of sustainable development. In short, choosing forest rotations andfor
silvicuItural regimes which maximize volume, without any reference to value, does not
necessarily promote a strong, forest-based economy. If one adds goals to incorporate
non-timber values in forest management, ttie inherent problems in focusing on physical
volume alone become further amplified.
There are a number of important questions which require an investigation of trade
related to wood species and sources of origin. For example, will BC's second growth
Douglas-fir (Pseudotsuga menziesii(Mirb.) Franco) be able to compete with New Zealand's
plantation produced clear radiata pine (Pinus radiata O. Don)? More generally, where have
BC's comparative advantages lain in the past, and where are they likely to lie in the future?
What will be the economic consequence of BC's transition to a second growth resource,
particularly in light of increased environmental pressures to reduce the forest land base?
To what degree will non-wood materials substitute for existing forest products produced
in BC, and what will be the economic and environmental consequences of such
substitutions? How does the emergence of engineered wood products affect demand
substitution for BC timber resources?
There are two potential situations which will have to be faced as BC makes the
transition toward a forest industry that is wholly dependent on second-growth and
subsequent forest crops:
1) according to the most recent BC Ministry of Forests timber suppfy reviews,
Gaston Chapter One Page l
BC is going to witness a significant reduction in the volume of available timber over the next couple of decades;
2) according to Constantino (1 986) and Constantino and Haley (1 988), withoul appropriate changes in 6C forest policy, the qualityl of timber is going to be sig nificantly lower.
If the forest industry in BC is to minimize these potentially negative impacts on the
provincial economy, it will be necessary to examine marketing opportunities for the future,
and translate these into appropriate land use plans, levels of silvicultural activities, and
forest rotations. In other words, it is time for the forest sector to rnake the transition from
a production-oriented to a market-oriented industry. This can only be accomplished by a
detailed analysis of which BC wood products have historically contributed most to net
revenues, and which are most likely to do so in the future. This need will becorne
increasingly important as old-growth timber becomes scarcer and price increases lead to
accelerated substitution.
1.2 Background
As can be seen in Figure 1.1, cash prices for lumber more than doubled in the first
couple of months of 1993 (following decades of limited price growth). Since then, prices
have been extremely volatile, making any forecast of future price trends difficult.
There is sorne debate as to the significance of this price spike. While sorne believe
'It is not easy to define quality in a general way. For example, one definition of quality might be the presence of attributes in wood that are related to appearance. In the case of softwood lurnber, this would include such characteristics as clear grain, large dimensions, and narrow ring width. Another definition of quality might be structural strength. In other words, quality must be related to the intended purpose of üie lumber. Constantino gets around defining quality in terms of specific wood characteristics by using a price index, where quality is related to the buyer's aggregate willingness to pay.
Gaston Chapter One Page 4
Figure 1.1 Random Lengths S-P-F Lurnber Futures, Chicago Mercantile Exchange, Spot Contract*. Cornpiled from various issues of The Financial Post.
' As this chart always tracks the nearest delivery month, prices are analogous to the cash market.
that this occurrence was not al1 that unusual (see Sohngen and Haynes, 1994), others
suggest that the market is displaying a stmctural change (see Sutton, 1994; and Michaelis,
1994). The latter opinion would suggest that prices will either stabilize at a new plateau
at some point in the future or continue to demonstrate real price growth.
Historically, the demand for construction lumber has been price inelastic? This can
be explained by one or more of the following: there have been few substitutes (this has not
likely been the case); price has not been an issue (e-g., lumber has represented a small
2A review of the literature which reports historieal lumber elasticities, both own-price and cross-price, is offered in Chapter 2.
Gaston Chapter One Page 5
portion of the cost of a home); or, there have historically been no inexpensive available
substitutes relative to the price of lumber. However, demand for construction lumber may
become pr ie elastic (i.e. a structural change) if an increased price level leads to reâuced
wood consumption through the building of smaller homes andlor lumber substitution. The
economic implications of the potential for such wood product substitutes translates into the
central theme of this thesis.
Substitutes for logs, lumber or further processed wood products can take many
fonns. The most obvious is substitution with the same basic product, but from a different
location. In the literature review offered in Chapter 2, it will be seen that such cross-price
elasticities of demand for lumber are signficantly higher (even elastic) as compared to the
own-price elasticities. In other words, while the quantity of local lumber demanded is not
very price responsive (such as the dernand for US Midwest lumber given the price of
Midwest lumber), the quantity demanded is responsive to the price of similar wood from
a different area, such as imports from Canada. For example, a 1 % decrease in the pr ie
of Canadian lumber may cause the quantity of US Midwest lurnber demanded to decrease
by more than 1 %. Further, the review in Chapter 2 illustrates that cross-price elasticities
may be high even for dissimilar types of wood, such as imports of hardwood from
lndonesia to replace US consumption of local sofhvood. Some studies also show that
non-wood materials may substitute for logs and lumber.
While the apparent willingness to substitute seems rather straight forward, it must
be noted that no mention has been made of the specific characteristics of "similar"
products. Due to an apparent lack of trade data broken down by grade, little can be found
Gaston Chapter One Page 6
in the literature to document this potentially important aspect of substitution. Figure 3.2,
showing the prices of three grades of PNW Douglas-fir lumber over the past two decades,
illustrates the danger of describing lumber (or logs) as a single hornogeneous cornmodity.
Note that these lumber prices are in real terms, not nominal. Over the time period
indicated, clear grade Douglas-fir export prices rose roughly 3.5% per annurn, the
merchantable grade price trend was virtually flat, and the price of the structural grade fell.
Given these distinct differences in p r i e trends, it is obviously not rational to expect that
construction grade lumber, for example, can fully substitute for clear grades. Prices can
also Vary tremendously within a grade. For example, prices for clear grade coastal BC
lumber of certain species, when the timber frorn which it is cut is "hand picked" by
Japanese buyers, have been reported to exceed $1 5,000 CDN per thousand board feet
(Currie, 19943).
1.3 Scope of the Research
Analysis of silvicultural regimes, forest practices, land-use and trade policies are al1
negatively affected by the lack of information on wood product demand by some measure
of disaggregation. However, before research can be carried out which addresses the
policy and trade ramifications of using aggregated wood product data, significant
background research is needed. This must begin with a quantification of the uniqueness
of individual product types (logs, lumber and further processed products), species and
source as distinct economic goods.
3Personal communication, Valuation Branch, Timber Pricing Secüon, BC Ministry of Forests, Victoria.
Gaston Chapter One Page
+ Clear + Merchantabte - Structural
Figure 1.2 PNW Douglas Fir Lumber Prices ($US per thousand board-feet. mal, PPI adjusted, l992=lOO)
Source: Complied from Random Lengths, Vanous Yearbooks.
Grade Definitions:
- Clear Douglas-Fir, green, #2 Clear, 15% #3; 2% X 6 and wider; export p h , f.0.b. dock, Or. and Wash. (prior to 1985 prices f.a.s.1.
- Merch. Douglas-Fir, Merch., # l , 15% #Z; 6 X 12 and wider; export price, as above (prior to 1985 prices f.a.s., based on #1,25% #2).
- Struct. Douglas-Fir, green, #1 and better, random 10120; 2 X 4; dornestic price, f.0.b. mill.
Gaston Chapter One Page 8
As the central theme of this thesis is to quantify the degree of substitution of wood
products, the sole focus will be on demand descriptors. Further, to keep the analysis
manageable, the thesis focuses on a single market4apan. The Japanese market was
chosen as 1) it represents the largest importer of forest products today (Sedjo, 1994); 2)
it has an interesting history of evolving from reliance on dornestic production, then
importation of whole logs, and most recently importation of lumber (which allows for
quantification of the substitution between these alternative inputs); and 3) it has been a
significant buyer of both construction grade and appearance grade wood products.
The balance of this chapter is devoted to defining the problem to be investigated,
leading to the research hypotheses.
1.3.1 The Research Problem
Figure 1.2 (page 7) helps put the research problem into perspective. By comparing
the three grades of Douglas-fir lumber over the past h o decades, the growing market
premium for the clear grade (and, to a fesser extent, the merchantable grade) is obvious.
Although international trade data do not offer such grade detail, they do offer species
detail, from which grade measures can often be deduced. For example, the species mix
spruce-pine-fir (S-P-F) lumber, which is exported primarily from North America, is known
as a construction or structural grade commodity. North American lumber exports to Japan
of such species as yellow cedar (Chamaecyparis noofkatensis (D. Don) Spach) and Sitka
spruce (Picea sitchensis (Bong.) Cam.), on the other hand, are primarily of clear and
merchantable grades. Further, the source of the wood also offers an association with
Gaston Chapter One Page 9
grade. New Zealand log and lumber exports, for example, have historically been known
to provide sub-structural grades, which have been used in Japan primarily as packaging
materials.
The research problem is best addressed through a number of questions. For
instance, how do the own-price elasticities of demand differ in Japan by product type,
source and by species? How do the cross-price elasticities for these wood products differ,
both with other wood (type, species and source) and non-wood substitutes? Wll scarcity
in North American S-P-F lumber lead to real price growth as evidenced in higher grade
lumber, or will price rises be met with reduced demand through substitution-both wood
and non-wood (Perez-Garcia, 1993; Prins, 1993a and 1993b). Will there be less
substitution in the future in species and/or source typical of clear grades as compared to
structural?
The second ramification of the price trend distinctions shown in the figure is that
coastal BC relies on old-growth timber stands for the vast majority of its present lurnber
production. Timber yielding clear grades is exploited in such stands. Given existing
silvicultural efforts and hawest rotations, the supply of clear timber will be significantly
reduced as old-growth availability declines. This leads to the question of whether it is
possible to generate this high-grade material economically from second growth stands
(although this will largely be an implication for further study). Finally, related to the
substitution questions above, it must be asked to what extent clear lumber from second
growth can compete with clear lumber from old-growth timber (again, this question is posed
as a motivation for the present research; the answer can only corne from research which
Gaston Chapter One Page 10
extends beyond the scope of this study).
1.3.2 Objectives
The research problem described in the previous section can be translated into the
following three objectives:
1. To determine own-price and cross-price demand elasticities in Japan for logs, lumber and other wood products by region and species. Cross-price demand elasticities include substitution with Japanese domestic logs, and substitution with non-wood products.
2. To qualitatively extend objective one to explore Japan's demand for broad grade categories (construction versus appearance).
3. To explore the implications of the above for BC forest industry strategy and public forest policy.
1.3.3 Hypotheses
The research hypotheses to be tested are as follows:
1. BC wood species, in the fom of logs, lumber or further processed products, behave as distinct economic goods, as rneasured by own-price and cross- price elasticities of demand, in the Japanese market.
2. The market share of BC wood species in Japan, in the form of logs, lurnber or further processed products, is dependent on the individual prices relative to other species and wood products in Canada and around the world.
3. Japan's wood product import mix is affected by Japan's domestic log supply and non-wood alternatives.
4. Structural changes in international markets for logs, lumber and panels have affected price levels and trends for these products.
Gaston Chapter One Page 11
1.4 Organizaüon of Thesis
The objectives/hypotheses of the previous sections are addressed and presented
in this thesis as follows. Chapter 2 offers a literature review of North Arnerican studies
which have estirnated log or lurnber elasticities of demand, as well as a discussion of the
implications of such studies for the methodological approach to be used in the present
study. In Chapter 3 the Japanese wood products market is described. Chapter 4
describes the theoretical foundation, data and the empincal rnodel in detail, while Chapter
5 presents the results of this quantitative analysis. Finally, Chapter 6 offers a discussion
of the results, followed by a summary, including limitations and implications for further
research in Chapter 7.
Gaston Chaoter Two Paae t 2
C hapter 2 Litenture Review on Log and Lumber Substitutions
and Implications for Further Research
This chapter reviews the literature on log and lumber demand elasticity estimates,
including a cross-section of the methodological techniques used. The chapter concludes
with methodological implications for the present study.
2.1 The Econometric Estimates of the Price Elasticity of Demand
There are a number of potential responses to a rise in the p r i e of domestic lumber.
These responses can be placed in one or more of the following categories: i) increased
efficiency of wood use andlor reduced consumption of finished products; 2) substitution by
wood from another location, different form (for example, lumber for logs) or different
species; and 3) substitution of non-wood inputs for wood inputs. In this section, these
possibilities are examined separately in Sections 2.1 .1 throug h 2.1 -3, respectively.
2 . 1 Estimates of Wood for Wood Subsütutes
There has been a considerable amount of research which investigates demand
elasticities for timber products, primarily for US lumber. Tables 2.1 through 2.3 highlight
some of this research. The summary information is largely adapted from the review by
Phelps (1 993).
The most obvious consistency found in Table 2.1, which presents own-price
demand elasticity studies, is that softwood lumber dernand is shown to be inelastic, with
Gaston Chapter Two Page 13
--
TABLE 2.1 Own-prie Elasticity of Demand for Softwood Lumber in N.A.
Elasticity f Time Fame f Author i Comments .-..-----....--.----......---.........--.* "...............*.---.-.-.-.--..*------.-..---.....-.-.--...-..*--.-~---.-- n&@s-f,*-, k ,><% .,;,: ,~ , ..-. "..".."...-..-.........-......*..-........*.............*........~...........*..............*....-....-.~~.*...-.~-..............*...*.~.........~......................................-..
-0.173 f 1947-1974 f McKillop et al. (1980) 1 US softwood lurnber wholesale pnce i index ...........................................................................*...................-.........................*............................................................................
-0.35 i 1950-1974 f Waggener et al. i US sofh~ood lurnber price j (1978) ....-....-.....- .............~..........................................<......................................-.-...*...........--......-..............................+..+...................
-0.38 i 07l79-12/84 i Gellner et al. (1991 ) i US sofhvood lurnber pnce ........................................................................ . ....................-...iil...r..i..........................*....i*r.... ....... A..... -0.075 1947-1974 ! Adams (1977) f US sofh~ood lumber price index.
i 1 year lag
1950 (Point) 1%0( " ) 1970( " ) 1980( " )
i Spelter (1 985) j US softwood lumber price
-0.88 , i 1950-1954 f Spelter (1 985) i US softwood lumber price -0.39 . 1970-1974 ....................-..........,..-......................................,........................................-.-. CC.....-. ...................................................................
4.91 i 01/68-12/77 i Rockel and Buon- f US Douglas-fir wholesale price index i giorno (1982) ...... " ................... .....,..........................................<..............................................*............................................................................ .
-0.88 i 1947-1967 ; Robinson (1974) i Douglas-fir .. .........................-... 4..........................................4..............................................&........--.................................................................
-0.667 Oln7-12/87 i Lewandrowski f - Southem pine -0.149 i f (1992) i + Douglas-fir . ...........................................................................i..r.....................................*.......................+................................................... .. -0.55 . i 1950-1987 Adams et al. (1992) j + Residential construction -1+15 i + Non-residential construction
............................... ...........7..."..'......................................... O 1 /7 1-02/82 f Jacques et al. (1 982) ......................................................................................... 1970-1 982 j Shama (1986)
t......... "."...... .....................,.*....................................*..... .. OlffI-ûîl92 j Prins (1993)
............................................................................. Domestic çoftwood lumber purchases ............................................................................. Softwood lurnber for residential construction ... ...........-............................................................. Total shipments of softwood lumber less exports
a range of -0.023 to -1.15, and an average of roughly -0.4. In other words, these studies
suggest that a 10% increase in the domestic price of lumber will decrease the local quantity
Gaston Chapter Two Page 1
demanded by an average of 4%- Not surprisingly, demand elasticities which are smalle
in value are from studies which estimate short-run demand responses. In the very shoi
run substitutes do not, for al1 practical purposes, exist.
Measurements of elasticities must also consider the specific years bein!
investigated. Spelter's (1 985) results illustrate this by showing that elasticities (in this cas6
share elasticities) have fallen over tirne. This trend, according to Spelter, may bc
attributable to improved technology and utilization, both of which have helped to alleviate
scarctty. One must also note that elasticity estimates are affected by the price range ove1
which they are measured. For example, elasticity estimates derived from data wherc
prices tended to be low will fikely be significantly different from a comparable study ove!
a different time period where prices tended to be high.
The range of elasticity estimates shown can also be partially explained by what is
being measured. For example, Adams, et a1.k (1 992) results show that the demand for
lumber used in residential construction is less elastic than for non-residential construction,
supporting the point that home buyers are not greatly influenced by the price of an input
which makes up a relatively small portion of the total purchase price, as well as the fact
that in non-residential construction more substitutes in the fom of non-wood materials are
available and acceptable. Lewandrowski's (1 992) results show that elasticities can Vary
by species, here suggesting that southern pines (e.g., Pinus taeda) have more substitutes
(i.e., the quantity demanded is more price sensitive) than Douglas-fir. This point is
paramount to the main theme of this thesis, and will be further explored throughout much
of this chapter.
Gaston Cha~tef Two Paae 75
I TABLE 2.2 Cross-price Elasticities of Demand for Similar Lumber in Different Reg ions
1 -48 i 01/74-01/86 i Buongiorno et al. i Demand for irnports fmm Canada; prices i (1988) i of softwood lurnber in the US. *-.. -.-.... .-.-.a.--.----*--..*- i.-.---**.----*-.--..-*.*.----*****.**..*--~-*.** ....... -....*--...*-* * .-..-.*.* *-.* ..... f ff.fffff..*.*.* **.---. *-*-.* ....--. *--*....---*-*-.--..-* ...-. - .*.-. *-- -.-.-.----
056 1950-1982 f Singh and Nautiyal j Demand for Canadian lurnber; US pnce i (1986) i index for al1 lurnber.
i 1963-85 j Flora et al. (1 991 ) +- Off shore demand facing the US in 1 i 1987; performance grade. -1 -95 - Off shore dernand facing the US in
) 1987; construction grade. ---------.---.------.-.-*--..--. i..-. -.------.-......----...---- .... -.-.-.. i.......-- ...... - ...-.. ,.,,..,... ....... ..................... - ..... .-...---.-.----------....-..-.--.-....- ............. -.. -3.088 f 1965-1985 j Chen et al. (1 988) f + Demand for Canadian sofbvood
j lumber; irnport prke fmm BC. 2.27 + Pnce of US softwood lumber.
*-0- ----.----. ------..----------;.*-- ----. ****---*-*..*..* ..---**.*-**..- A ..--..m.- * -.-*--.----..*--*...***.*....-.-.... f f..fffffffff..fff.f~.fffff.ff.. ff~ff.f~*..f.fffffff.fffff~fff...ffffffffffffffff.f
4.39 1975-1985 f Constantino (1988) ! World irnports of hardwood from Sawnwood . . Indonesia; importing country's pnce of
i hardwood. 12.30 !
Plywood j
Note: When interpreting the sign of the elasticity values, it must be noted which price is being considered. With Chen, et a/.'s (1988) results, for example, a 10% decrease in the BC price of lurnber will increase US irnport demand by over 30%. Conversely, a 10% decrease in the US price of lumber will decrease US import demand from Canada bv over 22%.
Table 2.2 shows some estimates of cross-price elasticities of demand for soffwood lumber
in different regions, in this case primarily the US demand for imports from Canada. The
most obvious point is that the demand response is now elastic (greater than l), or at least
more elastic than for own-price. This clearly shows, as would be expected, a willingness
to substitute for a similar commodity from another geographic area. One might expect
Gaston Chapter Two Page 16
1 TABLE 2.3 Cross-price Elasticity of Demand for DMerent Lumber - -
Elasticity i tirne Frame i Author ! Cornrnents ....... ~~...~.~-~~....-~~~..~*...~~....~.~CCC~~~CCC~CC~~C~CC.C..CC*CCC.~CCCC~*..~~...*.~....*.~*~*~~*.~*.*.*~~~....~~..~.~~~~*~.~~*~~*.....-*.*~.~~.~~...*...*...*~.~*...~~.*~.~.**..*~..*.-*---*.*...~~*~
1.30 i 1975-1985 i Constantin0 (1988) 'i World imports of hardwood from , Sawnwood i i Indonesia relative to importing
j country's price of softwood. ' 0.75
Plywood i 1.--.-.... .. *..*.*-.......-..; -...-.-*.**.--..........*-*--.-*.-... **.i * I.-~I.I.....II.~.~..I.~II.III...I.I~ *..-....* * ......--*.**.------**.........---....-*..*.*.......-.-*..-***------. 1.45 1 1971-1991 Brooks (1 993) j US impocts of tropical lumber relative
l / to US price of sofhn<ood lumber. ...*----....*.~--.......*-...***.......---...*....-.*. C.*.-..*.-*.**.---.-*-..
i 1 .O6 i 1970-1989 i Youn and Yum i Korean imports of hardwood logs (1992) i relative to the import price of softwood
i logs.
these elasticity values to be higher than indicated. That they are not suggests that while
the imports are good substitutes for dornestic production, they are far from being perfect
substitutes. This may be partially due to the fact that aggregate imports in these studies
are not equivalent to aggregate domestic production, neither by species nor other
characteristics.
Finally, Table 2.3 shows some estimates of cross-price elasticities of demand for
diffemnt types of lumber. Although the estimates are mostly greater than unit, the demand
is generally less elastic than for similar wood products in different regions. This suggests
that consumers are less willing to substitute hardwoods for softwoods than Canadian S-P-F
for US southern pine.
2.1.2 Estirnates of Non-Wood for Wood Substitutes
Another possible reaction to higher lurnber prices is, of course, substitution for wood
products with non-wood commodities. For construction lumber, this includes steel,
Gaston Chapter Two Page 17
concrete, bricks, plastics, etc. Recent pice increases in lumber have already initiated an
extensive program by the American lron and Steel lnstitute to promote the replacement of
wood structural and non-structural members in construction with steel members (Haws,
1994). Surveys undertaken in 1993 indicate that 45% of builders in California would
consider switching to steel due to the high and unstable price of wood products-
There are a number of studies which have examined the cross-price dernand
elasticities between wood and non-wood materials. A better understanding of the
substitution impact is achieved when the extent to which non-wood materials substitute for
wood is examined, and the extent to which wood substitutes for non-wood materials. Table
2.4 summarizes the results of McKillop, et al. (1980) for the US.
First, it should be noted that ail of the own-price elasticities (the diagonal from top-
left to bottom-right) have the expected negative signs and are al1 less than 1, indicating
inelastic demands. Second, the table indicates that the price of lurnber influences the
quantity dernanded of non-wood materials. By contrast, however, the price of substitutes
- - -
TABLE 2.4 Own-price and Cross-price ûernand Elasticities for Construction Materials i
1 Q Lumber Q Plywood Q Steel Q Alurninurn Q Concrete 1
1 Source: McKillo~. et el. (1 9801 1
P Lumber -0.17 i 0.79 0.24 -0.54
P Ply~ood
P Steel
P Aluminum
P Concrete
0.14 j 4.67 i -0.4 0.54 f.............i.i...---.....................*.....-....~i...-ii.i...*-.~-.~.~~...*..i.......i-.--.i....ii-.i...~~...i-rr......**...................--.
0.37 f i -0.93 f 0.74 .-.-----.................-----~~......................~.................-.~..***-..~~~-.-.....*..*~~*......~~..~....-~-*..*.~~.......................~..*-.-----.-..***..*.*.. 0.02 f O .47 4.83 ! ..----.. .-.-*---..........***.~.....-.-..........,..*..... ~,...*....*~*..~.~.~....*..-.*....~..~..*~.~~~.~.*-..~...~~...*........~~~..,..................~~~~~.------.**..*.
-0.51 . - . ___- . . .-
Gaston Chapter Two Page 18
1 TABLE 2.5 Own-pdce and Cross-prie Demand Elasticities for Construction Materials
1 Q Lumber Q Plvwood Q Non-Wood
f Source: Rockel and Buonciiorno (1982)
does not influence the quantity demanded of lumber to the same degree. For example,
a 10% increase in the price of steel will increase the demand for lumber by 3.7%.
Conversely, a 10% increase in the price of lumber will increase the demand for steel by
7.9%.
Rockel and Buongiomo (1 982) specifically examined the demand for wood products
for residential construction (as opposed to total US demand) (Table 2.5). The non-wood
substitutes included in the study were structural steel, cernent, bricks, plurnbing and
heating fixtures, and selected fabricated rnetal products. The extremely low cross-price
elasticities indicated in the table are the result of aggregating al1 these inputs into a single
basket of goods.
In Table 2.6, the result of time on elasticities (primarily technological change) is
demonstrated by Spelter for the US. As can be seen, both the own-price and the cross-
price elasticities fell (with the exception of concrete) from the 1950s to the 1980s.
Finally, Prim (1 993) examined woodlnon-wood substitution in Canada (Table 2.7).
Note that while the results suggest that a 100% increase in the price of lumber will cause
Gaston Chapter Two Page 19
TABLE 2.6 Own-price and Cross-prie Demand Elasticities for US Softwood Lumber
P Lumber 1 -0.285 i. -0.162 -0.13 i -0.1 11
P Plywood 0.f09 f 0.04 0.009 i 0.004 i.i...i....*..i..r...--.i---.-.--..*~*.--.-~~..-...~.~.~~~~.~~~.-A--.-----~~..~.~.~.~~.----....-.+~.....*.~*...*...*-----.-*.*---.--....
P Steel 0.026 f 0.017 i 0.012 0.005 .....-............................1............................t.----.....1............................t.----.....1............................t.-----.*tttttttttttttttttttttttttttttt.*--*---*....~...-.--..--*......*---.-.----..-.--.-.t--....-....
P Concrete 0.006 0.006 i 0.006 i 0.006
1 Source: Spelter (1 985) I
I TABLE 2.7 Own-price and Cross-price Demand Elasticities for Selected Canadian Construction Materials
1 Q Lumber Q 8rick Q Cernent Q Steel
' P Cernent
P Steel
P Gypsum 4**-.*....-..*.*-*--**.*....**..-.....**-*-.-........-.--..,..-.........
P Panels \
0.08
1 Source: Prins (1993)
only a 5% reduction in the demand for lumber, it also creates a 51% increase in the
demand for bricks, a 15% increase in cement and a 32% increase in steel. This
demonstrates the dominance of wood use in construction: 5% of al1 lumber used in
construction is a significant volume of rnaterial relative to 32% of al1 steel used. Also, note
that price increases in non-wood substitutes have a greater impact on the demand for
wood than suggested by the previous studies.
Gaston Chapter Two Page 2C
2.2 Parametric Demand Elasticity Estimation Techniques
From the outset, it should be emphasized that only a small number of the demand
elasticity studies listed in the previous tables made any attempt to disaggregate the data
beyond softwoud logs or lumber. As mentioned in the previous chapter, the likely reason
for this is the lack of published disaggregated data.
All of the studies reported to this point have involved econometric techniques in
estimating the pnce elasticities of demand. While the estimation techniques employed
were not unusual (normally ordinary least squares, two or three stage least squares, non-
linear least squares or generalized least squares), a few studies utilized an approach of
interest to the present study.
Flora and his colleagues at the USDA Forest Service, Pacific Northwest Research
Station in Seattle have conducted North American wood product demand studies which
have made direct reference to quality or grade (Flora and Lane, 1994; Flora, et al.. 1993;
Flora, 1993; Flora, 1992; Flora, et al., 1991-a; Flora, et al., 1991 -b; Flora, 1991 ; Flora, et
al., 1990; Flora and McGinnis, 1989; Flora, 1986). In one of the studies (Flora, et al..
1991-b), the researchers developed export supply functions for Pacific Rim log suppliers
(US, Canada, Chile, New Zealand and the Soviet Union), and import demand functions for
Pacific Rirn buyers (Japan, Korea, China and Taiwan). These supply and demand
functions were then surnmed across quantities to yield aggregate demand and supply
functions. To estimate trade flows pertinent to an individual region, the demand or supply
facing that region is developed by netting out al1 of the other regions' demand and supply
functions. The individual equations used by Flora tend to be veiy simple, with quantity
Gaston Chapter Two Page 21
demanded typically a function of price, GDP and housing starts, and quantity supplied a
function of plantation area, timber hanrest, and possibly a sawrnilling cost index.
Flora's methodology suffers from three specific limitations. First, where price
projections are made, projections of al1 variables except price and volume are done outside
of the model (by making assumptions relative to a presentday "base case"). This means
either heavy reliance on other studies, use of other modelling techniques, or significant
persona1 judgement.
The second limitation is Flora's method of dealing with disaggregated trade data.
Notes Flora, et al. (1 991 -b, page 6):
Because log-trade data are rarely reported by grade, quality class, or economic category, it was necessary to judge the proportions and relative values. ... Future volume-share shifts among grades were assumed ...
This, unfortunately, offers little guidance for dealing with such data over a wide range of
applications.
Finally, Flora's models are limited to a single grade at a time. This does not allow
for the measurement of cross-price elasticities of demand across grades or species.
However, the own-prie elasticities which resulted do suggest that elasticities of demand
are negatively correlated with quality (as quality increases, demand becomes more
inelastic).
Flora (1 991-b) categorized logs into one of four grades:
Select logs whose value derives from "appearance" grade lumber;
Performance Coast and Cascade Grade No. 2 sawlogs; second- and old- growth logs with scaling diameters between 12 and 24 inches;
Gaston Chapter Two Page 22
Construction Coast Grade No. 3 sawlogs; second-growth logs with scaling diameters between 6 and 12 inches;
Utiiity submerchantable in the export market.
Flora's conclusions suggest that the performance grade will have rising real price growth
through the turn of the century, and that the construction grade will see declines due to
international cornpetition. As shown in Table 2.2, the authors pegged the price elasticity
of demand facing the US in 1987 for the performance grade at -0.80 as compared to -1.95
for construction (the author did not analyse the two extremes in grades, reasoning that
select5 will ahvays be scarce and that the utility grade is unimportant for the export market).
Haynes and Fight (1992), also working with the USDA Forest Service in the PNW,
conducted a study on projecting prices of selected grades of Douglas-fir, Coast Hem-fir,
lnland Hem-fir and ponderosa pine lumber. Working with historical volumes and prices
from representative invoices submitted to the Western Wood Products Association for the
PNW region4, the authors estimated the relationships between the prices of the selected
lumber grades and the price of the dominant lumber grade for each species in the general
form:
Sjt = 4, + b, S, + b,, Mi, (2.1
where: S, = regional lumber price for the j" species and grade in year t; S,, = price of the dominant species and grade in year t, and; Wj, = the proportion of total lumber production in year t that cornes from
j" species and grade.
4Unlike the other methodologies reported in this section, Haynes and Fight (1992) are using domestic market data (as opposed to export data). Given the noted premium for export markets (see Flora, et al.. 1993), this will underestimate the price premium for higher grades.
Gaston Chapter Two Page 23
Wdh the values of the b,'s estimated, the authors predicted the price for each grade
by independently projecüng the price of the dominant grade (SJ and grade production
proportions. Their results supported the notion that increasing scarcity of high-grade
material will result in higher prices. However, given the confines of their analysis,
projections out to the year 2040 showed that the relative price spread for each grade
remains virtually unchanged. This is in contrast to historical changes in p r i e spreads over
grades. As noted by Flora, for example, in Japan in 1978, Alaska Prime Spruce cants
were worth 3 times as much as US #3 hemlock logs; by 1992, the multiple increased to 20.
Sedjo, et al. (1994) offer a study which specifically investigates cross-price
elasticities of wood inputs. Noting the effect of the price of US logs on the log import
behaviour of Japan, the authors reason that imports from any region will be a function of
that region's timber price to Japan, the price of Japanese domestic timber, the level of
construction activity in Japan, the price of US timber to Japan, and the price of timber to
Japan from any other source that may substitute for the region in question's timber. A
multiple regression analysis was used, with the quantity of timber demanded from region
" A as the dependent variable, and each of the above factors taken as independent
variables, over the period 1970-1 991 :
OA = b, + b2 PA + b, PUS + b, PJ + b, HS + cPi
where: QA = quantity imported from region "A"; PA = price of region A's timber in Japan; PUS = price of US logs to Japan; PJ = Japanese domestic price of logs; HS = number of Japanese new wooden housing starts; Pi = prices of timber to Japan from regions other that "A" or the US.
Gaston Cha~ter Two Page 24
Interestingly, the results showed no significance for the domestic price in Japan
("sugi" conifer logs), suggesting either that import decisions were made independently of
domestic production (possibly suggesting different end uses), or that perhaps there was
too Iittle variation in domestic production to estimate the effect. The price parameter on
imports from Canada (Douglas-fir lumber) was also found to be insignificant, with the
authors reasoning a high degree of multicollinearity of Canadian lumber exports
(roundwood equivalent) to Japan and US Douglas-fir logs exported to Japans. The other
regions investigated, al1 of which were found significant, included the Philippines,
Indonesia, New Guinea, and Malaysia, collectively called "tropical" ( h a n veneer tropical
logs); Russia (larch logs); and ChilelNew Zealand, collectively called "radiata".
The elasticities of Japanese imports from these three regionshnrood type with
respect to the independent variables were then calculated. Due to the objective of the
study, the authors focused on the cross-price elasticity of Japanese imports with respect
to the price of US logs. This cross-price elasticity of wood quantity from region "A" (QA)
with respect to the US log price (PUS) is the percentage change in Japanese imports from
A for each unit percentage change in the US price, given by:
where: b3 = the regression coefficient of PUS in the previous equation; (PUSiQA) = value using the mear i over the study period.
'As will becorne apparent in the following review of Armington (1 969) and applications by Chou and Buongiorno (1983) and Hseu and Buongiorno (1992), such multicollinearity is a major limitation of trade studies which have many price regressors of 'similar" products in the same equation.
Gaston Chapter Two Page 25
Using ordinary least squares, the recovered cross-price elasticities for Japanese
imports with respect to the US log price were 0.58, 5.0, and 0.84 for tropical, radiata and
Russia, respectively.
Unfortunately, none of the methodologies reviewed to this point are totally adequate
for addressing the main objective of this thesis, that is to estimate the substitution
possibilities among a significant number of disaggregated wood inputs in the Japanese
market. The problern which needs to be addressed is how to estimate own- and cross-
price elasticities for a number of potentially unique, yet similar, price series.
Amington (1 969) offers a potential solution. Recognizing the heterogenous nature
of products, even when of a similar "kind", Armington relaxes the assumption that a
particular "good" produced in a particular country is a perfect substitute for the "same"
good produced in another country (relaxing the assumption that the elasticity of substitution
between, Say, softwood lumber from Canada and sofîwood lumber from New Zealand is
infinite). This is accomplished by assuming that an importer performs a two-stage
optimization process. In stage one, the importer decides the total amount of the
commodity "kind" to import from al1 sources (say, softwood lumber, or even al1 wood
products in aggregate). In the second stage, the importer detemines the optimal levels
of "good" imports (say , softwood lumber from a number of different sources).
Arrnington makes four assumptions, "systematically simplifying the product demand
functions to the point where they are relevant to the practical purposes of estimation and
forecasting" (Armington, 1969; page 160). The first is that importer preferences are
homogeneously separable. This assumption is necessary to incorporate two-stage
Gaston Chapter Two Page 26
optimization. It is next assumed that market shares depend only on relative prices of the
products in the market, not on the size of the market itself. In the absence of these
assumptions, a country would have mn demand functions in the general fom:
where: rn = number of supplying countries (specific product); n = number of goods (groups of products); x, = specific product demand; D = income; P, = specific product price.
Wdh Armingtonls first two assumptions, this is reduced to m+n demand functions:
P.. p.. P- x#=47 Xi,Al> ,... l A) l pi, pi2 pini
where
and: Xi is any good, and X, is any product.
From Armington's first two assumptions, Equation 2.5 requires that a linear,
homogeneous quantity index function, cpl be utilized for each market, such that Xi = cp (Xi,,
X,, ..., X,,). The reason for this is that if imports of products of the same kind from different
countries are wnsidered to be irnperfect substitutes, the arithmetic sum of various imports
would not be an appropriate index of total imports.
Recognizing that equation 2.5 is still too complicated to be of practical use when
more than a few countries are identified, Arrnington proposes two further simplifying
Gaston Chapter Two Page 27
assumptions. These are that the elasticities of substitution are constant for each market,
and that the elasticity of substitution between any two products competing in a market is
the same as that between any other pair of products competing in the same market.
These assumptions are equivalent to specifying that the cp's above are constant elasticity
of substitution (CES) functions, having the general fon6:
Wth these added assumptions, it can be shown that equations 2.5 have the general fom:
where: (Ji = the constant elasticity of substitution in the iM market; bij = a constant.
Armington notes that equation 2.8 can also be written to express the market share as the
dependent variable:
The advantages of Amington's assurnptions are obvious. As stated by the author,
"these assumptions yield a specific fom for the relation between demand for a product, the
size of the corresponding market, and relative prices; and the only price parameter in this
6Note that this function is of the needed linear aml homogenous fom.
Gaston Chapter Two Page 28
function [equation 2.8 or 2.91 is the (single) elasticity of substitution in that market"
(Armington, 1969; page 161). The problern of rnulticollinear data has been greatly
reduced.
The real advantages to Amington's assumptions corne in the analysis of price
changes (detemining the elasticities of demand). Total differentiation of the market
demand equation (2.6) and the product demand equation (2.8) yields the relationship
between changes in X, and changes in the explanatory variables. Beginning with the
latter7:
Dividing both sides by Xij:
Given that the partial elasticity of X, with respect to Xiequals unity:
The first term reflects the growth in the Xi market, while the second t e n reflects the
7This derivation follows Armington (1969), Appendix II.
Gaston Chapter Two Page 29
percent change in Xi's share of the market. The next step is to differentiate equation 2.6
dXi - dD 0
dPi - - €.- - q;- + E fi. dPk
Xi ' D pi rlk-
Pk
where: ci = the income elasticity of demand for Xi; hi = the direct p r i e elasticity of demand for Xi: fi, = the cross elasticity of demand for Xi with respect to P,.
Substituting into equation 2.1 2:
It should be noted that there is no P, terni in equation 2.12, without which it is not possible
to derive an expression for the cross price elasticity of X,. Annington shows that:
dp- dpik L = x ' i k - , where S, = - "iTi Pi Pik PM,
where: S, = the market share of &, in value ternis.
This substitution for dPi /Pi is possible due to Armington's assumption of a Iinear and
homogeneous indexing function, cp.
To sum, it is shown that the effects on X, of changes in pries of products cornpeting
in the i" market depend not only on ai and fii but also on market shares. By substituting
2.1 5 into 2.14, Armington arrives at:
Gaston Chapter Two Page 30
with the first bracketed coefficient being the own-price elasticity of demand for X,, and the
second bracketed coefficient being the cross-price elasticity of demand for Xi, with the
respect to any other product price in the im market. 60th of these bracketed expressions
contain two terms; the first notes that a price change alters relative prices, creating a
substitution effect. The second notes that a price change also alters the price level in the
market, creating a market "expansionn effect.
The Armington model has been applied in a nurnber of studies reporteci in the
fiterature; its popularity is undoubtably supported by its simplicity and its ability to deal with
multicollinearity problems. Agricultural applications are the most prevalent, a cross-section
of which can be found in Babula (1987), Grennes, et ai. (1977), Penson, et al. (1 988),
Webb, et al. (1989), and Adelman, et al. (1 989). Extensive use of the Armington model is
made in the equilibrium modelling of the International Monetary Fund (see Grennes, et al.,
1977). Although al1 of these studies stress the advantages of the model, Armington is not
without his critics. Alston, et al. (1 990), for example, find that the restrictive assumptions
used by the Armington model lead to underestimated price elasticities.
While applications of the Armington model in forest products' trade studies are
scarce, Chou and Buongiorno (1983) use this approach in their estimation of the US
demand for hardwood plywood imports by country of origin (Taiwan, Korea, Japan,
Philippines and "rest of world"). Following Arrnington's stepwise approach to import
Gaston Cha~ter Two Page 31
demand specification, the authors begin by estimating the constant elasticity of
where: QilQj = quantity imported from country I and j, respectively (1 zj); Pi, P, = CIF price of Qi and Qj, respectively.
The values of the bi / $ and o coefficients are estimated from four simultaneous equations,
setting I = 1 (Taiwan) and j = 2, ..., 5 (Korea, Japan, Philippines and Vest of world"),
restricting the o to be constant and linearizing equation 2.16 by converting it to a
logarithmic form:
where: = a random residual.
Their estimate for the constant elasticity of substitution between hardwood plywood imports
of different origin, o, is -1.74 and highly significant. The fact that this value is significantly
different from zero shows that the two different sources of plywood are not considered
complements; the fact that the value is not very high suggests that plywood imports from
different sources are also far from being perfect substitutes (requiring that o = a).
The next step followed by Chou and Buongiorno is to estimate demand for total
hardwood plywood imports in the US. Expanding an earlier paper (Chou and Buongiomo.
1982), they utilize a demand function derived from residential construction:
'AS Chou and Buongiomo use rnonthly data, they utilire lags in their estimation. For the purposes of describing their overall approach, however, the lags are omitted here.
Gaston Chapter Two Page 32
PM -' Q = al-1 Y' PDA
w here: Q = total quantity of plywood irnported by the US; PM = the price of total imports; PDA = US producer price index for al1 commodities; Y = US housing starts.
However, to link this total demand to the elasticity of substitution from above, the
researchers estimate equation 2.19 by replacing Q and PM by their equivalent CES
quantity and price indices, defined as:
PM = (1 bp PMi'-'' ) '-O
where: t = surn i frorn 1 to 5.
The bi weights needed to calculate these indices can be determined from the estimated
parameters on b, / bi in equation 2.18, adding that the sum of the 6's must sum to one; this
translates into five equations and five unknowns, allowing for the recovery of each bi.
The resuîting value of the P parameter, being the price elasticity of demand for US
hardwood plywood imports in aggregate (equation 2.19) is -2.20 and significant. This
compares to a value of -1.98 when the researchers utilize arithmetic indices (Chou and
Buongiorno, 1982) as opposed to the CES indices. Wth value of the aggregate elasticity
of demand, Q, the constant elasticity of substitution, a, and knowledge of the average
market share by value for each of the noted supplying regions, the researchers are now
Gaston Chapter Two Page 33
Table 2.8 Elasticities of Demand of US Hardwood Plywood lmports by Country of Origin
Source: Chou and Buongiorno (1 983)
Market Korea Taiwan Japan Philip- Restof Share pines World
in the position to calculate individual own- and cross-price elasticities as outlined by
Armington. The results are shown in Table 2.8, breaking out the substitution and market
expansion effects.
The net own-price elasticities reporteci in Table 2.8 (the highlighted diagonal values)
and the net cross price elasticities are determined by adding the substitution and market
expansion values in any one cell. Beginning with the own-price, note that the net effects
have their expected minus sign, and that the substitution effect varies somewhat, with
Korean plywood standing out. Also note that the market expansion effect reduces with the
supplying country's market share, which is what one would expect. Finally, it can be noted
that the net own-price elasticities do not Vary much by country of origin, ranging from -1 -77
Korea
Taiwan
Japan
Philippines
Rest of World
0.45 f s i-0.96 i 0.42 i 0.24 0.12 i 0.17 i x i 6.99 i -0.53 i -0.31 i -0.15 f -0.22
.i---.-.i.iiiiiiii..*-...~....~a.~.11.1.11..111.....1.a...,...~..~~***.*.*~..~~~.a....*..-~..~.~..~..-...*44444*..*..44.4444444...a....-.--..-----.-------.~
0.24 s j 0.78 i -1.32 0.24 0.12 1 0.17 i x -0.99 i 4.53 -0.31 -0.15 -0.22
-.i----r..iiiii.t...*........iii--.~*~~...4~--........*~.~~~~.~~~~~~~~..~.~...*......~~.~..~.~.~*~*~.~.-.-..-*....-~..-*..*~~..... a....----..--.----.-...--.
0.14 f s i 0.78 0.42 -1.50 i 0.12 0.17 x i -0.99 i -0.53 i -0.31 i -0.15 -0.22
-...rr.i--i.r...--..*..~....-.*a~.~.~.*~..~-.*~.*.-~~..*~.~~~-....~~.~-..~..~.-...a.......~~....~.*~...-..-*.~~.*......*-..---..~..-*.-----.-----.--.--------.
0.07 ; s j 0.78 i 0.42 10.24 i-1.62 1 0.17 i x i -0-99 i -0.53 i -0.31 i 4.15 i -0.22
i...i--.-....i..ii... *.-~......~.~~~..~~~.~~~~*...~.*.~~..~~...~.~*~.*~.~..~...-~~*...--.~....~-~~....~...*11..1111111.11.111.11-.1..*..-..-----------------.
0.10 j s j 0.78 j 0.42 0.24 j 0.12 -1.57 i x -0.99 -0.53 : W..-. -* ------, - --
i -0.31 i -0.15 i -0.22
~=substitution effect; ~=market expansion effect
Gaston Chapter Two Page 34
to -1.95. Keeping in mind that a constant elasticity of substitution is "forced", this outcome
should not corne as a surprise.
Turning to the cross-price elasticities of demand reported in the table, note that
while the substitution effects show the expected positive signs, the net effect is negative.
As stated by the authors, "a rise in the price from country j causes a reduction in the total
United States hardwood plywood imports which more than offsets the gains of country 1
arising from the substitution of country Ps plywood for that of countryj". It can be seen that
the net effect depends on the relative values of the elasticity of substitution (O) and the
aggregated import price elasticity of demand (9); when the latter is larger in value as
cornpared to the former, cross-price elasticities will be negative. It can be noted that the
net cross-price elasticities are al1 highly inelastic, with the highest value being -0.21, the
import quantdy response in the US for non-Korean hardwood plywood against a price
increase in Korean product. In al1 cases, the market expansion effect counteracts any
substitution effect.
Recognizing the potentially restrictive nature of Armington's assurnptions, a study
by Hseu and Buongiorno (1993) attempts to use a more "realistic" approach by allowing
the elasticity of substitution to Vary. Further, rather than disaggregating the second stage
demand by country of origin, the researchers investigate the US demand for Canadian
sofhvood lumber by species.
Starting with a production function for the construction of houses in the US, the
researchers begin by specifying the derived demand for total lumber imported from
Canada:
Gaston Chapter Two Page 35
where: Q = aggregated quantity of Canadian softwood lumber imported; P = average pr ie of Q; P d = pr ie of US domestic softwood lumber; Pa = price of al1 other inputs; Y = US housing starts.
Next, the share of a particular species is assumed to depend on the price of that species
relative to the price of al1 imports:
where: Qi = is the quantity of softwood lumber of species 1 imported from Canada;
Pi = the average price of species 1; ai, 6, = constants specific to species /.
The authors note: "equation [2.22] differs slightly from Armington's (1969) theory in that the
elasticity of substitution oi varies by species". Equations 2.21 and 2.22 are estimated
separately in log-log form, and own- and cross-price elasticities calculated from the total
differential as in Armington (1969) and Chou and Buongiorno (1983).
H i l e the hypothesis that the elasticities of substitution by species are significantly
different from one another is worthy of investigation, it is not at al1 clear how the
researchers link such an hypothesis back to Armington's theory. In fact, there are a
number of major problems with this methodology.
First, getting separate estimates for the single B and the numerous oils does not
constitute a two-stage optimization; the Q in equation 2.21 must somehow be linked to the
Gaston Chapter Two Page 36
Q in equation 2.22. Wth Armington (1969) and Chou and Buongiorno (1983) this is
accomplished by using the CES indices.
Second, estimating equation 2.22, while shown to be possible under Armington's
assumptions (see equation 2.9), becomes problematic without some way of ucollapsing"
al1 the Q,'s into Q (as is done with Amington's cp function). As is, Hseu and Buongiorno's
equation 2.22 violates one of the assumptions of the classical linear regression model.
The right-hand-side contains a component which is not independent of a left-hand-side
variable: P, being the price of the aggregate imports of softwood lurnber from Canada, is
determined as the arithmetic mean, t P i X Qi / Q. While the second problem could have
been avoided by defining Q as the total aggregate quantity less Q , and P the average
price of this new Q, other problems with the application of Armington's theory remain. Most
importantly, without the linear, homogeneous aggregation function, the substitution for dPi
I Pi in Armington's equation 2.1 5 cannot be made.
These problems not withstanding, Hseu and Buongiorno do get interesting empirical
results that are worth exploring. As shown in Table 2.9, own-price elasticities Vary
considerably across species and cross-price elasticities exceed unity in sorne cases. While
the market expansion effect remains constant over species in both the calculations of owvn-
and cross-price elasticities, note that by allowing the "share elasticity" to Vary by species,
the substitution effect changes. In calculatirtg the share elasticities, the researchers
em ploy a seeming ly unrelated regression estimation (SURE). 'To test the validity of
[Armington's] simplification, [equation 2-22] was re-estimated with the restriction that ... ai
... [was] the same across equations" (Hseu and Buongiorno, 1992, p. 595). This was
Gaston Chapter Two Page 37
(Tabla 2.9 Elasticities of Demand of US SofLwood Lumber import. from Canada by Species
l Market Spruce Pine Fir Hemlock Red Others Share Cedar
1 Source: Hseu Buongiorno (1 992) 1
rejected with a computed XZ statistic which was significantly higher than the critical value.
2.3 Implications for the Present Study
While a detailed description of the data and modelling procedure to be utilized in this
thesis is resenred for Chapter 4, a few comments are offered here in order to provide a link
between the existing research with the stated thesis objectives.
Following an exhaustive search in BC, the US and Japan (including trade
associations, government agencies and the academic profession), it is clear that the
highest level of detail for secondary data on wood products trade for the Pacific Rim is a
Gaston Chapter Two Page 38
breakdown by country, species (in some cases, only genus), and product (logs, chips,
lumber, or further level of processing). This suggests that it is not possible to improve on
many of the noted limitations of the studies reported in the previous section without
gathering prirnary datag. Investigation into this possibility also proved futile, both in ternis
of the confidential nature of individual exporters' data and individual Japanese irnportersl
data.
Given the stated research objectives of this thesis, being pnmarily ta estimate own-
price and cross-price elasticities of the Japanese demand for wood products across
product type, species and country of origin, the only applicable methodology found is that
suggested by Armington (1 969). The strength of this methodology lies in the fact that it
allows the researcher to estimate an unlimited number of own- and cross-price demand
elasticities without sacrificing degrees of freedom or being burdened with multicollinearity
over a large number of explanatory price variables. As has already been suggested,
however, this methodology is not without its problems. This is due to Armington's rather
restrictive assumptions, and the difficulties involved in circumventing these assurnptions.
While the rnethodology employed by Sedjo, et al., also estimates cross-price
demand elasticities between alternative wood inputs, such estimates are necessarily
timited to a very few substitution possibilities.
Finally, in both the Flora, et al., and the Haynes and Fight studies, the
methodologies are more appropriate for price forecasting by grade than for estimating
'As noted in the previous section, this is not tnie for the US domestic sofkood log market (Haynes and Fight, 1992). However, there is no secondary quantitylprice data in Canada broken dom to even species (let alone grade), for either logs or lumber.
Gaston Cha~ter Two Page 39
wood input substitution. The methodologies ernployed in these studies are, therefore,
beyond the scope of the present study, and will be returned to in the final chapter when
discussing recommendations for further research.
In the following chapter, the complexity of the Japanese demand for wood products
is discussed. This is followed by the theoretical foundations and implications for empirically
analysing this demand in Chapter 4. An Annington-type, CES model will be developed,
using a similar approach to that suggested by Chou and Buongirno (1983). Given the
problems associated with the further application offered by Hseu and Buongimo (1992),
this approach is not incorporated into the methodology employed in the present research.
However, the practical intent of Hseu and Buongirno's research will be discussed in later
chapters.
Gaston Chapter Three Page 40
Chapter 3 The Market for Wood Products in Japan
This chapter investigates the market for wood products in Japan, including its
evolution over the past several decades. This investigation starts with a synopsis of
Japan's timber resources and log production, followed by a description of the demand for
this production along with the demand for imports. Finally, a discussion of Japan's lumber
and panel production, comparing domestic with imported timber inputs as well as
competition with lumber and panel imports, is presented. This is an important lead-in to
Chapter 4, which describes the economic model developed in this thesis to represent the
derived Japanese demand for logs, lumber and other wood products.
3.1 The Japanese Domestic Timber Resource
Although approximately 70 percent of Japan's 37 million hectares is covered by
forests, the population is high (approximately 125 million, Canadian Global Almanac,
1995), resulting in a per capita forest area which, at less than a fifth of a hectare, is less
than half the world average (Japan Forestry Agency, 1991).
Of the total forest land in Japan, there are 13.67 million hectares of natural forests
(54%), 10.22 million hectares of man-made forests (40%), with the balance being either
unstocked land or bamboo groves (1.37 million hectares, or 6%). The natural forest area
consists of 75% deciduous species, 13% coniferous species and 12% mixed forests. The
deciduous species include oak (Quercus mongolica and Quercus dentata), elm (Ulmus
davidiana), ash (Fraxinus mandshuica), and beech (Fagus crenata). The coniferous
Gaston Chapter Three Page 41
species include fir (Abies veifchii Abies matksii, and Abies sachalinensis), spruce (Picea
hondoensis and Picea jezoensis), hemlock (Tsuga divemifoIia), larch (La* leptolepis),
pine (Pinus densiflom, or red pine; Pinus pentapphylla, or white pine; Pinus Thunbergii, or
black pine), Hinoki (Chamaecyparis obtusa), and Sug i (Clyptomeria japonica).
In contrast, 98% of the man-made forest is coniferous. Ten percent of the area is
larch, 11% is pine, 24% is Hinoki, 45%Sugi, 9% is spruce and fir, and 1 % miscellaneous.
The growing stock of the natural forests is roughly 1.5 billion cubic metres compared
to roughly 1 -4 billion cubic metres in the man-made forests (Japan Forestry Agency, 1991).
The man-made forests are primarily a product of extensive planting which took place in the
one to two decades following World War II. Annual growth of the plantations is roughly 76
million cubic metres, or a mean annual increment (MAI) of 7.5 cubic metres per hectare.
Figure 3.1 shows the age distribution of these trees.
In spite of this impressive growth rate on their man-made forests, it has been
suggested that the quality of the timber from these stands is not high, particularly in terms
of inadequate log diameters due to a noted lack of tree spacing (Iwai, 1986). This point
will be returned to later in this chapter.
Japan's annual harvest from 1990 to 1993 ranged from about 27 million cubic
metres to 30 million cubic metres, with roughly 60% being harvested from the man-made
forests. As can be seen from Figure 3.2, which shows log production by species, this has
dropped considerably since the 1960s. However, as made evident by Figure 3.1, the
volume harvested can be expected to increase significantly over the coming
Gaston Chapter Three Page 42
Figure 3.1 Distribution of Man-made Forest by Age Class, 1986 (Japan Forestry Agency, 199 1)
In terms of forest land ownership, as of 1986 58% was private, 31% national and
the remaining 1 1 % was under prefecture and community control (Japan Forestry Agency,
1991). The private forests (14.68 million hectares) are owned by nearly 3 million entities
(individuals, corporations and other organizations). Approxirnately 90% is owned by
individuals, with an average holding of only 2.6 hectares (60% of the private owners own
less than 1 hectare of land). The national forest land base (7.89 million hectares) is under
the jurisdiction of the Forestry Agency. The national forests tend to be located in the steep
mountainous areas, unlike the private, prefecture and community forests, which tend to be
''Given the reforestation effort in Japan post World War II, and given that forest rotations in Japan are typically 40 to 60 pars, depending on species, site quality, etc. (Iwai, 1986), this would suggest a significant increase in the potential availability of domestic supplies early in the next century. However, these rotations will also depend on desired log quality.
Gaston Chapter Three Page 43
- 7
[ Cedar Cypmsr Pine - - - Other Soft Total Hard
Figure 3.2 Japanese Domestic Log Production by Species (Japan Forestiy Agency Data, Provided by Dr. Y. Moi, Kyoto University, Japan)
Note: The volume scale on Figures 3.2, 3.3, 3.4, and 3.7 are identical for ease of comparison.
located in more econornically accessible areas (Japan Forestry Agency, 1991). Roughly
33% of the national forests are replanted by area (as of 1989), the vast majority of which
is in softwood (Otsuka, 1992).
Of the total annual log production in Japan in 1990, 20.5 million cubic metres came
from private lands, 1.9 million cubic metres from the prefecture and community lands, and
8.6 million cubic metres from national forests. Figure 3.3 shows how this relationship has
varied since 1960. Over 40% by area of the private lands are replanted (as of 1989)
(Otsuka, 1992).
Gaston Chapter Three Page 44
3.2
fam
Figure 3.3 Japanese Domestic Log Production by Ownership (Japan Forest Agency Data, Provided by Dr. Y. Mori, Kyoto UniveMy, Japan)
The Use of Japanese Domestic Timber Production
Japan has a very long history of using wood, particularly for housing. The country's
iliar post and beam construction has created a demand for wood which has both
structural strength and appearance qualities. The importance of this combination lies in
the visually exposed vertical pillars joined to exposed horizontal beams and girdersl1.
The domestic timber of choice for the pillars, due to their combined strength and
high appearance characteristics are Hinoki (Japanese cypress) and Sugi (Japanese cedar,
or Cryptomena). For beams, Akamatsu (Japanese red pine) is often used for its ability to
"lt is noted that this is only tnie for traditional p s t and beam construction. Penonal communication with Bob Holm, Executive Director of the BC Wood Specialties Group, reveals that this is changing. Mr. Holm suggests that post and beam construction in Japan today is sometimes similar to North Amefican platform- ffarne construction in-so-far as the posts are hidden Rom sight with panelling.
Gaston Chapter Three Page 45
handle large shearing stress. Foundations are often made from Hinoki due to natural rot-
resistant properties. Sugi heartwood is often used for panelling due to its decorative
colour. Sugi is also used for ceiling boards due to its light weight. OveraH, it is the Hinoki
that has been the species most valued by the Japanese, even in ancient times (Japan
Forestry Agency, 1991).
Aside from the Japanese demand for wood used in post and beam construction,
there has been a growing demand for wood suitable for platform-frame (PFC) and
prefabricated housing construction. The wood imports most suitable for these housing
types include North American S-P-F and other dried, planed, dimension softwood lumber,
as well as panel products. Largely due to the marketing efforts of the Canadian Council
of Forest Industries in the mid 1970s, PFC starts rose from zero in 1975 to 56,299 in 1993,
representing 4.8% of al1 housing starts, or just over 8% of wood housing starts (INTEREX,
1995). Prefabricated housing construction was introduced in the 1950s, and by 1993
represented just over 20% of total housing starts (246,108 starts). However, most of the
prefabricated homes are made from steel and concrete, with wooden starts being roughly
30,000 in 1991 (Pesonen, 1993). Small amounts of wood are required in steel
prefabricated houses. Once again, planed, dimension lumber and panel products are
demanded for this housing type.
Interestingly, hardwoods in Japan do not typically get used for decorative purposes.
In fact, hardwoods are primarily used as pulp furnish or other woodchip products, followed
by their use in plywood manufacture. An estimateci 35% of Japan's plywood consumption
is for the manufacture of concrete foms, with most of the balance being used as sheathing
Gaston Chapter Three Page 46
in construction for walls, floors and roofing (Sedjo, et al., 1994).
Combined with softwood, over 60% of the domestic industrial timber in Japan has
historicaly been used for lumber, followed by roughly 30% for pulp and wood chips
combined, and a small percentage for veneer sheets for plywood and other miscellaneous
products (Japan Forestry Agency, 1991). The historical context is presented in Figure 3.4.
One of the distinctive features of lumber demand in Japan is that in addition to the
quality of the wood, dimensions are critical. Not only are the dimensions demanded
inconsistent with North American standards, for example, but they can change from one
region in Japan to the next, or even frorn one building project to the next (Sedjo, et al.,
1994; Japan Forestry Agency, 1991). This partially explains the existence of thousands
Figure 3.4 Japanese Domestic Log Supply by Utilization (Japan Forest Agency Data, Provided by Y. Mon, Kyoto University, Japan)
Gaston Chapter Three Page 47
of local mills producing to meet highly localized demand conditions (to be discussed in
Section 3.4).
In 1992, 79% of domestic lumber shipments went into housing construction (Japan
Forestry Agency). For this reason, a look at housing starts over time can be quite
instructive; Figures 3.5 and 3.6 show both wood and non-wood housing starts since 1965,
by number and by area respectively.
The rapid growth in housing starts throughout the 1960s and early 1970s reflects
the rapid economic growth Japan was enjoying over this period. Referring back to either
Figure 3.2 or 3.3. domestic wood production also increased through much of this time.
peaking at 53 million cubic metres in 1967, and remaining over 40 million cubic metres
through the early 1970s. (As will be made clear in the next section, this domestic
production was, of course, supplemented by growing levels of irnports.)
From the mid-1970s to the early 1980s this economic growth slowed and ultimately
declined. spurred by the "oil crisis" of 1973. After 1986, economic activity stabilized and
began to show modest growth (as did housing starts).
It is interesting to note that the population in Japan has not changed significantly
over the past several decades. During the 1960s, population increased by an average of
1 % per year, peaking at roughly 2% in 1970. Ever since then the rate of population growth
declined, being roughly 0.5% per year in 1989 (Yu, et al., 1990). This suggests that
economic activity (or per capita GNP) is a better indicator of housing starts than is
population growth.
Before tuming to a description of the Japanese lumber processing sector, imports
Gaston Chapter Three Page 48
Non-Wood
Figure 3.5 Japanese Housing Starts by Number (Japanese Ministry of Construction Data, Provided by Y. Mon, Kyoto UniveMy, Japan; 2x4 Data fmm INTERU()
1966 1970 1 990
Figure 3.6 Japanese Housing Starts by Area (Japanese Ministry of Constnrction Data, Provided by Y. Mori, Kyoto Univemity, Japaa)
Gaston Chapter Three Page 49
of wood products are sumrnarized in the following section.
3.3 lmports of Wood Products into Japan
As can be seen in Figure 3.7, Japan has moved from a situation of alrnost total self-
sufficiency in wood products (95% of Japan's total industrial wood supply in 1955 came
from domestic production) to a very strong reliance on imports (only 25% of Japan's total
industriai wood supply in 1992 came from dornestic production).
1966
Figure 3.7 Japanese Industrial Wood Supply (Japan Forestry Agency Data, Provided by Dr. Y. Mari, Kyoto University, Japan)
Gaston Chapter Three Page 50
,-- -- Soitwood Log. -A- Hirdwood Log* )
Figure 3.8 Japanese Self-Sufficiency in Logs (FA0 YeanSook, Various Years)
Figure 3.8 shows that Japan's self-sufficiency in Iogs alone has declined by a similar
magnitude for both softwood and hardwood. Domestic sofhvood sawlog production
declined from roughly 26 million cubic metres in the early 1960s to less than 16 million
cubic metres in the 1990s, white imports increased from 3 to over 16 million cubic metres
over the same period. The drop in domestic hardwood sawlog production is even more
dramatic, rnoving from over 6 million cubic metres to less than 2 million cubic metres over
these three decades. Unlike softwood, imports have been an important component of
hardwood log supply over the whole period, ranging around the 10 million cubic metre
mark both in the 1960s and early 7990s. In fact, in the early 1960s, Japan imported
Gaston C haoter Three Page 51
almost twice as much hardwood logs by volume than softwood. By the 1990s this turned
around, with imports of softwood logs being almost twice that of hardwood logs (1962 and
1993 percentages of softwood log imports were 32% and 62%, respectively, with the total
volume of log imports almost tripling).
It is also obvious from Figure 3.7 that Japan has shown a strong preference for
importing logs rather than lurnber, aîthough lumber imports increased throughout this
period. Lumber imports increased from 1 12,000 cubic metres in 1955 to 1 2,424,000 cubic
metres in 1 992, in roundwood equivalents. Log imports increased only up to 1 973, and
have been decreasing ever since. It is widely accepted that this decline in log imports,
relative to lumber and other wood product imports, is less a function of Japanese demand
and more a function of world supply (Cartwright, 1995; Pesonen, 1993; Sedjo, et al, 1994;
Robertson and Waggener, 1995). Indonesia, for example, traditionally a major hardwood
log supplier to Japan, adopted log export restrictions in the early 1980s, and by 1985
banned log exports al1 together. Presently. parts of Malaysia are considering similar
policies (Sedjo, et al., 1994). This trend toward log export restrictions is due in part to the
producing countries' desire to develop their own wood processing industry, and in part to
growing local economies (particularly Malaysia and Indonesia), which have increased
domestic demand for their wood products. US log supplies have also decreased,
particularly logs cut from old growth timber. The drop in the availability of such logs has
become most pronounced over the past few years, exacerbated by land withdrawals from
the public forests for non-timber uses. As one Japanese forest economist concludes, it is
difficult for second growth PNW logs or dornestic Japanese logs to compete with lumber
Gaston Chapter Three Page 52
imported from BC, which has been produced from old growth timber (Kato, 1982).
As a resuk of decreasing log supplies, Japan has, however unwillingly, been
substituthg lumber for log imports. In 1965, 84% of al1 solid wood imports by value (logs,
lumber, panel and other further manufactured products) were in the form of logs. By 1993,
log imports as a percentage of total solid wood products had decreased to 44% (Japan
Tariff Association). Lumber irnports increased from 15% to 33% of the value of total
importç over the same period, while panel product imports increased from 1% to 23% of
the total.
Figures 3.9 and 3.10 illustrate how Japanese self-sufficiency in lumber and other
panel products changed h m 1962 to 1992. Keeping in mind that the dornestic lumber or
panel product production in these figures includes production from imported logs, the fact
that Japan's self-sufficiency in lumber and veneer has dropped significantly since the
1960s confirms its gradua1 substitution away from logs.
Lumber imports, like logs, have also seen a shift away from hardwoods in favour of
softwoods. In 1962, only 11% of lumber imports were softwood, as compared to 85% in
1993, and with roughly 15 times the volume of lumber imports in 1993 as cornpared to
1962.
Although Japan exports insignificant arnounts of logs and lumber, the country has
historically been a major exporter of hardwood plywood. In the 1950s, Japan was the
second largest plywood producer (after the US) and the largest exporter (primarily to the
US and Europe). Due to increased domestic demands, export volumes became
insignificant by the 1970s. lndonesia replaced Japan in this market, exporting large
Gaston Chapter Three Page 53
Figure 3.9 Japanese Self-Sufficiency in Lumber (FA0 Yearbook, Va rious Years)
Figure 3.1 0 Japanese Self-Sufficiency in Selected Panel Prod ucts (FA0 YeanSook, Various Years)
Gaston Chapter Three Page 54
volumes of tropical plywood by the early 1980s. By 1988, lndonesia was the largest
tropical plywood exporter in the world (FAO). Japan, however, is still the second largest
tropical plywood producer in the world, utilizing mostly irnported logs and veneer (primarily
from Malaysia). ln spite of this, Japan's plywood imports have increased from negligible
amounts in the early 1960s to over 4 million cubic metres in 1993. Indonesia provides
about 95% of these imports. Finally, Japan has also been producing softwood plywood
in increasing quantities in recent years (Sedjo, et a1.,1994), although imports have
remained sluggish (less than 220,000 cubic metres in 1993; Japan Tariff Association).
To date, both domestic production and imports of other panel products have been
minor compared to plywood. In 1992, Japanese production of particle board was
estimated at just over 1 million cubic metres (roundwood equivalent; FAO) compared to
imports of only 125,000 cubic metres. Equivalent values for fibreboard are 929,000 cubic
metres and 155,000 cubic metres, respectively. In neither case are Japanese exports
sig nificant.
Figures 3.1 1 through 3.14 demonstrate the rather consistent sources of Japanese
imports, especially for softwood logs and lumber. In the case of hardwood logs, the major
imports have shifted away from the Philippines, first to lndonesia and then to Malaysia.
This has not, however, been the case for further processed products, particularly wood
panels. ln 1965, the major panel irnports into Japan (primarily plywood) came from North
America and Europe, whereas in 1993, the biggest plywood imports came from Indonesia;
this was also supplemented with fibreboard imports (with New Zealand being the largest
supplier), and particle board (with Canada being the largest supplier).
Gaston Chapter Three Page 55
.. - . . . < * . -
- Canada-
m ber
Figure 3.1 1 Japanese lmports of Sofhwood Lumber and Logs. 1993 (Japan T a M Association)
0% U.S.
Figure 3.12 Japanese lmports of Softwood Lumber and Logs, 1965 (Japan Tanff Association)
Gaston Chapter Three Page 56
on ' -
Mali
Figure 3.13 Japanese lmports of Hardwood Lumber and Logs, 1993 (Japan T m Association)
80%
60%
ron ,
UA. !
h Hong Kong 1 Omar
Figure 3.14 Japanese lmports of Hardwood Lumber and Logs, 1965 (Japan Tariff Association)
Gaston Chapter Three Page 57
While the sources of Japanese wood product imports have been rather consistent,
the market share that each exporting country enjoys has not. As already discussed earfier
in this section, the biggest change over this time period is the change from imports of
hardwood to softwood, foHowed by the less pronounced change in imports from logs to
lumber. This largely translates into an increase in Japanese market share enjoyed by
North America (rnostly the PNW for logs and BC for lumber).
3.4 Japanese Processing of Domestic and lmported Logs
As made evident in the previous section, Japan has shown a strong preference for
the import of unprocessed logs over lumber and other products. This section explores the
processing of logs in Japan, both domestic and imported, in the hope of shedding some
light on input preferences.
It was shown in Figure 3.4 that approximately 60-70% of Japan's dornestic logs are
used for lumber, with the balance being used primarily for pulp and wood chips, and small
amounts for veneer, fibreboard, scaffolding, and other miscellaneous uses. lt was also
shown that this rough breakdown has remained relatively consistent over the time period
shown. Virtually 100% of the imported logs from North America, the former Soviet Union
and New Zealand, by contrast, are used for lumber production. On the other hand,
imported logs from the South Sea countries are primarily used for veneer, with less than
20% being used for lumber (Japan Forest Agency). Figure 3.15 shows the breakdown
of Japanese lumber production, from combined domestic and imported logç, over time.
An average of 70-75% of the lumber production over the period of this graph was used in
Gaston Chapter Three Page 58
Conrtuctlon: Strïpr ThlcLnoaw7.l cm Width<4 Umar thkknaar - - Constuction: Boards Thlcknorrc7.S un Width=4 Umar Ihicknoir
Figure 3.15 Japanese Lumber Shipments by Use (Japan Forestly Agency Data, Pmvided by Y. Mon Kyofo University, Japan)
construction, with the fernainder being used primarily for packaging and furniture.
As of 1989, roughly 80% of lurnber made from domestic logs went into housing
construction, as was the case for lumber processed from North American and USSR log
imports. In the case of lumber produced from South Sea logs, however, only 45% went
into housing, while an additional 20% went into packaging and the remaining 35% intu
fumiture and other miscellaneous uses. The vast majority (over 80%) of the lumber made
from New Zealand logs went into packagingI2 (Otsuka, 1992).
As of 1989, there where over 17,000 sawmills in Japan. Given lumber shipments
of approximately 30 million cubic metres at that time, this gives an overall average output
121t must be kept in mind that in 1989, New Zealand had not begun shipping significant quantities of i t ~ pruned pine. The percentage of their wood products going into Japanese housing can, therefore, be expected to change quite dramaticalty.
Gaston Chartter Three Page 59
of only 1,750 cubic metres (roundwood equivalent) per mill. Of these sawmills,
approximately 40% process domestic logs only, approxirnately 15% process imported logs
only, and the balance process both (Otsuka, 1992).
Although the average sawmill size is small, especially by BC standards, they range
significantly in size. Those mills that utilize predominantly (or only) domestic logs are
generally small family operations employing less than 10 people. These tend to be inland
mills located close to the timber source. While this makes up the majority of sawmills by
number in Japan, those that process predominately imported logs tend to be considerably
larger. These are usually either coastal mills, or mills located close to large urban centres.
Logging and sawmilling typically are not integrated in Japan. Sawmills purchase
domestic logs directly from the landowners, independent log producers, forestry
cooperatives or sawlog markets (which number in the hundreds). lmported logs are mostly
purchased frorn trading companies and wholesalers. Logs from the national forests in
Japan are sold competitively (Kato, 1982).
There are many sources in the literature which state that Japan's domestic log
suppliers have difficulty competing with imports on price (see, for example, Sedjo, et ab,
1994; Otsuka, 1992; Iwai, 1986). In the case of Japanese cypress, for example, the
stumpage cost alone averaged over 40,000 Yen/rn3 in 1990 (approximately $325 US), or
a total cost of producing a domestic log of roughly 55,000 Yenlm3 (approxirnately $425 US)
(Otsuka, 1992). This compared to the average irnport price for US hemlock logs (a
competing species) of less than 27,0001m3 Yen in 1990 (or less than $210 US) (Japan
Tariff Association). Reporting Japanese cypress log costs a decade earlier, Mochida
(1984) quotes an even higher price of over 53,000 Yen/m3 stumpage and a total log cos
of over 65,000 Yen/m3 13.
While it appears that imported lumber is also less expensive than domesticallj
produced lumber, the higher cost of shipping lumber reduces the price difierential. Otsuka
(1992), quotes three price cornparisons for lumber from a study done by the Forest
Products Research lnstitute in Japan. These cornpansons are for the production of posts
in 1990. The final cost of these posts in Japan when domestic cedar logs were used was
54,800 Yen/m3; when North American hemlock logs were used, 48,400 Yen/m3; and finally,
the cost of imported North American hemlock lumber was 43,000 Yen/m3. In terms of US
dollars, these values are approximately $420, $375 and $330/m3, respectively.
When looking at the price of lurnber produced in Japan relative to imports, however,
it is not clear, due to inconsistencies in dimension and other measures of quality, that the
two are as comparable as is the case with logs.
3.5 Summary
This chapter has highlighted the significant trends in Japan's demands for domestic
and imported wood products over the past three decades:
1) Japan has moved from almost total self-sufficiency in log inputs to a heavy reliance on log imports. Although Japan has undertaken considerable reforestation, this was mostly done after the war, leaving little opportunity to change this trend before the turn of the century.
13This higher price is likely due to the lawer level of competing log imports.
Gaston Chapter Three Page 61
At present, roug hly 60% of Japan's dornestic log production is harvested from man- made forests. Given the lower quality and higher cost of this source, compared to domestic old growth, this lends support to the previous point.
Although the harvest from Forest Agency land has remained rather constant over this period, it has shown a gradua1 decline as a percent of total harvests; the significance of this lies in the fact that it is these lands that contain the largest percentages of old growth, albeit on less accessible lands than the private forests.
Domestic softwood log production dropped roughly 40% over this period while domestic hardwood log production dropped more than 65%. Softwood log imports increased 400% while hardwood log imports stayed relatively constant.
While log imports have shown the noted overall increase over this period, imports actually peaked in 1973 and have been dropping ever since. Against this trend, lumber imports have been increasing throughout. As was the case with logs, Japan has shifted its lumber imports away from hardwoods in favour of softwoods.
The primary reason for the drop in log imports seems to be less a function of Japanese demand and more a function of the declining availability of logs on the worid market (due to growing export restrictions and declining old growth supplies worid-wide). The former Soviet Union seems to offer the major potential for added future supply.
While the sources of softwood log and lumber imports have not changed significantly over this time period, total log and lumber market shares have.
North America and the former Soviet Union are the only significant suppliers of imported logs for housing in Japan. Logs from these two countries are used almost exclusively for lumber production. Only 20% of South Sea logs are used for lumber production, and New Zealand logs have been used almost exclusively for packaging material.
Japan has not shown a great acceptance for either softwood plywood or other panel products as substitutes for its traditional hardwood plywood (of which Japan is a significant producer-initially using domestic hardwood logs and later substituting imported hardwood logs and veneer).
Japan clearly enjoys a significant forest resource, with forested land as a
percentage of the total land base being very similar to that of BC, and growing conditions
Gaston Chapter Three Page 62
which allow for significantly greater annual increments in their volume of timber. Given the
high population density, however, it is likely that domestic supply will continue to fall far
short of demand. Further, given that Japan has already exploited most of its accessible
old growth stocks, coupled with a heavy reliance on relatively inexpensive imports, much
of Japan's timber resources lie outside of the country's extensive margin (the existence of
the imports putting downward pressure on domestic prices). It could be hypothesised, in
fact, that much of Japan's man-made timber stocks are also outside of the extensive
margin, due to the lower cost of imports relative to the cost of intensive silviculture and
harvesting .
The question now, however, is will the Japanese substitute lower quality logs,
imported lumber and other wood products for the high quality logs, which currently
comprise a major proportion of their total imports. Or, will they begin to rely increasingly
on domestic wood supplies?.
In terms of BC, as a past and potential future supplier of wood products, Japan has
shown a strong demand for high quality lumber from BC's old growth, in spite of its
preference for logs. Given the higher cost of log production in Japan, it is Iikely that this
demand will continue for as long as BC has old-growth stocks to mill; this could last for
several decades if the expansion of BC's extensive margin outpaces that of Japan's. At
some point, however, it is possible (or even likely given BC's present level of silvicultural
efforts), that Japan's domestic stocks will be more valuable (revenue minus cost) than BC
imports. In addition, of course, is the possibility of increased lumber imports from sources
other than BC. It is to these substitution possibilities that this thesis will now turn.
Gaston Chapter Four Page 63
Chapter 4 Theoretical Foundaüons and linplications for the Empirîcal Analysis of the
Japanese Demand for Wood Products
This chapter develops the methodology for quantitatively investigating Japan's
willingness to substitute alternative wood inputs in their production of wood products,
primarily housing. The possible wood input substitutions include: 1) imported wood versus
domestic wood; 2) wood from one region versus wood from another region; 3) one type of
wood versus another type of wood (for example, softwood venus hardwood; lumber versus
logs); and 4) non-wood inputs versus wood inputs.
It was stated in Chapter 2 that the most appropriate methodology found in the
literature for investigating derived factor demands for disaggregated wood imports cornes
from the Armington two-stage approach (1 969), and its subsequent applications. This
chapter starts with a discussion of the theoretical foundation of derived demand, describes
the empirical analysis used in the present study, and concludes with a description of the
data.
4.1 Theoretical Foundations
Japanese home builders, being the primary end-users of wood products, have a
number of choices among possible material inputs. They can use domestic lumber milled
from domestic logs, domestic lumber milled from irnported logs, or imported lumber.
Builders can also choose between hardwood and softwood, and between domestic and
imported further processed wood products (such as wood panels). Finally, the builders can
change the proportion of wood to non-wood materials used. It must also be noted that the
Gaston Chapter Four Page 64
builders' choice of input is dependent on the type of housing construction, such as post
and beam versus platform-fiame, with the former requiring larger dimensions, higher
quality, and different species (see Chapter 3).
In making these decisions, economic theory suggests that the builders (or the
building industry) will combine these alternative wood products with other inputs needed
in the production of houses (such as labour, energy, machinery and capital) in such a way
as to maximize profits or, equivalently, to minimize costs subject to the production function.
To illustrate, consider a Cobb-Douglas production function as foll~ws'~:
where: GNP = gross national product in Japan; a, = the quantities of domestic wood, imported wood. and the
quantity of 'everything else" that goes into building a house; @*ai = parameters.
The costs of building these homes can be represented as:
c = PDQD + P,Q, + PEQE
where: p, = the price of Q,
If builders are assumed to adjust their input mix in such a way as to minirnize costs
subject to the technology described by equation 4.1, this will yield the derived demand for
I41n this discussion. as in the empirical analysis used in the present study, output is taken to be per capita gross national product (GNP) as opposed to housing starts. This more general measure of output is considered appropnate as various foms of the wood input demand are being investigated, from logs to w w d panels. Logs are not directly demanded by house builden, rather the lumber from which the logs are transformed (not to mention the portion of logs which go into veneer for plywood, for example). Further, lumber imports themselves may not be directly demanded by house builden, much of which is remanufactured in Japan.
The use of GNP as the output in measuthg wood product input demand is not unique to the present study. Further. unlike North America, there exists a strong relationship between per capita GNP and housing starts in Japan, shown by Yu and Mori (1 990) to have a historical correlation coefficient of 96 percent.
Gaston Chapter Four Page 65
input materials, as a function of only input prices and output quantity. The constrained
minimization problem is:
Minimize C = PlQI + pDQD + PEQE
s.t. GNP = @Q:' Q,"' Q,"'
The Lagrangian expression associated with this constrained minimization is:
9 = PDQD + PlQI + PEQE - A [ @ Q ~ ' Q D a 2 ~ ~ ] (4-4)
If one assumes that the house builder's input choices do not affect the input prices (i.e. that
they are pr ie takers, facing a perfectly elastic supply curve for their inputs), the first-order
conditions for a minimum are:
&? - = GNP - @QP1QDa2QEa3 = O BA
The first three of these equations can be written as:
Gaston Chapter Four Page 66
where MP is marginal produd. Given that the Lagrangian multiplier. A, can be interpreted
as marginal cost (MC), as it reflects the change in the objective (costs) given a change in
the constraint (output), this can be re-written as'':
MC MPD = PD
MC MP, = P,
MC MPE = PE
Given that MC must equal marginal revenue (MR) under the assumption of profit
maximization :
where MRP is the marginal revenue product, or the additional revenue obtained from
selling what an additional unit of the input produces. Choice of any one input, then,
involves equating its marginal revenue product with its price (once again, given the
assumption that the buyer of the input is a price taker). In effect, the marginal revenue
product is the derived demand for the input.
Unfortunately, calculation of the derived demands for multiple inputs is not so
straight-forward. For example, given a drop in the price of domestic lumber, there should
not only be an increase in the quantity of domestic lumber demanded, ceteris paribus, but
lSSee W. Nicholson (1 989).
Gaston Chapter Four Page 67
there will also be a change in the quantity demanded of other wood alternatives as buMers
adjust to a new cost-minimizing combination of inputs. This can be broken down into a
substitution effect (here, substiMing domestic lumber for, Say, imported lumber from BC)
and an output effect (if building a house is now cheaper due to the drop in lumber cost,
and if this saving is passed on to the ultimate consumer, the builder will likely see an
increase in the demand for houses). Obviously, both of these effects cause the quantity
demanded of an input to move in the same direction, and opposite to a price move. This
concept will be retumed to shortly, when describing the analogous situation of deriving the
demand for a specific wood import (such as Douglas-fir lumber from Canada) from the
aggregated demand for al1 imports combined.
Retuming now to equations 4.5, it is possible to detemine the derived demand for
each input. expressed in ternis of input prices and output. Solving for the derived demand
for imported lumber, the final result becomes:
In short, the derived demand takes the form of (compare to equation 2.19):
Gaston Cha~ter Four Paae 68
where the parameters and the p's are functions of the a's in equation 4.9:
By ~ p i r Ï d l y estimating equation 4.10 when Q, , for example, is the quantity of al1
imported lumber by Japan, the value of Pl would represent the own-price demand elasticity
of imported lumber (thus the expected minus sign), b and P, the cross-price elasticities for
changes in the quantity of imported lurnber demanded given changes in the prices of
Japanese domestic lumber and "everything else", respectively, and P, the change in
quantity of imported lumber demanded given a change in production output. Note that
constant returns-to-scale can be tested for and/or imposed by equating the value of P, with
one (in the constant returns-to-scale case in a Cobb-Douglas production function,
a, + a, + a, = 1 ; see the constraint in equation 4.3). Note as well that -B, = P, + P3,
or that the own-price and the sum of al1 the cross-price elasticities of the inputs should
equal zero. Once again, this can be tested for andJor imposed.
As discussed in Chapter 2, given the stated objectives of this thesis, rather than
including P, (the average pnce of imported lumber in aggregate) in equation 4.10, it would
Gaston Chapter Four Page 69
be more desireable to disaggregate the P, into its component parts (such as Douglas-fir
lurnber from Canada, radiata pine lumber from New Zealand, etc.). This would allow for
the estimation of a number of potentially relevant cross-price elasticities between country
of origin, species or even product type?
The problem in obtaining cross-prie elasticity of demand estimates in this manner,
however, is two-fold. First, every price variable used as a regressor will use up one degree
of freedorn, which is particularly problematic when the researcher is limited in the number
of available observations (such is usually the case when one must rely on annual data).
It is not hard to imagine the number of desired price regressors exceeding the number of
observations when one considers the possible permutations of the sources of the import,
species, and product type.
The second problem is that even a few prices used as explanatory variables can
lead to problems of multicollinearity. In spite of the fact that it would be expected that there
are differences in the prices histories of, Say, BC Sitka spruce lumber and New Zealand
radiata pine lumber (or logs), it would not be surprising to see that the overall pattern is
An exarnple of this problem was offered in Chapter 2 in the description of Sedjo and
other's study (1994). Using Japan as the demander for imported timber products (see
equation 2.22), the researchers regressed the import price from region i'A's" timber on the
quantity demanded of this import, along with the p r ie of US timber, the price of Japanese
"ln order to break down the import prices by product type, the dependent variable would have to be the sum total of log, lumber and product quantities.
Gaston Chapter Four Page 70
domestic timber, and the average import price of timber from regions other than ' 'A or the
US. As the parameters on the Japanese domestic timber price and the "other" timber price
were found to be insignificant, they were suppressed. It is possible that this insignificance
stemmed from multicollinearity among the price series; if this is the case, it is not clear that
the variables should have been omitted, due to the potential for biasI7.
In the present study, the demand for a specific wood product is being sought (such
as the Japanese demand for Canadian Douglas-fir lumber), derived from the "output" of
aggregated wood imports. The derived factor demand function can be written as (see
equation 4.9): -(a2 ' (13) a2 a3 1
a, - az - a3 QI = UJ Pl ' a2 ' a3 P? . -
Q * a2 - a3 (4.1 3)
where: QI = the quantity demanded of a specific wood product (for exarnple, Canadian Douglas-fir lumber);
p I = the price of this product; P,, P, = the prices of other products which make up the total imports, Q; Q = the aggregate quantity of irnports (the "output").
This equation could, at least theoretically, be estirnated generating the own-price elasticity
of product "1" as well as the cross-price elasticities of the quantity dernanded of "1" (say,
Japanese demand for Canadian cedar) relative to the price of either "2" or "3" (say, the
price of US cedar and New Zealand radiata pine). Note, however, that this equation
disaggregates total imports into only three cornponent parts; while this in itself could lead
'7Multiwllinearity and omitted variable bias is well documented in rnost texts on econornetric theory. Multiwllinearity tends to exaggerate the variance of the affected regressor, which leads to the likelihood of omitting a variable that should not be ornitted. Johnston (1984), pages 259-264 offers a good account of the consequences of omitted variable bias. These potential problems are explored in greater detail when discussing the results in the following chapter.
Gaston Cha~ter Four Paae 71
to problems of mufticollinearity, the elasticity estimates of a greater number of component
parts are desired in the present study.
As was shown in Chapter 2, Arrnington (1969) offers a potential solution. The
approach, illustrated empirïcally by Chou and Buongiorno (1983), allows for a highly
aggregated form of equation 4-10 to be used, such as the quantity of al1 lumber imports by
Japan, yet still leads to highly disaggregated price elasticity information. To recap, this is
accomplished by a two step process. First, the demand for total imports of a kind (such
as plywood) is estimated, derived from the demand for some measure of output. Second,
the demand for individual sources of the product, deived from the demand for the product
in aggregate is estimated. As shown in Chapter 2, this process can be reversed
empirically for the ease of calculating CES quantity and price indices (Le., first estimating
the constant elasticity of substitution, then using this to estimate the aggregate demand).
4.2 The Empirical Model
The following chapter will report the results from two sets of analysis. The first of
these will be individual factor demand equations (such as equation 4.1 0):
where Q, and the corresponding P, represent various levels of aggregate quantity and
pke, respectively, of imported Japanese wood products. When estimating the aggregate
derived demand for al1 imports, P, is the real domestic price of Japanese logs. When
estimating a less aggregated fom of the derived demand, such as softwood lumber from
Gaston Cha~ter Four Paae 72
Canada, P, is the average of both the domestic Japanese log price and the price of al1
other imports (everything other that softwood lumber from Canada). While these
regressions will not allow for the determination of disaggregated crossprke elasticity
estimates, the analysis is done for cornparison of results with the Amington, two-stage
approach. P,, being the price of everything else, is taken in this study to be a wage index
due to its significance in Japan.
The second set of analyses will largely utilize the Chou and Buongiorno (1983)
application of the Armington model, allowing for a greater range of own- and cross-price
elasticity estimation.
Specificaily, the following equations are estirnated, using a linear log-log
transformation:
and
Equation 4.26 is estimated as system of equations, repeating the process for various levels
of aggregation. For example, in the first case the system varies I over major categories of
wood (softwood logs, hardwood logs, softwood lumber, hardwood lumber, and wood-based
panel products). Subsequent systems focus in on greater detail, beginning with softwood
lumber imports by Japan from various countries of origin, then on the imports of softwood
lumber from Canada by species. Wth the estimates of a (the constant elasticity of
substitution) and the constant ternis in hand, the relative weights can be recovered for
creating the CES quantity and price indices (as explained in Chapter 2). With these
Gaston Chapter Four Page 73
indices, equation 4.25 can be estimated in a rnanner consistent with Armington's two-stage
assumptions.
4.3 The Data Sources Used in the Empirical Analysis
The main source of data for the quantity and price relationships is the Japan Tariff
Association, lmporfs of Commodity by Country. This publication offers data on the annual
import of al1 commodities in considerable detail, giving volume and value by country of
origin. The data set used in this study covers the period 1965 to 1993, with the recognition
that the level of detail diminishes as one goes further back in tirne. The reason that the
study does not utilize data prior to 1965 is that the level of detal was considered to be
inadequate.
In 1 965, this publication reported imports from over 50 countries, broken down into
a total of 80 categories of wood products. This included 10 categories of softwood logs,
14 categories of hardwood logs, 16 categories of softwood lumber, I O categories of
hardwood lumber, 14 categories of panel products, and 16 categories of further
manufactured products. Unlike later years, the wood product detail is primarily in the form
of species. At the other extrerne, 1993 showed considerably more detail. The total
number of wood product categories increased to 145, broken down to 10, 20,21, 23,41,
and 30, respectively, as above. The detail on country of origin also increased, exceeding
80.
In order to run time series regressions over the entire 29 year period, it was
necessary to aggregate rnuch of the detail offered by these data in the Iater years in order
Gaston Chapter Four Page 74
to obtain consistent product categories through al1 years. While this task was considerable
in itself, it was further complicated by the fact that the Japan Tariff Association utilized
three different comrnodity classification systerns over this tirne period. This meant that the
data had to once again be aggregated to the cornmon denominator found over the three
commodity classification systerns. As this requires a deg ree of subjective judgement, the
end result of the aggregations used in this study is reported in detail in Table 4.1.
As seen in the table, in spite of the need for aggregation due to changes in the data
series over tirne, considerable detail was retained. There are 10 categories of softwood
logs (SLG-X) and 10 categories of hardwood logs (HLG-X), the breakdown being purely
by species. The first category in each, which is treated as lumber in this study, is logs
which are roughly squared or half squared (cants). Although it might have been expected
that prices within this category would be significantly higher than prices of dimension
lumber, such is not the case; further, the reported volumes in this category are very low.
For this reason, SLG-1 and HLG-1 were aggregated with SLM-9 and HLM-9, respectively,
these latter categories being sofhvood and hardwood lumber, not elsewhere specified
(n-es.), respectively. (For definitions of SLG-1, etc., see Table 4.1 .)
There are 20 final categories of sofh~ood lumber (SLM-X), along with 8 categories
of hardwood lumber (HLM-X). In the case of sofbvood lumber the categories include detail
on size breakdown (greater or less than 160 mm) as well as species. Unfortunately, this
breakdown was not consistently offered throughout the entire period, starting only in 1974
and 1977 in most cases. It is possible that there was no lumber imported by Japan less
than 160 mm previous to these years. Further, just as was the case with cants, although
Gaston Chapter Four Page 75
Table 4.1 : Japm Tariff Association Data, Converted Codes New 65-75 76-87 88-93 Description SLG-1 242-299 44.04-31 O 4403.20-010 Coniferous Logs, roughly squared or half squared
SLG-2 242-210 44.03-321 4403.2 0-091 Sawlogs & veneer logs, Pinus
SLG-3 242-221 44-03-322 4403.20-092 Sawlogs 8 veneer logs, S i a sprue -- SLG4 242-229 44-03-323 4403.20-093 Sawlogs & veneer logs, Abies and Picea, excluding
S i i a spnice --
SLG-5 242-230 44.03-324 4403.20494 Sawldgs 8 veneer logs, La&
SLGb 242-240 44.03-325 4403.20495 Sawlogs & veneer logs, white cedar, yellow cedar,
& other Charnaecyparis -- - - - - -
SLG-7 242-250 44.03-326 4403.20-096 Sawlogs 8 veneer logs, hemlock 8 other Tsuga
SLG-8 242-260 44.03-327 4403.20-097 Sawlogs 8 veneer logs, red cedar 8 other Thuja
SLG-9 242-270 44.03-328 4403.20498 Sawlogs & veneer logs, Douglas-fir 8 other Pseudotsuga
SLG-10 242-298 44.03-329 4403.20-099 Sawlogs & veneer logs, conifer, n.e.s. HLG-1 242-391 + 44.04-1 00 + 4403.99-21 0 + Non-coniferous fogs, roughly squared or half squamd
242-399 44.04-390 4403.99-31 1 +
4403.32-ûlO +
4403.3341 1 --- --- -. - -- - - -
HLG-2 242-310 + 44.03-331 + 4403.31490 + Sawlogs 8 veneer logs, lauans and apitons to '75; lauan,
242-381 44.03-336 4403.32-090 + kruirng mersawa and other Dipterocarpaceae family 76-'87;
4403.33419 + Al1 Meranti, Keniing, and kapur. '88 onward, plus mahogany
4403.99-290
HLG-3 242-320 44.03-100 4403.99-319 + Sawlogs 8 v e k r logs. Kwann. Tsuge or bomood. Tagayasan
4403.99-31 0 + (Cassia siamea Lam.), red sandal wood, rosewood, or
4403.33499 -- ebonywood (excl. ebony wl white streaks) - - - . - - - - . - - - -
HLG4 242-340 44.03-333 4403.99-391 Sawlogs & veneer logs. cottonwood and aspens
HLG-5 242-350 44.03-200 4403.99-1 90 Sawlogs 8 veneer Iogs, kiri (Paulownia)
HLG-6 242-360 44.03-334 Sawlogs & veneer logs. lignum vitae
HLG-7 242-370 44.03-335 4403.33-091 Sawlogs 8 veneer logs, teak
HLGd 342-382 44.03-337 4403.99-392 Sawlogs 8 veneer logs, American black wôlnut .---- -- --- -- -- - - - -. - - - -
HLG-9 242-383 + 44.03-338 Sawlogs & veneer logs. sandalwood
-- 242-384 -- - - - - - -a - - - - - - - - - - -- - . - - - -
HLG-IO 242-389 + 44.03-339 + 4403.99-399 + Sawlogs & veneer logs, non-coniferous, n.e.s. (incl. oak
242-330 44.03-390 + 4403.91600 + and beech post 1987)
44.03-332 4403.92-000 +
4403.34400 +
4403.35400
Gaston Cha~ter Four Page 76
Table 4.1 : Continued New 65-75 7647 88-93 Description
4407.10-330 Lumber, SPF. not more than 160 mm in thickness
4407.1 0-320 Lumber, planed or sanded, n.e.s.
SU-1 a 243-21 1 44.05-31 0 4407.10-121 + Lumber, Pinus, not exœeding 160 mm in thickness
SLM-1 b 243-21 2 M.05-5101511 Lumber, Pinus, exceeding 160 mm in thickness ---- -.
SLM-2a 243-221 44.05-51 2/52l 4407.1 0-341 Lumber, Sitka spruce (corn bined; post 1 9f7, not
exceeding 160 mm)
SLM-2b 44.05-522 4407.1 0-349 Lumber, Sitka spruce exceeding 160 mm (after 1977) - - - - -- - - - -
SLM-3ô 243-222 44.05320 4407.1 0-129 + Lumber. Abies (exciuding Calif. red fir, grand fir, noble
4407.10-350 fir, etc.) & Picea, not exceeding 160 mm ----- --
SLM-3b 243-223 44-05-51 31530 Lurnber, Abies (excluding Caiii. red fir, grand fir, noble fir.
etc.) 8 Piœa, exceeding 160 mm -- - - - - - -
SLM- 243-231 44.05-330 4407.10-210 + Lumber. Larix, not exceeding 160 mm
44O?.lO-Z9O
SLM4b 243-232 44.05-540 .
Lumber. Larix, exceeâing 160 mm - - . . - - - -
SLM-Sa 243-240 44.05-5151551 4407.10-361 Lumber, white and yellow cedar and other Chamaecyparîs
(post 1977, not exceeding 160 mm) SLM-Sb 44.05-552 4407.10-369 Lumber, white and yellow cedar and other Charnaecypads,
exceeding 160 mm (post 1977) -
SLM-ôa 243-2501251 4405-5161561 4407.10-371 Lumber. hemlock and other Tsuga (post 1974, not
exceeding 160 mm) - - - - - - .- - - - - - - - -- - - - - - - - - - -
SLM-ôb 243-252 M.OMli/562 4407.10-379 Lumber, hemlock and other Tsuga, exceeding 160 mm
(post 1974) . - - - -- - - - -- -- -
SLM-Ta 243-260 44.05-51W571 4407.10-381 Lumber, G l a s - f i r and other Pseudotsuga (post 1977. not
exceeding 160 mm) - -
SLM-7b 44.05-572 4407.10-389 Lumber, Doug las-fir and other Pseudotsuga, exceeding
160 mm (post 1977) -- - - - - -- - - -- SLM-8 243-271 + 44.05-521 1581 + 44Oi.lO-3lO Lurnber, incense cedar
243-279 44.055 W 5 8 9 -- - - -- -- - . - - A - -. -- -- - - SLM-Sa 243-280 44.05-5291591 4407.10-391 Lumber, conifer, n.e.s. (post 1977, not exceeding 160 mm)
SLM-Sb 44.05-592 4407.10-399 Lumber, conifer, n.e.s., exceeding 160 mm (post 1977)
SLM-t O 243-29 1 44.1 3-300 4409.10-31 0 Planed, grooved or tongued; Pinus, Abies, Picea and Larix
SLM-11 243-299 44.13-510 4409.10-320 Planed, grooved or tongued, conifer, n.9.s.
Gaston Chapter Four Page ï7
Table 4.1 : Continued New 65-75 7647 88-93 Description HLM4 243-310 44.05100 4407.99-1 10 + Lumber, Kwarin, Tsuge or boxwood, Tagayasan (Cassia
4407.99-1 90 siamea Lam.), red sandal wood. rosewood, or ebonywood
HLM-2 243-320 44.05200 4407.99-21 O + Lumber. Kin
HLM-3 243-330 44.055311593 4407.21-1 t 0 + Lumber. teak
HLM4 243-340 44.055321594 4407.99-410 + Lumber, Iignum vlae
4407.99490
HLM-5 243-350 44.05400 4407.21-270 + Lumber. lauan, kruing. mersawa and other Dipterocarpacea
4407.25000 -- ~ -
HLM4 243-360 44.055391599 4407.99-500 + Lumber. nonanifer, n.e.s.
4407.91-000 + (oak)
4407.92-000 + (beech)
4407.22-000
HLM-7 243-393 44.13-400 &l9.20-330 Lumber, planed. grooved or tongued. lauan. kruing, menawa
and other Dipterocarpaceae . - - . -. -
HLM4 243-399 + 44.13-590 + 4409,20350 + Lumber, planed. grooved or tongued, non-confer. n.e.s.
243-392 44.1 3-200 4409.20-320
VS-1 631-1 11 44.14-100 4408.90-100 Veneer sheets. Kwarin, Tsuge or boxwood. Tagcyasan, red
sandalwood. rosewood and ebony wood- . - --
VS-2 631-1 12 + 44.14-220 4408.90-200 Veneer sheeîs, Teak
VS-3 631-119 + 44.14-210 + 4408.10-010 + Veneer sheeis, n.e.s.
Gaston Chapter Four Page 78
Table 4.1 : Conünued New 65-75 76-87 Oescription PLY 631-210 +
631-21 1 +
631-212 +
631 -21 3 +
631 -21 4 +
631 -21 9 +
631 -220
441 8.90-100
PB 631420 44.1 &IO0 + 4410.1 0-01 0 + Particle board; "reconstiiuted"; "densified"
441 O.9O-OlO
FB 44.1 1-100 + 441 1.1 1-000 -> Fibreboard; "hardboard"; "building board"
44.1 1-900 441 1.99400
LAM 631410 44.15200 + 4412.29010 + Laminated: "irnproved"
MISC 631-870 -> 44.19400 -> 4409.10-200 + Misc.; incl. wood beadinglmoulding, boxes. casks.
632-899 44.28-290 4409.20-200 + barrels, wood for decoative use, etc.
4414-00-000 ->
4421 .go499
Gaston Chapter Four Page 79
there is a price spread behrveen the two size categories for most species, this spread is not
as dramatic as one might expect. This is illustrated in Figures 4.1 and 4.2, which show
size cornparisons for Japanese imports of selected Canadian lumber species. As a result,
the size detail was not maintained in the regressions reported in this study; volumes and
total values were summed within each category.
It can also be noted in Table 4.1 that spruce-pine-fir (S-P-F) lumber and "planed or
sandedJ1, n.e.s. imports were not reported individually until 1988. It is assurned that
previous to this date such imports were reported in the category of "planed, grooved or
tongued"; the regressions reported in this study, therefore, aggregate SLM-O, SLM-10 and
SLM-11 into a single category. In the case of hardwood, the two categories of planed,
grooved or tongued lumber, HLMJ and HLM-8, are aggregated into one category for the
regressions.
It is with the panel products that the Japan Tariff Association data loses the greatest
level of detail in the earlier years. While the data from 1988 onward includes breakdown
by species (or at least hardwood versus softwood), and often other characteristics such as
density and thickness, previous years lose detail progressively. For the regressions
reported in this study, a single category is used for each of the following: veneer sheets
(VS-1 through VS-3 are aggregated), plywood, particle board, fibreboard, and laminated
lumber. Other assumptions regarding panel descriptions found in the data series are noted
in Table 4.1 (for exarnple, including ucellular" and "blockboard" in the plywood category).
Finally, the Japan Tariff Association data include considerable detail under the
category of miscellaneous, such as mouldings, wood beadings, and other further
Gaston Chapter Four Page 8C
+ less than 160 mm + greater than 160 mm
Figure 4.1 Nominal Price of Japanese ImpoRs of Canadian Sitka Spruce Lumber By Size Category (Japan Tariff Association)
1 20
+ less than 160 mm + greater than 160 mm
Figure 4.2 Nominal Price of Japanese Imports of White and Yellow Cedar Lumber By Size Category (Japan Tariff Association)
Gaston Chapter Four Page 81
manufactured wood products. lmports in this category were not incIuded in the present
analysis due to their comparatively insignificant volumes, and the problems associated with
converting volumes to a common unit.
All log and lumber volumes are reported in cubic metres, roundwood equivalent.
In the aggregate regressions, where log imports are included with lumber and/or wood
panel imports, consideration was given to using a lumber recovery factor. However, this
was not done for two main reasons. First, lumber recovery can Vary widely, not only due
to processing differences among sawmills, but also because of differences in the fibre
source, species, log characteristics and product being produced. Secondly, one might just
as rightly state that the lumber irnports by Japan should also include a "lumber recovery
factor" insofar as Japan remanufactures a significant quantity of its raw imports. This is,
of course, particularly true for cants or other large dimensions. As assigning a value to this
recovery would be highly arbitrafy, it was decided to leave al1 volumes as reported.
Panel products are reported in a number of different units, which makes conversions
more difficult. While 1000 square metres of panel products which are 1 mm thick equal
one cubic metre, the product categories used in this study span a great variety of
thicknesses, not al1 of which are reported. To get around this problem, it was noticed that
the value of panel imports reported by the Japan Tariff Association very closely parallel
those quoted by the FA0 over the same time period (once converted to a common
currency)(Forest Products Yearfiook, various issues). As a result, the panel product
volumes in this study were converted using the average values suggested by the FA0
data.
Gaston Chapter Four Page 82
As particle board and laminated lumber are quoted in cubic metres (solid wood
equivalent), they required no conversions for the present study. Plywood and veneer
sheets are quoted in square metres and were converted to cubic metres by dividing by 135
(FAO). Fibreboard is quoted in kilograms and was converted to cubic metres by dividing
by 300 (FAO).
As the country of origin detail was much too high for the purposes of this study, six
country groups were created and data aggregated accordingly: Canada, the United
StatesfB, the former Soviet Union, the combined imports from New Zealand and Chile
(representing the major plantation producers of radiata pine), the combined imports from
the South Seas, and the combined imports from the "rest-of-world" (al1 other countries
exporting wood products to Japan). While The Japan Tariff Association does not break
down Canadian imports by province, as Table 4.2 demonstrates for lumber, the vast
majorrty of Canadian off-shore solid wood product exports originate from British Columbia.
A number of additional time-series data were needed for the present study. As
noted in Chapter 3, dornestic log and lumber production were obtained from the Japan
Forestry Agency, Table of Demand and Supply. Prices for dornestic logs and lumber were
obtained from the Japan Wood Products Information & Research Centre; from 1984 on
these prices were received directly from their in-house publication (various issues), while
prices before this date were obtained from the Global Trade Model data bank at the
lBGiven the similarity of wood products imported from Canada and the United States, it would have been reasonable to combine these two into 'North America". However, this disaggregation was desired due to the emphasis on Canada in the results and discussion in Chapters 5 through 7.
Gaston Cha~ter Four Paae 83
I Table 4.2 B.C. Offshore Lumber Exports Relative to the Whole of Canada (000s m3)
--
Year B.C. Canada 6.C.ICanada
I Source: Selected Forestry Statistics Canada, Information Report E-X-47. Natural Resources Canada, 1993.
University of Washingt~n'~.
To convert the price series used in the estimation of aggregate imports to real
values, the deflator employed was the Japanese producer price index for imported "wood,
lumber & related productsJ' (Bank of Japan).
For the "cost of everything elseJy, noted as P, in Sections 4.1 and 4.2, a monthly
wage earnings index for Japan was used, obtained from FAO's International Financial
Statistics Yearbook (1994). In those regressions where it was desirable to investigate
cross-price elasticities between the quantity of a wood product demanded and a non-wood
import, individual wholesale price indices for iron 8 steel products, cerarnics, stone 8 clay
products, and for plastic products were used, obtained from the Bank of Japan.
Finaily, the per-capita GNP values were obtained from FAO's International Financial
IQCenter for International Trade in Forest Products (CINTRAFOR).
Gaston Chapter Four Page 84
Statistics Yearbook (1 994).
Gaston Chapter Five Page 85
Chapter 5 Empirical Results
This chapter reports the results of the econometric analysis. Estirnates of Japanese
aggregate derived demand of al1 wood product imports are presented in Section 5.1, as
well as the derived demands of selected disaggregated products. The disaggreg ated
product own-prie elasticities are desired for comparison with the Armington two-stage
model, following aie empirical approach suggested by Chou and Buongiomo (1983). The
two-stage resufs are presented in Section 5.2. First, the constant elasticity of substitution
is estirnated over three individual systems, with each system disaggregating Japanese
demand for wood product imports by varying degrees of product detaii. This is followed
by the estimation of the CES demand function and the resulting calculation of the own- and
cross-price elasticities. In Section 5.3, the results from the direct own-price elasticity
estimations are compared to the calcuiated values from the two-stage approach, leading
to a brief discussion of the appropriateness of Armington's assumptions. Finally, Section
5.4 offers the estirnates of non-wood substitution by the Japanese importer.
5.1 Direct Estimation of Japanese Price Elasticities of Demand for Wood lmports
Table 5.1 shows the ordinary least square (OLS) and the Cochrane-Orcutt estimates
of the Japanese demand for aggregated wood product imports (including logs, lumber and
panel products, both softwood and hardwood). In log-log form, the quantity of import
demand is regressed on the real unit price of the aggregate wood products import (P,), the
domestic price of logs in Japan (P,), an index of wage rates in Japan (P,) and the
Gaston Chapter Five Page 86
Table 5.1 Estimates of the Japanese demand for aggregated wood importç. 1 -- -
Constant 1 PI 1 PD 1 PE GNP 1 Rz-Adj. 1 DW
Ordinary Least Square 1
12.741 i -0.1607 f 1.208 i -0.802 f 0.842 0.646 i 0.590 (11.630) i (-0.642) i (3.366) f (-5.347) f (6.935) i
Cochrane-Orcutt Durbin's h
13.625 i . -0.0373 f 0.862 i -0.719 0.8253 i 0.816 0.233 (12.280) i (-0.194) (2.324) i (-3.341) i (4.919)
I ~p
Note: P, , PD, P, , and GNP, are the logarithms of the price of aggregate wood imports (logs, lumber and panels), the pdce of Japanese domestic logs, the monthly average wage index in Japan, and percapita GNP in Japan, respectively. Numbers ,ii parentheses are t-values.
per capita gross national product in Japan (GNP).
The reason for including the Cochrane-Orcutt estimate is apparent from the
investigation of the Durbin-Watson (DW) statistic in the OLS regression. The lower and
upper bound critical values for the DW test for five parameters and 29 observations are
1.124 and 1.743, respectively20. As the DW statistic from the OLS regression lies below
the Iower bound, suggesting that this regression is potentially serially correlated, a
Cochrane-Orcutt regression is used.
The value of Durbin's h statistic on the Cochrane-Orcutt regression is 0.233,
indicating that there is no evidence of higher order autocorrelation. Under the nuIl
hypothesis of no higher order autocorrelation, Durbin's h is asymptotically normal with zero
mean and unit variance. This nuIl hypothesis is rejected if the statistic is greater than 1.645
ZODurbin-Watson critical values are quoted from Judge, et al. (1988). reproduced from Savin and White (1 977).
Gaston Chapter Five Page 87
at the 5 percent level of signïficance (1 -645 being the t-value at 5 percent significance with
degrees of freedom) (see Judge, et al., 1988; and Whit, 1993).
In the previous chapter, it was shown that the parameters on the aggregate import
price, the Japanese log price and the price of "everything else" should theoretically sum
to zero (see equation 4.1 1). The appropriate test on the regression reported in Table 5.1
yields an F-value of 1.1491, which is well below the critical value of 4.26 with 1 and 24
degrees of freedom. As a result, there was no reason to impose this restriction.
It was also shown in the previous chapter that the returns ta scale can be
determined by taking the reciprocal of the Japanese per capita GNP parameter. The
appropriate test to determine whether this regression demonstrates constant returns to
scale is to equate the GNP parameter with 1.0. As this yiekls an F-value of 1.0843, once
again being below the critical value indicated above, it can be concluded that this model
demonstrates a return to scale which is not significantly different from being constant.
As a final test on the direct factor demand regression reported in Table 4.1,
evidence of structural change was sought in two ways. First, a sequential Chow test was
performed. Second, the regression was re-nin with the inclusion of dummy variables, both
on the intercept and on the import price. The dumrny variable was defined as being zero
for the first x years and one otherwise. This was done with two different values of x. The
first period is defined as being from 1965 to 1973 due to the rapid growth in Japanese
housing starts as compared to 1974 to 1993. Further, Japan utilized fixed exchange rates
based on the gold standard until the early 1970s. The second period is defined as being
1965 to 1980, due to the introduction of log export controls by two major South Sea
Gaston Chapter Five Page 88
- Observed - Predicted
Figure 5.1 Observed versus predicted values of quantity demanded of aggregate softwood lumber importç by Japan when regressed on the average import price, possible wood substitute price (other wood imports and domestic logs), the Japanese wage index, and per capita GNP.
hardwood log producers in the early 1980s.
The Chow test rejects structural change, and there are insignificant t-values on the
intercept and import price dummy variables.
In addition to these tests, Table 5.1 dernonstrates that this regression offers a
reasonably good fit, with an adjusted correlation coefficient of 0.816. This is graphically
illustrated in Figure 5.1. Further, al1 of the parameter values meet a priori expectations in
ternis of sign, and al1 parameter values are significant with the exception of that on the
imported wood price. That this parameter is insignificant cornes as no great surprise; one
would expect the own-prie elasticity of aggregate imports of al1 wood products to be highly
Gaston Chapter Five Page 89
inelastic (few available substitutes). The parameter shown c m be interpreted as not being
significantly different from zero.
Table 5.2 shows the results of estimating the derived demand for selected
disaggregations of Japanese wood product imports. Cochrane-Orcutt regressions are
again employed due to evidence of serial correlation. Each row in the table represents an
individual regression, changing the dependent variable Qi and independent variable Pi in
each case, with the / representing the specific product indicated. The individual
regressions also include a second price variable, being the average real unit price of al1
other possible wood substitutes. This includes the price of imported products other than
Qi and the price of domestic logs in Japan. The average real price per unit of these two
substitution possibilities is indicted as Po in the table. The other independent variables,
being the wage rate index in Japan (P,) and the Japanese per capita gross national
product (GNP) are common to al1 of the regressions.
As was the case with the regression on the aggregate demand for al1 wood imports
by Japan (Table 51), it can be noted that the parameters on the specific import price, the
p r i e of ail possible wood substitutes, and the wage index should theoretically sum to zero.
lndividual tests yield F-values which are below the critical values in each case, again
making it unnecessary to impose this restriction. As regards returns to scale, while the
GNP parameter in some of the regressions would suggest decreasing returns to scale, the
appropriate tests also yield F-values which are below the critical value.
Over all, the regressions offer reasonably good fits, with adjusted correlation
coefficients typically over 0.8. Further, almost al1 of the parameter values meet a prion
Gaston Chapter Five Page 90
1 Table 5.2 Estimates of the Japanese demand for selected disaggregated wood imports.
Constant 1 PI 1 Po 1 PE 1 GNP 1 R2-Adj. ( Duibin's t
Softwood lumber from al1 sources 11.109 . i -0.650 i 1.469 f -0.710 f 1.562 i 0.940 i 0.499 (9.313) i (-2.340) f (3.351) f (4.105) i (8.839)
1 SonWood lurnber fmm Canada
1 Yellow cedar lumber from Canada
1 Sitka spruce fmrn Canada 8.124 i -1.109 1.553 j -0.366 1.222 f 0.676 f 0.119
(2.222) f (-2.287) i (2.543) i (-1.259) i (3.111) f
Douglas fir lumber from Canada 5.1 97 -1.255 1.993 i -0.993 j 1.422 i 0.911 i 0.259
(8.814) i (-3.012) i. (2.265) i (-0.831) j (6.619)
Hemlock lumber from Canada 4.593 -0.209 i 0.439 j -0.577 i 1.198 f 0.618 f 0.926 (3.770) (-0.255) i (0.630) j (-3.169) i (2.999)
Other lumber from Canada 12.282 . i -1.536 f 2.003 i -0.387 i 1.500 0.809 0.456 (6.991) j (-2.558) (2.931) i (-1.553) (8.803) f
"Planedm lumber fmm Canada 3.730 j -3.591 3.596 -0.470 1.338 0.9% i 0.188
(0.694) i (-3.216) f (2.302) f (-0.446) f (6.172) f
Softwood lumber from the US 3.61 9 -1.329 f 2.531 -0.891 1.626 0.788 0.557
(1.922) i (-1.529) i (2.013) f (-0.809) f (4.233) f
Red cedar lumber from the US 8.808 -0.040 i 0.983 -1.202 1.577 f 0.713 i 0.707 (6.811) i (-1.893) f (1.689) f (-1.098) f (2.633) j
Note: P,, Pm P, and GNP, are the logaflthms of the ptice of the indicated wood product, the average price of other imported wood products and Japanese domestic logs combined, the monthly average wage index in Japan, and per capita GNP in Japari, respectively. Nurnbers in parentheses are t-values.
Gaston Chapter Five Page 91
1 Table 5.2 (Cont) Estimates of the Japanese demand for selected disaggregated wood im ports.
Constant 1 pi 1 PO 1 PE 1 GNP 1 R2-Adj. ( Durbin's h 1
"Planedu lumber from the US 9.331 ; -5.309 i 4.863 j -0.239 f 1.207 0.866 i 0.122
(3.167) i (-2.981) i (2.887) i (-0.883) i (4.454) - - - -
Softwood lumber from New Zealand
6.1 18 -3.217 i 2.881 -0.408 j 0.967 f 0.777 i 0.142 (4.298) . i (-2.009) i (2.514) ! (-1.255) f (4.833) f
1 Softwood lumber from the former Soviet Union 1.181 ! 0.045 j 0.454 f -0.611 f 0.983 j 0.606 j 0.983
(2.645) (1.563) j (-0.607)
Softwood lumber from Other 9.91 0 ; -1.417 j 2.691 -0.436 f 1.262 i 0.903 f 0.188
(4.1 11)
Hemlock lumber from Other 14.232 i -3.417 i 3.139 f -0.228 f 1.403 f 0.897 i 0.558 (7.31 9) i (-2.999) (3.222) 1 (-1.936) (8.278)
. . - -
"Planedm lurnber from Other 6.689 i -0.517 f 1 A04 -0.655 1.239 i 0.770 i 0.812
(2.300) i (-2.300) f (5.309) j -
Softwood l o g ~ from al1 sources 15.609 f -0.0901 0.174 -0.372 j 0.651 j 0.752 i 0.774 (20.99) i (-0.294) j (0.703) i (-1.345) (2.475) i
Softwood logs from the US 11.712 i -0.209 f 1.146 i -0.653 i 0.777 f 0.634 j 0.0387 (6.843) i (-1.660) f (1.943) i (-2.318) f (3.653) f
Sitka spruce logs from the US 5.177 i -0.104 i 0.399 f -0.481 i 1.293 f 0.701 j 0.836
(4.008) i (-1.809) (2.166) f (-1.563) i (2.599) f - - - - - - -- - - - -- - .
Abieslpicea logs from the US
3.696 ; -0.339 i 1.190 -0.936 f 0.880 f 0.793 f 0.254 (1 -990) i (-1.458) i (2.203) j (-0.816) j (3.636) i
Yellow cedar logs from the US 8.294 i -0.400 f 0.525 j -0.267 i 1.193 j 0.660 f 0.779 (5.073) i (-1.826) i (1.927) f (1.193) i (3.101) j
Note: Pi, Pa 6, and GNP, are the loganthms of the price of the indicated wood product, the average price of other imported wood products and Japanese domestic logs combined, the monthly average wage index in Japan, and per capita GNP in Japan, respectively. Numbers in ~arentheses are t-values.
Gaston Chapter Five Page 9:
( Table 5.2 (Cont.) Estimates of the Japanese demand for selected disaggregated wood imports.
Constant 1 pi 1 Po 1 PE GNP 1 R2-Adj. 1 Durbin's h
1 Hemlock logs frorn the US 10.363 f -0.388 f 1.121 i -0.622 0,655 i 0.819 0.903 (4.468) f (-2.473) f (2.301) i (-2.456) f (2.709) i
Douglas fir logs from the US 3.290 f -0.554 j 0.906 f -0.355 0.773 0.791 0.127
(6.309) (-2.936) f (2.631) f (-1.853) f (2.985) j
Softwood logs from Canada 2.333 i -2.318 f 1.939 i -0.800 f 1.283 j 0.613 0.505
(8.300) i (-1.709) i (1.882) 1 (-2.067) (3.929)
Softwood logs from the NZlChile 11.255 i -3.015 f 3.093 -0.553 f 1.098 f 0.788 0.816 (3.901) f (-2.190) f (2.361) f (-1.637) i, (1.986) i
Softwood logs from the former Soviet Union 5.1 O0 f -0.109 f 0.666 f -0.839 1.459 i 0.512 f 1.233
(1 -994) (-0.029) i (1.107) (-0.934) f (2.069) a
Softwood logs from 'Othern 9.112 i -1.747 f 2.447 -1.143 i 0.769 0.876 f 0.311
(4.373) i (-7.419) f (4.938) (-5.046) (2.349)
Hardwood lumber from al1 sources 13.989 -1.158 i 1.685 i -0.672 i 1.693 i 0.954 0.421 (9.526) (-4.477) i (3.685) (-1.632) i (5.519) i
Hardwood logs from al1 sources 12.875 -0.0827 f 0.675 -0.604 0.723 f 0.820 i 0.808 (9.709) i (-0.631) f (1.913) (-2.310) (2.419) 1
Panel products from al1 sources 14.139 i -2.531 f 2.334 i -0.887 f 1.481 i 0.883 i 0.866
i (-3.400) i (-3.965) f (2.360) i (-0.632) f (1.195) i
I Note: Pi, Po P,, and GNP, are the logarithms of the pifce of the indicated wood product, the average pnce of other imported wood products and Japanese domestic Iogs combined, the monthly average wage index in Japan, and per capita GNP in Japan, respectively. Numbers in parentheses are t-values.
Gaston Chapter Five Page 93
expectations in terrns of sign, and the majority of the parameter values are significant.
Finally, tests for structural change were again rejected in each case.
lt is interesting to note the differences in own-price elasticities based on product
(with imported log demand being highly inelastic, panels being rather elastic and lumber
lying sornewhere in-between), source (for example, demand for US softwood logs being
highly inelastic and softwood logs from "other" being elastic), and species (for example,
the demand for yellow cedar lumber from Canada being highly inelastic and "planned"
lurnber being quite elastic). The significance of this variation will be returned to in Section
5.3, as well as in Chapter 6.
5.2 Estimation of the Armington Two-Stage Model of the Japanese Oemand for Total Wood Imports
Following Chou and Buongiorno's (1983) approach for estimating a two-stage
demand system, the constant elasticity of substitution of the produci imports is deterrnined
first. Table 5.3 shows the result of three rnodels (equation 2-18), utilizing various
aggregates of Japanese irnports. In the first case, wood products are broken down by
major product type (softwood logs, softwood lumber, hardwood logs, hardwood lurnber and
aggregated wood-based panels). In the second case, the investigation is lirnited to
softwood lumber imports by country of origin (Canada, United States, New Zealand, the
former Soviet Union, and "other" countries). Finally, in the third case the investigation is
lirnited to sofh~ood lurnber impoiis from Canada by species (yellow cedar, Sitka spruce,
hernlock, Douglas fir, "planed lumber", and "other" species). In al1 three systems of
Gaston Chapter Five Page 94
I ".' Estimates of the Constant Elasticity of Substitution over Varying Degrees of Wood lmport Aggregation, Correcting for Serial Correlation.
1 Wood Pmduet by Type
a -- ~ S U 1 ~ S L G ~ L M 1 ~ H L = ~ L M 1 ~ H U ~ S U 1 ~ P A N - - - - - - - -
-7 -456 -0.1 553 -0.1484 0.3705 0.5342 (-2.321 1) (-2.583) (-2.233) (3.380) (2.622)
Softwood Lumber by Source
- -- - -- - -
a -- b ~ L U - ~ ~ I bSLM-CAN b~~~~ --- I ~sLM-FSU b ~ ~ ~ - ~ ~ I b ~ ~ - N Z b ~ L M - ~ ~ - - - I - b ~ ~ - ~ ~ ~ - - - - - - - - - . - -
4.633 4.4619 2.451 1 1.7920 2.061 2 (-3.953) (4.3465) (3.9532) (2.888) (14.976)
- -- A- --
Canadian Softwood Lumber by Species
bsu-mer 1 b s w - m a , 1 b s ~ ~ - m a r 1 b s u - m e r 1 b s u - m e r 1 bsu-ritiu -- &LM-Y. csdir b ~ ~ - ~ e n i l o c k bsucp. flr bsur_piried- - . - -- -- -- - . l
equations, the estimates are corrected for firçt-order autocorrelation, and the values of the
elasticity of substitution (a) are constrained to be equal across equations. The systems are
estimated using Zellner's seemingly unrelated regression method (Judge, et al., 1988).
In each case, the elasticity of substitution has the expected sign and is significant.
As these values are al1 significantly different from zero, the component parts of the
Japanese imports are indeed substitutes rather than complements. As the values are not
Gaston Chapter Five Page 95
very large, however, the alternative imports are also far from being perfect substitutes for
one another.
While there are no expectations on the sign of the constant ternis, it can be noted
that, with one exception, al1 of the parameters are significant.
It should be noted at this point that the appropriate test on the equality restriction
on the elasticities of substitution is mjected in al/ t h e cases. The consequences of
employing this restricüon will be retumed to in the next section.
As shown in Chapter 2. the bi weights needed to calculate the CES quantity and
price indices can be recovered frorn the constant values reported in Table 5.3, combined
with the knowledge that the sum of the b$ must sum to one (five equations with five
unknowns for the first Wo systems, and six equations with six unknowns for the third
system). Table 5.4 shows the resulting weights for each of the three systems. Combining
these weights with the constant elasticity of substitution (a) yields the CES quantity and
price indices needed to estimate the aggregate Japanese dernand for wood imports,
repeating the process for each of the aggregation levels reported in Table 5.3. The results
of the regressions appear in Table 5.5.
As is the case in the regressions reported in Tables 5.1 and 5.2, the explanatory Po
variable represents the pdce of al1 possible alternatives to the independent variable. In the
first regression reported in Table 5.5, this is the average real price of Japanese domestic
logs. In the second two regressions, Po is the average real price of combined Japanese
domestic logs and al1 other imports besides aggregate softwood lumber and softwood
lumber from Canada, respectively. As before, the Japanese wage index (Pd and the per
Gaston Chapter Five Page 96
Table 5.4 Calculated CES Weights (b,'s) from Table 5.3
Wood product by type
Softwood tumber by source
CochrantOrcutt Estimates of the Japanese Demand for Seiected Aggregations of Wood Irnports. Utilking CES Quantity and Pnce Indices.
Constant 1 PI (CEII) 1 PO 1 PE 1 GNP 1 Ra-Adj. 1 Duibin's h
( Aggregate imports of ail wood products 1
- - - - -. .
1 Aggregate irnports of softwood lurnber fom al1 sources
( Aggregate irnports of al1 species of softwood lurnber from Canada 1
Note: Pi, PD. P, , and GNP. am the logarithms of the price of aggregate wooû i m m (Iogs, lumber and panels), Me price of Japanese domestic log* the monfhly average wage index in Japan. and per capita GNP in Japan, respective&. Numbers in parentheses are t-values.
capita gross national product (GNP) are common to al1 three regressions. Cochrane-Orcutt
estimates are obtained to correct for serial correlation.
When cornparhg these results with those of Tables 5.1 and 5.2, it can be noted that
Gaston Chapter Five Page 97
the regressions again offer good fits, with correlation coefficients which are of a similar
magnitude. The signs are as expected in each case, and the parameters are mostly
significant (with the notable exception of the price parameter of the aggregate import of al1
wood products).
It is interesting to note that in each case, the own-price elasticity of the aggregate
import is somewhat lower than those reported in Tables 5.1 and 5.2. This is not consistent
with the results reported by Chou and Buongiorno (1983) for the US imports of plywood,
where their regressions employing CES quantity and prices indices are slightly higher than
when using arithmetic means.
With the estimates of the aggregate irnport demand elasticity and the constant
elasticity of substitution for the component parts within each system, it is now possible to
calculate the individual own- and cross-price elasticities. These are reported in Table 5.6
for the first aggregation, being al1 wood product imports broken into types (softwood
lumber, softwood logs, etc.).
It can be noted from the table that al1 of the own-price elasticities (the diagonal from
upper left to lower right) have the expected negative sign, with both softwood and
hardwood logs reflecting slightly inelastic demand and softwood lumber, hardwood lumber
and panels reflecting elastic demands. The cross-price elasticities also have the expected
signs, and are less than unitary in al1 cases. Note that the cross-price elasticities indicate
a greater willingness to substitute lumber and panels in response to increases in the price
of logs than the other way around.
Table 5.6 also breaks out the substitution and market expansion effects of the
Gaston Chapter F ive Page 98
brpble 5.6 Calculated own- and cross-prie elasticiües of demand for the 1 1 Ja~anese imports of al1 wood products bv tv~e.
SLG Sub X
HLG Sub X
SLM Sub X
HLM Sub X
PAN Sub X
SLG, HLG, SLM, HLM, PAN refer to softwwd logs, hardwood logs, softwood lumber, hardwood lumber, and aggregate wood-based panels, respectively,
The elasticity of substitution (O) = 1.456 The elasticity of the Japanese demand for aggregate importç (B) = 0.122
* Shares (Si) are calculated by value at aie mean. Own-price elasticity of each product type is calculated as (1-Si)u + Si B Cross-price elasticity between product types is calculated as Si a - Si P
* Sub = substitution effect: X = market expansion effect
calculated elasticities, as discussed in Chapter 2. As the own-price elasticity of the
aggregate demand of al1 wood product imports (B, in equation 4.25) is extremely low,
however, the market expansion effect is always negligible.
Table 5.7 shows the calculated own- and cross-price elasticities of demand when
imports are defined as softwood lumber by country of origin. The own-pnce elasticities are
represented by the sum of the two values in each cell (the addition of the substitution and
market expansion effects), and are again of the expected sign. All values reflect inelastic
demand, with little variation by source of the softwood lumber.
The signs of the cross-price elasticities, on the other hand, are not what one might
initially expect. In al1 cases, the sum of the two values (again, the substitution and market
Gaston Chaoter Five Paae 99
'able 5.7 Calculated own- and cross-price elasticities of demand for the Ja~anese imports of softwood lumber by countrv of oriçiin.
SLM- Sub X
=Mus Sub X
SLMw Sub X
SL&u Sub X
s w m Sub X
Shares
* SLM-, SLMus, SLM,, SLMRu, and SLM,, refer to sofhnrood lumber from Canada. the US. New Zealand, the former Soviet Union, and U~ther" countries. respectively
The elasticity of substitution (a) = 0.6331 * The elasticity of the Japanese demand for imports of al1 softwood lumber (P) = 0.768 * Shares (Si) are calculated by value at the mean.
Own-price elasticity of each product type is calculated as (lSi)a + Si p Cross-pnce elasticity between product types is calculated as Sj o - Si (3
* Sub = substitution effect X = market expansion effect
expansion effects) is negative; without investigation of the component parts one cornes to
the conclusion that softwood lumber from different sources are complements rather than
substitutes. This is shown by the positive substitution effects not to be the case, however.
The negative net effect occurs because the market expansion effect counteracts the
substitution effect in al1 cases, as the constant elasticity of substitution is smaller in value
than the elasticity of demand of the aggregate import of softwood lumber from al1 sources.
The result of this 6'cancelling" effect is that the cross-price elasticities are very low in al1
cases.
Finally, Table 5.8 shows the calculated own- and cross-price elasticities of demand
Gaston Chapter Fie Page 100
'able 5.8 Calculated own- and cross-price elasticities of demand for the Japanese imports of Canadian softwood lumber bv s~ecies.
S L k Sub X
SLMcs Sub X
SLM- Sub X
SLM, Sub X
SL%o Sub X
SLM, Sub X
Shares
SLM,, SLM=, SLM,, SLM,,, SLMC-, and SLMco refer to Canadian Sitka spruce lumber, yellow cedar, hemlock, Douglas fir, "other" species, and "planed", respectively.
* The elasticity of substitution (a) = 0.477 The elasticity of the Japanese demand for imports of softwood lumber from Canada (0) = 1.299 Shares (Si) are calculated by value at the mean. Own-prïce elasticity of each product type is calculated as (lSi)u + Si B Cross-pnce elasticity between product types is calculated as Si a - Si P
* Sub = substitution effect: X = market expansion effect
when focussing on the Japanese imports of Canadian softwood lumber by species. The
signs are again as expected, being negative for both the own- and cross-price elasticities,
noting once again that the market expansion effect in the latter is more than offsetting the
substitution effect.
5.3 Cornparison of the Two-Stage and Direct Estimates of the Own-Price Elasticities of Demand for Wood Product lmports in Japan
ft can be noted tt-iat there exists considerable difference between the own-price
elasticities reported in Tables 5.6 through 5.8 as compared to the values reported in Table
Gaston Chapter Five Page 101
5.2. Beginning with the disaggregations by product type in Table 5.6, being the estimates
from the two-stage analysis, the own-price elasticities are shown to range from -0.888 for
softwood logs to -1 -395 for panels. This compares to the direct estimates from Table 5.2,
where the range is from -0.090 for softwood logs to -2.531 for panel products. While the
overall grouping is largely maintained, with more processed products being more elastic,
with the two-stage process this is only by degree; in fact the elasticity estimate for panel
products is shown to be indistinguishably different from hardwood lumber.
As regards the cross-price elasticities generated from the ho-stage model, Table
5.6 shows that there appears to be a greater willingness for the Japanese buyer to
substitute more processed products for less processed products than there is for the other
way around. For example, while a price increase in softvvood logs leads to a significant
substitution with panel products, a price increase in panel products leads to minor
substitution with soflwood logs. A possible explanation for this is that as the price of
irnported panel products goes up, Japanese log processors recover a higher proportion of
these products relative to lumber (i-e., substitute domestically produced panel products in
response to price increases in irnported panel products).
As a more general observation on the cross-price elasticities shown in Table 5.6,
note the expected result of identical increases in the quantity demanded of, for example,
hardwood logs, softwood and hardwood lumber, and panels in response to a price change
in softwood logs. This somewhat counterintuitive result is, of course, a direct consequence
of imposing an equal elasticity of substitution across product types.
Cornparisons of the direct and two-stage estimates of the own-price elasticities of
Gaston Chapter f i e Page 102
softwood lumber by source and Canadian sofhtvood lumber by species show even greater
inconsistencies. In both cases, it is seen that the range in elasticity values is significantly
narrower with the Iwo-stage estimation procedure, suggesting that Japanese dernand
response to price changes daes not Vary dramatically by either source of the product or
species. This is not what is implied by the direst estimation results.
Given the assumption of the constant elasticity of substitution which underlies the
two-stage procedure, however, this result is again not surpnsing. After all, this assumption
states that the Japanese wood buyer views the substitution of sofbvood lumber from New
Zealand for sofiwood lumber from the US, for example, exactly the same as the buyer
views substituting Canadian lumber. Given that softwood lurnber from New Zealand has
historically been considered to be of only packaging quality, such an assurnption may
indeed be far too restrictive. As a reminder, the appropriate tests on the equality restriction
of the elasticity of substitution (Section 5.2) was rejected. The Japanese import data used
in this study does not support the notion of a constant elasticity of substitution across al1
substitution possibilities investigated.
Ironically, this means that the procedure suggested by Armington (1 969), and later
forwarded by Chou and Buongiorno (1983), largely negates what Arrnington set out to
accornplish to begin with. This was to show that the assurnption of homogeneous
"commodity" demand is potentiall y over-restrictive. It would a ppear from the results
presented here that what is being suggested by Armington for dealing with this restriction
Gaston Cha~ter Five Pane 103
ends up being self-defeating2'.
This is undoubtably what prompted Hseu and Buongiomo (1 W2), who also found
that their data rejected the equality restriction on the elasticity of substitution, to pursue
their research. As was discussed in some detail in Chapter 2, however, their findings can
only be considered empirical; that is, it is not supported by theoretical foundations. As a
matter of interest, a similar procedure to that followed by Hseu and Buongiorno was
applied to the Japanese import data used in the present study. This is of interest as the
results closely parallel the findings of Hseu and Buongiorno, and the direct own-price
elasticity estimates shown in Table 5.2. While these results are not presented for reasons
already outlined, it does reinforce the need for further research which addresses the non-
commodity nature of wood products.
5.4 Non-Wood Substitution in Japan
As the final set of results, this section presents direct elasticity of demand
estimates for non-wood materials, with corresponding estimates for the cross-price
elasticity for aggregated wood imports in Japan. It was shown in Chapter 3 that Japan has
made growing use of non-wood materials in its construction of homes. This trend is
emphasized by Figure 5.2, showing the non-wood housing starts over the study period.
While the substitution of non-wood materials for wood is clear from the figure,
quantifying the trend is not without its problems. Inclusion of price indices for ironlsteel,
''The results obtained by Chou and Buongiomo (1983) for the US imports of hardwood plywood support this finding, with little variation found in the own-price elasticities by country of origin.
Gaston Chapter Five Page 104
Figure 5.2 Number of Non-Wood Housing Starts in Japan (Japanese Ministry of Construction)
ceramicslstone/clay or plastic products, either together or separately, tended to be
associated with insignificant parameter values, possibly due to multicollinearity of these
data with the irnport andior dornestic wood price data. Further, as the collection of a
detailed tirne series on the quantities and pnces for non-wood materials was beyond the
swpe of this study, this problem could not be circumvented with the two-stage approach
employed in this study.
Table 5.5 shows the same regression reported in Table 5.1, but with the addition
of a price index for iron/steel. The parameter on this non-wood "substitute" comes as
Gaston Chapter Five Page 105
-- -- - - - - -- 1 ~ a b l e 5.9 Cochrane-Orcutt estimates of the Japanese demand for aggregated wood imports, with the inclusion of a non-wood regressor.
constant 1 pi 1 PD 1 PE 1 PSW 1 GNP 1 R2-Adj. ( Durbin's l
I Note: P, , PD, P, , P , and GNP, are the logarithms of the price of aggregate wood imports (logs, lumbe and panels), the price of Japanese domestic logs, the monthly average wage index in Japan. the ptfc, index of irWstee1 in Japan, and per capita GNP in Japan, respectively. Numbers in parentheses afi
I t-values.
somewhat of a surprise, as it has a negative sign (although the parameter is not
significant). This suggests that ironlsteel acts as a complemenf to wood in the Japanese
output of products (as measured by the per capita GNP), rather than as a substitute. Aside
from the possibility of multicollinearity among these regressors (Le., that the ironisteel
parameter is not meaningful due to very high variances), one would have to conclude that
for the Japanese output which requires wood as an input (which is primarily housing
construction in Japan), ironlsteel is also desired in combination.
5.5 Summary
This chapter has presented the results of two econometric analyses. The firçt was
the direct estimate of the demand elasticities for Japanese imports of various wood
products inputs, including various levels of aggregation. The second was the resuks of the
Mo-stage approach initially suggested by Armington in 1969, with three levels of
aggregation (al1 wood imports by type, softwood lurnber imports by source, and Canadian
softwood lumber imports by species).
It was shown that the own-price elasticity estimates mostly meet a priori
Gaston Chapter Five Page 106
expectations in terrns of sign and relative magnitude. The cross-price elasticities derived
from the two-stage methodology also met a prion expectations in terms of their signs. It
was found that with the exception of the first case, where imports of al1 wood products are
broken into major product categories, that the net cross-price effects tend to be very small,
with any substitution effect being counteracted by a market expansion effect.
Hawever, it was also shown that considerable difference exist between the direct
and the two-stage own-price elasticity estimates. This is attributed to the required
restriction of a constant elasticity of substitution across al1 input pairs being investigated
in the two-stage estimations.
Finally, it was shown that individual commodities within each level of aggregation,
whether by product type, source or species act as distinct economic units. This is made
evident in the direct estimates of the price elasticities of demand through the large variation
in the own-price demand elasticities, and confinned by the rejection of the test on the
equality of the elasticities of substitution in the two-stage model.
In the following chapter, the econometric results presented here are discussed in
the context of Japanese wood product import trends from 1965 to 1993. While the
theoretical foundation of the two-stage approach was found to be sound, the needed
restrictions cast considerable doubt as to its practical application. As a result, the
discussion will Iimit itself to the direct own-price elasticity estimates offered in Table 5.2,
and a few general observations regarding cross-price elasticities from the two-stage
results.
Gaston Cha~ter Six Page 107
Chapter 6 Discussion of the ResulQ
Considerable detail has been offered in the previous chapters on the analysis of
forest product import substitutions by Japan. This included a review of the North Amencan
literature on wood product substitutions (Chapter 2), a description of the Japanese forest
industry and wood usage trends (Chapter 3), the theoretical foundations for quantifying
Japanese wood import demand price elasticities (Chapter 4), and, finally , a description of
the empirical results (Chapter 5). In this chapter, the relevance of these results is
discussed.
To facilitate this discussion, it will be helpful to visualize the Japanese import
quantities and corresponding real p r i e trends. starting with the most aggregated Japanese
import basket, and moving to the least aggregated. M i l e import quantity trends were
summarized in Chapter 3, the simultaneous consideration of real price trends2* will be
helpful in understanding substitution effects. To this end, Figures 6.1 through 6.16
graphically summarize the Japanese Tariff Association data used in the econometric
analysis.
6.1 Japanese Wood Product Imports, Aggregated by Product Type
Starting with Figure 6.1, showing the volume and correspanding real prices of the
Japanese imports by major product types, a number of general observations can be made.
aAs discussed in Chapter 4, real prices were generated by adjusting nominal prices to 1993 dollars, using the Japanese GNP deflator.
Gaston Chapter Six Page 108
- SLM
+ HLG
+ HLM SLG
+ VSlPLYlPARTlFlB
Figure 6.1 Japanese imports of wood products by major product types; volume and real value. SLM, HLM, SLG, HLG, and VSIPLYIPARTIFIB refer to softwood lumber, hardwood lumber, sofhood logs, hardwood logs, and combined panel products, respectively.
Gaston Chapter Six Page 109
First and foremost, with al1 of the categories of wood products, in aggregate, with the
possible exception of hardwood logs, Japanese importers were paying less (real Yen per
d) for theirimporfs in 1993 than they were in 1965. When one considers the strength of
the Japanese Yen relative to the currencies of any of the major fibre suppliers discussed
in this study, this becomes clear. For example, in 1965 the aggregate price of softwood
lumber is shown in the figure to be roughly 55 thousand Yen per rn3, and roughly 40
thousand Yen per m3 in 1993, real. In terms of Canadian dollars, these two values are
roughly $170 per m3 and $500 per m3, respectively. This growth in the purchasing power
of the Yen is very important to the interpretation of the results of this study, and will be
revisited when discussing implications for the BC forest industry in Chapter 7.
A further observation regarding the prices of the aggregated fibre imports is that
they are not identical, neither in magnitudes nor in theirprecise trends over time. Clearly,
hardwood lumber has seen the largest price prernium over other fibre categories, and the
largest price volatility. This is followed by veneer sheets and other panel products and then
by softwood lumber. Finally, the lowest real price per m3 is shared by softwood and
hardwood logs. It can also be seen from the figure that softwood lumber and softwood
logs share a similar price pattern. This is not too surprising given that both are prirnarily
used for housing construction in Japan (for both structural and appearance purposes).
That softwood lumber trades at a premium to softwood logs is also not too surprising, given
the higher waste and cost associated with the Japanese processing of log imports as
cornpared to lumber imports. In other words, the derived demand for logs, after subtracting
al1 other costs associated with building a house, for example, is logically lower than for
Gaston Chapter Six Page 1 10
lumber.
When comparing hardwood lumber with hardwood logs, the price patterns are not
as similar as for softwood, and the price premiurn for lumber over Iogs is much wider.
Unlike the softwood comparison, these two products do not tend to go into the same end
product. Hardwood lumber, as evidenced by its price premium, is prized for its appearance
qualities. While this appearance quality is primarily exploited for fumiture, it is used in
housing to a smaller degree, mainly as panelling and trim. Hardwood logs, on the other
hand, are largely used by Japan's sizeable plywood industry.
As regards the corresponding volumes imported, it can be seen that these data
confirm the trends discussed in Chapter 3. First, there was a strong increase in volume
of softwood and hardwood log imports from 1965 to 1973, partially due to substitution of
imports for domestic production, and partially due to rapid increases in Japanese housing
starts. This was followed by a period of flux from 1974 to 1981, when Japan witnessed a
decline in economic activity and a corresponding decline in the number of wooden housing
starts. Finally, there were slightly increasing and declining volumes for softwood logs and
hardwood logs, respectively, from 1982 on, corresponding to small increases in wooden
housing starts and export controls on hardwood logs by two major producers, respectively.
Softwood lumber imports show a gradual increase throughout the study period, as
does hardwood lumber on a smaller scale. This shows the gradual trend of substitution
of lumber for logs. Panel imports, on the other hand, became prominent only from the
early 1980s on, contributing to Japan's import substitution away from Iogs.
Relating this visual picture to the elasticity results presented in Chapter 5 yields few
Gaston Cha~ter Six Page 1 II
surprises. Referring back to the results of the direct estimations for own-price elasticities
for selected irnports (Table 5.2), it was shown that both sofhivood and hardwood logs reflect
highly inelastic demand in aggregate (in fact, not significantly different from zero),
compared to a moderately inelastic value for softwood and a slightly elastic value for
hardwood lumber. This suggests that there are more substitutes for imported lumber than
there are for imported logs. As mentioned in the previous chapter, this makes sense as
Japan can substitute both domestic lumber and domestic logs for imported lumber.
Further, dornestic lumber can be made from both domestic and imported logs. lmported
logs, on the other hand, can only be directly substituted with domestic logs. The panel
products are shown to have a quite elastic dernand, which when one extends the
substitution possibility logic just presented, also makes common sense.
Bearing in mind the limitations of the two-stage results presented in the previous
chapter due to the restrictive nature of the constant elasticity of substitution assumption
across al1 product pairs, it is interesting to note that there appears to be a greater
willingness for the Japanese buyer to substitute more processed products for less
processed products than conversely (see Table 5.6). For example, while a price increase
in softwood logs leads to a significant substitution with panel products, a price increase in
panel products leads to minor substitution with softwood logs. A possible explanation for
this is that as the price of irnported panel products goes up, Japanese log processors
recover a higher proportion of these products relative to lumber ( ie. , substitute
domestically produced panel products in response to pdce increases in imported panel
prod ucts).
Gaston Chapter Six Page 1 12
6.2 Japanese Softwood Lumber Imports, Aggregated by Source
Figure 6.2 offers a graphical representation of the next level of disaggregation of the
Japanese Tariff Association import data: total sofhivood lumber imports by county of origin.
Section 6.3 follows with a discussion of sofhnrood lurnber by species. This is then repeated
in subsequent sections for hardwood lumber, softwood and hardwood logs, and panel
products by country of origin, and, where appropriate, by species. The greatest detail is
ofiered for softwood lumber, due to its importance to the BC forest industry.
Starting once again with general observations on the price levels and trends, it
can be seen that there are three basic groups. Going from least to most expensive, there
is the former Soviet Union and New ZealandlChile group, the CanadaNS group, and the
'other" group. Once again it can be noted that al1 groups have witnessed real price
declines over the penod of the study. Further, there was a slight widening between the first
two groups over time. and the "other" group saw the largest price drop over time, as well
as the largest price volatility. As regards this last point, softwood lumber imports falling into
the 'other'' category originated originally from Asia, and later from the South Seas, Asia,
and Scandinavia. It is unclear why there was such a large price premium for softwood
lumber from these sources. One possible explanation is that Japan was purchasing a
particularly high quality softwood. Another possible explanation is that these lower
volumes represent marginal purchases above and beyond Japan's main supply of
softwood lumber, and a resulting willingness to pay more.
As regards the difference observed between the North Amerka group and the New
Zealand/Chile/former Soviet Union group, the lower prices indicated for the latter are
Gaston Chapter Six Page 1 13
- Canada + US + USSR + NZICtiile +s+ Other
Figure 6.2 Japanese imports of s o ~ o o d lumber by source; volume and real value.
Gaston Chapter Six Page 114
intuitively explained by quality differences. When one considers that North American
lumber over most of this tirne period largely represented product from old growth PNW and
BC forests, it may be a source of some surprise, in fact, that there was not a larger price
spread than that shown. The average landed price in Japan for softwood lumber from
Canada was roughly CDN $490 per m3 in 1993, compared to CDN $275 per m3 from New
ZealandIChile. It must be stressed, however, that these are averages. While this average
Iikely represents a relatively small range of prices in the case of New ZealandIChile,
representing primarily radiata pine and, historically, of only a low grade, the North
American average is over a wide range of species and grades. As the question of species
will be dealt with below, discussion is reserved to that point. To give a sense of the
variability at this point, however, the 1993 value of Japanese imports of yellow cedar
exceeded $CDN 950 per m3, which is again a potentially misleading average across
grades. The price of the highest grade of yellow cedar lumber reported by a leading BC
producerlexporter in 1995, "C" clear and better, was nearly $2,700 per m3, f.a.~.*~,
recognizing that this is still aggregated over ail sizes within this grade.
As a final comment on the p r i e cornparisons shown, it comes as some surprise that
from 1991 on there was a price premium for softwood lumber imported from the US over
that from Canada. Even when aggregated over grades, it would have been expected that
the price premium should have belonged to Canada. While rnost of the Canadian lumber
shipped to Japan is still obtained from old growth timber, the US have shipped significantly
23Note that cornparison of this value with the landed values in Japan reported in this study would require the addition of loading and transportation costs.
Gaston Chapter Six Page 115
lower quantities of old growth lumber for quite some time. At least a partial explanation for
this observation cornes from the fact that planed lumber in the 1990s made up a larger
component of Canada's market mix to Japan than that from the US. In 1993, the planed
share for Canada and the US was 8.14% and 4.35% of al1 wood products imported by
Japan (logs, lumber and panels), respectively. This is an interesting point, one that will be
returned to later, especially given that the average share of planed lumber over 1965 to
1993 for the two countries is virtually identi~al*~.
In ternis of the market share of soffwood lumber by exporting country, 1 can be seen
that in spite of year ta year differences, the overall trend has stayed relatively constant,
with the exception of Canada's gain in share at the expense of the US after 1989. Canada
has maintained its position as the largest sofbvood lumber supplier to Japan, followed by
the US and distantly followed by other sources.
The direct owngrice ehsticity estimates from Chapter 5 (Table 5.2) do suggest that
the level of substitutability does Vary for softwood lumber by source. The demand for
Canadian soffwood lumber is slightly inelastic, the demand for US and "other" softwood
lurnber moderately elastic, and the demand for New Zealand lumber is quite elastic. The
estimated value for the former Soviet Union, being a positive value of 0.045, is an
unexpected result that cannot be explained beyond the comments made in the previous
chapter.
24When refemng to planed lumber in this thesis, reference is being made to the Japan Tariff Association's category termed 'planed, grooved or tongued" before 1988, and "S-P-Fn plus 'planed and saoded, n.e.s." from 1988 on. It is assumed that this corresponds to North America's loosely defined "kiln dried, dimension lumbern. as opposed to green lumber going to Japan, being prirnarily squares and baby squares.
Gaston Chapter Six Page 116
As mentioned in the previous chapter, the calculated cross-price elasticities from the
ho-stage estimations for softwood lumber by source Fable 5.7) indicated the unexpected
result of a negative net value. This is attributed ta the non-zero elasticity of demand for
softwood lumber in aggregate, in this case yielding a market expansion effect that more
that reverses the substitution effect. For example, a 10% increase in the price of sofhivood
lumber from Canada leads to a 3.15% increase in the demand for softwood lurnber from
any other country (the same increase once again due to the assumption of a constant
elasticity of substitution across al1 pairs of countries). Counteracting this, however is a
negative market contraction effect of 3.82%, leading to a net cross-price effect of - 0.067.
The results against price increases from any country are similar, with very small cross-prie
effects between countries.
Given the constant elasticity of substitution across pairs of lumber sources, the small
cross-price values do not corne as a great surprise. It suggests that Japanese buyers are
not apt to make significant adjustments to their import mix of softwood lumber by source
due to relative price changes, but rather substitute with other product types andior their
own domestic production. Such substitution is clearly indicated in Tables 5.1 and 5.2.
Even without such a strong assumption as that imposed in the two-stage rnodel. low cross-
price elasticities could be expected for sirnilar reasons.
6.3 Japanese Softwood Lumber lmports from Canada, Aggregated by Species
Tuming to Figure 6.3, detail is offered on the Japanese import of softwood lumber
from Canada by species. Note that this level of detail reveals that not al1 species had
Gaston Chapter Six Page 117
- Sitka + Y. Cedar -c- Hemlock
+ Doug-fir Planed - Other
Figure 6.3 Japanese imports of Canadian sofhvood lumber by species; volume and real value.
Gaston Chapter Six Page 11 8
declining real price trends over the period 1965 to 1993. Both yellow cedar and Douglas-fir
showed modest price increases, with the former showing the greatest price volatility. If one
restricts the period of observation to 1974 onward, however, only Douglas-fir showed
rnodest price increases over time.
Yellow cedar clearly enjoyed the highest price premiums over time. Planed lumber
and hernlock lumber occupied the other end of the spectrum, showing the lowest and least
volatile prices over the study period, although the small volumes of planed lumber traded
at high relative values early in the study period. Sitka spruce, Douglas-fir and "other"
lumber prices are positioned somewhere in between.
Even at the level of species detail, it is an important observation for this study that
considerable price variation exists. The proposition that individual species of softwood
lumber act as distinct economic units seems obvious from the figure, and was confirmed
by rejection of the equality restriction on the elasticities of substitution.
The hnro most prominent species, in terms of volume, are shown to be hemlock,
which has shown fairly consistent levels throughout, and planed lumber, which has seen
exponential growth since the mid-1970s. If is also interesthg to note that these are the
fwo lowesf pnced species.
The volumes of al1 other species imported from Canada25 have gradually risen over
the study pen'od and in recent years have represented very similar volumes. The increased
market share of planed lumber in Japan over time has largely
25The vast majority of Canadian exports from Japan are from BC.
been at the expense of the
See Table 4.2.
Gaston Chapter Six Page 119
hemlock share.
The direct estimates of own-price elasticities of demand Vary considerably over
species (Table 5.2). Yellow cedar shows the least elastic values, indicating a lack of
willingness of Japanese buyers to reduce quantities purchased in response to price
increases (note, too that this species is also the highest priced). The own-price elasticities
for Sitka spruce, Douglas-fir and "other" are similar to each other, demonstrating unitary
to slightly elastic demand. The most elastic dernand is demonstrated by planed lumber,
with an elasticity value of -3.591. Curiously, the elasticity parameter on hemlock is not
significant.
Before moving on to the Japanese imports of softwood lumber from other sources,
it must once again be pointed out that the prices shown in Figure 6.3 represent an average
over al1 grades of lumber within a species, and over ranges of size, etc., within a grade.
While the range of own-price elasticities noted above largely appeals to a p ion reasoning
in terms of planed versus non-planed lumber, no further quantification of quality by species
can be made from the data used in this study. Quaiitatively, the fact that yellow cedar
lurnber demonstrates an inelastic demand, compared to Douglas-fir's slig htly elastic
demand, also appeals to a prion reasoning , as it is yellow cedar which is thoug ht to be the
''superior" product in terms of its value in appearance usage. However, without trade data
by grade, this cannot be properly quantified. For example, the highest grade of Douglas-fir
may be more highly valued than the lowest grade of yellow cedar; al1 that can be said is
that yellow cedar on average demonstrates fewer substitution possibilities than Douglas-fir
on average, and that the former has historically traded at a premium average value as a
Gaston Chapter Six Page 120
result.
Further, while it is obvious that al1 of the species except hemlock traded at average
price premiums over planed lumber, not so obvious is that these premiums are
understated. The reason for this understatement is largely technological. Japanese
buyers have been willing to paya premium price for lumber which contains clear material
for the "appearance effectm used in their traditionai post-and-beam construction (Chapter
3). However, this appearance effect can be sirnulated, thanks to the technology which
makes possible the use of thin laminates and glueing. In other words, Japanese builders
now need less clear raw material to produce an equivalent number of post and beams, yet
they are still willing to pay a price premium for the input. In the absence of this technology,
therefore, the price premiums would likely have been considerably higher than those
shown in Figure 6.3'=.
To add a sense of the range of quality that exists within any one species, a brief
summary of the 1995 grade distribution of softwood lumber exports to Japan by a leading
BC producerlexporter are briefly discussed. Unfortunately, trade data by grade are only
available for this fim for 1994 on, disallowing direct comparison to the econometric
analysis.
Of the 1994 shipments of this coastal BC fin, sofh~ood lumber shipments to Japan
were primarily made up of fir and hemlock, with smaller quantities of Sitka spruce, red
cedar, yellow cedar and S-P-F. Prices ranged from nearly $2,500 per m3 to less than $60
26Although there was no evidence of structural change to support this, it is possible that the acceptance of veneered posts was too slow to register as a break at a particular point in time.
Gaston Chapter Six Page 121
per m3, CDN. As these prices are aggregated over al1 sizes, one would also expect a wide
range in prices within each of these grades.
It is important to note that these data indicate that pnces were much more grade
specific than species specific. Even with red cedar and S-P-F, which had the lowest
average prices, prices reached levels of roughly $1,000 and $700 per m3, respectively, for
the clear grades.
These grade data revealed that there was a relatively small volume of clear grade
shipments, being roughly 10% by volume and 20% by value in 1994. Shipments of al1
species and grades (entirely clear) which exceeded $1000 per m3 represented less than
3% of the volume and a little over 8% of the value of this company's export mix. Shipments
of lumber at prices exceeding $500 per m3 represented roughly 17% of the total volume
and 32% of the total value. These still mostly represent high grades down to #4 clear and
#1 merchantable. Shipments exceeding $400 per m3 represented roughly 47% and 63%
of the total volume and value, respectively, while shipments exceeding $300 per m3
represented 74% and 85%, respectively. These are largely merchantable grades. The
rernainder of this company's coastal shipments, at less than 15% by value, represent
structural, utility and economy grades. The average price over al1 grades is roughly $560
per m3.
There are hnro important points which emerge from these data in the context of the
analysis done in the present study. First, the variation in price by grade exceeds the
variation in price by species. This suggests that the results of the present study, detailing
only species, should be interpreted with caution, and strongly supports the need to extend
Gaston Chapter Six Page 122
this analysis to the level of grade. Second, these data clearly point out that while the
volumes of the very high quality lumber are relatively small, coastal BC shipments include
only minor quantities of structural grade lumber. Given that the majority of Canadian
lumber exports to Japan are from BC, and the majority of the lumber exports to Japan from
the lnterior of BC are S-P-F, this suggests that the vast majority of Canadian exports of al1
non-S-P-F species originate from old-growth forest of the BC Coast are of appearance
quality and range from merchantable to clear grades.
6.4 Japanese Softwood Lumber lmports from NonCanadian Sources, Aggregateâ by Species
To complete the picture of softwood lumber, Figures 6.4 through 6.7 graphically
illustrate the quantity and real price trends for US, former Soviet Union, NZlChile and
"other" country im ports, res pectivel y.
In Figure 6.4, showing softwood lumber imports from the US, the picture is seen to
be similar to that for Canada. In terms of volumes, the US also saw dramatic increases in
planed lumber shipments, although dropping from 1988 on. The US, however, had higher
shipments of Sitka spruce from 1965 to the late 1970s. The major differences in price were
for red cedar (there were no significant quantities of yellow cedar lumber reported), which
showed dramatic premiums until the mid 1980s, at which point only hemlock and planed
lumber were lower priced. Also, unlike Canada, Douglas-fir lumber enjoyed a price
premium over Sitka spnice lumber throughout much of the study period. Finally, from 1989
on, "other" lumber held a price premium over al1 other species. Once again,
Gaston Chapter Six Page 123
- Sitka -c Hemlock - Doug-fir - Red Cedar - Planed Other
Figure 6.4 Japanese imports of US softwood lumber by species; volume and real value.
Gaston Chapter Six Page 124
this premium is most likely due to the negligible volumes traded, showing a higher
willingness to pay on such marginal purchases.
The own-price elasticities of demand (Table 5.2) are similar to those shown for
Canada, insofar as the demand for cedar is inelastic as compared to a very elastic demand
for planed lumber.
The Japanese import picture from the former Soviet Union, shown in Figure 6.5,
shows that there are only three relevant species, dominated by abieslpicea species for
most of the study period, followed by pine (except from 1977 to 1988) and larix. The
overall volume has remained fairly consistent over time, but the volume by species has
been quite volatile. Finally, it should be noted that the overall volume is relatively minor as
compared to softwood lumber imports from North America.
Wth the exception of 1979 and 1980, real prïces showed a steady decline over the
entire study period, with pine and abieslpicea species showing a considerable premium
over larix. This price decline is more prominent than for lumber frorn all other countries
except New ZealandlChile. As mentioned in the aggregate discussion, lumber imported
from the former Soviet Union shares New Zealand's position of having the lowest prices
compared to other countries.
The own-pnce elasticities by species are not reported in Table 5.2 as there was no
improvement in the results over the aggregate regression reported earlier.
In Figure 6.6, showing the New ZealandlChile situation, it can be seen that pine (in
this case radiata pine) has been the only signifiant species imported by Japan historically.
The volume consistently increased over time and the real price showed more dramatic
Gaston Chapter Six Page 125
- Pinus - AbiedPicea - Larix
Figure 6.5 Japanese imports of former USSR soffwood lumber by species; volume and reaI value.
Gaston Chapter Six Page 126
Figure 6.6 Japanese imports of NUChile softwood lurnber by species; volume and real value.
Gaston Chapter Six Page 127
Decreases than from any other source of Japanese supply. As shown in Table 5.2, the
demand for New ZealandlChile radiata pine is quite elastic.
Finally, Figure 6.7 illustrates the softwood lumber trade from ('otherW countries. Note
the similarity of the planed volume trend compared to North Amerka, and the sporadic
hemlock volume. In ternis of price, it can be noted that the overall level is higher than for
the countries already discussed, and that the price premium for yellow cedar is even more
prominent. Also, the price trends tended to be flatter (ranging from minor to zero real
declines over tirne), and in the case of cedar more positive.
The own-price elasticities are different fiom the countries already discussed in two
respects, being highly elastic for hemlock, and inelastic for planed lumber. The source of
this planed lumber is alrnost exclusively Scandinavia and Western Europe (mostly the
former). "Other" hemlock is almost exclusively obtained from Asia.
6.5 Japanese Softwood Log Irnports, Aggregated by Source
Figure 6.8 illustrates the quantity and real price trends for sofhnrood logs by country
of origin. Once again, real prices decline in ail cases, with differences in price levels and
trends by grouping. The nature of the grouping is identical to the case of softwood lumber,
but this time the imports from 'other" countries were even more volatile and tended to show
smaller prïce premiurns (or after 1989, price discounts). This volatility can most likely be
attributed to the srnall volumes. "Other" logs were primarily imported from Asia in the early
part of the study period, and by 1993 from Scandinavia, Asia and Eastern Europe, in that
order.
Gaston Chapter Six Page 128
+ W N Cedar + Hemlock - Doug-fir
+ Planed -- Other
Figure 6.7 Japanese imports of "othern softwood lumber by species; volume and real value.
Gaston Chapter Six Page 129
+ Canada - US USSR + NUChile + Other
0 1 ' ' t 9k5 1&9' ' '1973' ' '19'77' ' '19'81' ' '19b5' ' '19'89' ' '19'93 1
Figure 6.8 Japanese imports of softwood logs by source; volume and real value.
Gaston Chapter Six Page 130
The Canadian dollar equivalents of the Japanese landed prices for softwood logs
from North America and the former Soviet Union, respectively, are roughly $440 per m3
and $150 per m3, which shows a sornewhat larger spread than that of softwood lumber.
The own-pnce elasticities for softwood logs Vary considerably by ongin (Table 5.2).
The value for the US indicates a quite inelastic demand, as is the case for the former
Soviet Union (although the pnce parameter is insignificant). The demand is shown to be
quite elastic for New ZealandJChile, Canada and "other" sohood logs.
The own-price elasticities of softwood logs imported from both the former Soviet
Union and Canada come as a surprise for intuitive reasons, prirnarily from a quality
perspective. While an inelastic value for the Soviet Union may be partially explained by
reasons cited earlier (contractual arrangements preventing price from properly explaining
quantity demanded), the reason for the elastic value for Canada is more dificult to explain.
Given the export restrictions that Canada imposes on its log producers. which
require that logs are proven to be in excess of domestic demand before exports are
allowed, it is possible that quantities purchased by Japan correspond to periods of log
surpluses and resulting depressed prices. In other words, if the shipment of logs to Japan
is driven by supply, the market suppiy assumptions employed in this study would fail to
capture this information. This is a potential limitation of this study that cannot be solved
with existing data constraints.
6.6 Japanese Softwood Log Irnports, Aggregated by Species
Figures 6.9 and 6.10 offer detail on softwood log trade by species for the US and
Gaston Chapter Six Page 131
+ Sitka
+ Hemlock
+ AbiesIPicea WîY Cedar
Doug-fir
Figure 6.9 Japanese imports of US softwood logs by species; volume and real value.
Gaston Chapter Six Page 132
the former Soviet Union. Aside from New ZealandKhile, these two sources account for
the vast rnajority of softwood log imports by Ja~an*~ .
Beginning with the US, there are two general observations which stand out. First,
hemlock and Douglas-fir have dominated the log trade. Hemlock had the largest share in
the beginning of the study period, while Douglas-fir took over from 1978 on. This is in part
due to a preference change by the Japanese market, where only hemlock was initially
considered a suitable substitute for their domestic species used for appearance
applications. While this was primarily due to the whiteness of hemlock wood, over time
Japan began accepting the slightly more yellow Douglas-fi?'.
The second general observation regarding Japanese imports of softwood logs from
the US is that with the exception of yellow cedar, which enjoyed a considerable price
premium over the entire study period, al1 species had very similar price trends and
relatively small price spreads. As compared to lumber, therefore, it appears that there is
less uniqueness associated with softwood logs by species.
This second point is at least partially supported by the quantitative analysis offered
in Chapter 5. As can be seen in Table 5.2, own-price elasticities narrowly ranged from -
0.10 to -0.55 (inelastic demand).
Figure 6.1 0 completes the picture for softwood logs, showing the trade summaries
by species for the former Soviet Union. Other than a increase in the spread of volume by
27As softwoad 109s from New ZealandIChile and "other" muntries are dominated by a single species, there is no reason to repeat the discussion offered earlier.
"1t was also the case that the small sawmills, which dominated in the earlier part of the study period, had a distinct preference for hemlock over Douglas-fir. Evidently, this was not the case with the large sawmills, which grew in importance toward the latter part of the study period (Robertson and Waggener, 1995).
Gaston Chapter Six Page 133
- Pinus + AbieslPicea - Larix
Figure 6.10 Japanese imports of fomer USSR softwood logs by species; volume and real value.
Gaston Chapter Six Page t 34
species, with abieslpicea species remaining dominant, note that there is M e difference
from the aggregate result presented in Section 6.5. The own-price elasticities by species
are not presented in Table 5.2 due to the same lack of significance as for the aggregate.
6.7 Japanese Hardwood Lumber and Log Imports, Aggregated by Source
Figure 6.1 i details Japanese imports of hardwood lumber by country of origin. It
is interesting to note that there was a wide variation in real prices, which gmdually
diminished over time. In 1965 there was a dramatic price premium for hardwood lumber
from the US, followed by hardwood lumber from "other" countries (primarily Asia. with less
amounts frorn Europe, Central and South America, and Africa), and finally hardwood
lumber from the South Seas. Also of interest, hardwood lumber imports from the South
Seas are one of the very few products discussed in this study that actually witnessed real
price growth in Japan over the study period (albeit minor).
Table 5.2 showed a near unitary own-price demand elasticity for hardwood
lumber, which is somewhat curious given the price premiums paid by Japan over soffwood
lumber. A partial expianation for this is found by noting Japan's large imports of hardwood
logs (discussed below), which can generate an abundant source of domestic substitution
for imported hardwood lumber by changing the lumber recovery.
Although there is no lack of data on Japanese imports of hardwood lurnber by
species as well as source, trade is not detailed here due to the relatively small volume
compared to other products and the desire to ultimately focus on implications for the BC
forest industry.
Gaston Chapter Six Page 135
- South Seas - US - Other
Figure 6.11 Japanese imports of hardwood lumber by county of origin; volume and real value.
Gaston Cha~ter Six Page 136
Unlike hardwood lumber, hardwood logs have been dominated by imports from the
South Seas alone over the study period, as shown in Figure 6.12. Minor quantities at
historic price premiums have been imported from "other" sources, which in 1965 was
dominated by shipments from the US, followed by Asia, the former Soviet Union and Africa,
in that order. By 1993, the "other" category was dominated by the former Soviet Union and
Africa, followed by Asia and the US.
6.8 Japanese Panel Product Imports, Aggregated by Source
The final set of illustrations in this chapter, shown in Figures 6.1 3 through 6.15,
detaii the veneer and panel products trade. It is easy to see that al! of these products have
gained in importance over the study period, with the South Seas being the most dominant
player. Board products show the lowest volume, and are only significant after 1985.
Both veneer sheets and plywood showed decreasing price volatility over time, while
board products had more sporadic pricing throughout (note that there were no fibreboard
imports by Japan pn'or to 1979). As indicated in Table 5.2, the Japanese demand for panel
products in aggregate is quite elastic.
Gaston Chapter Six Page 137
- South Seas - Other
Figure 6.12 Japanese imports of hardwood logs by county of origin; volume and real value.
Gaston Cha~ter Six Paae 138
- South Seas - US - Other
Figure 6.13 Japanese imports of veneer sheets by county of origin; volume and real value.
Gaston Chapter Six Page 139
+ South Seas - Other
Figure 6.14 Japanese imports of plywood by county of origin; volume and real value.
Gaston Chapter Six Page 140
+ Particle Board Fibreboard
Figure 6.15 Japanese irnports of particle board and fibreboard; volume and real value.
Gaston Chapter Seven Page 141
Chapter 7 Contributions, Limitations and Implications for Further Research
By investigating the Japanese demand for wood imports disaggregated by product,
region and species, this research has shown that wood inputs are imperfect substitutes in
production. This important finding suggests that hiding wood characteristics through data
aggregation potentially obscures important dimensions of both forest product trade and
forest policy.
This chapter summarizes the results which have led to this observation, including
a discussion on the implications of these results for the BC forest industry, followed by the
limitations of this study and recomrnendations for further research.
7.1 Research Contributions and Implications for the BC Forest lndustry
The primary contribution of this study is to offer some of the needed background
information to develop a more detailed understanding of international wood product trade.
To date, there have been very few studies which have investigated the factor demand for
wood beyond very broad product categories, such as "softwood logs", or "softwood
lumber". It is hoped that this study has succeeded in demonstrating the need to move
beyond such limiting product aggregations.
As a background study, no hard conclusions nor recommendations can be made.
This task is left for future extensions and additions to the present research. However,
there are a number of implications of this study for the BC forest industry which can be
discussed, particularly those which relate to the marketing of BC solid wood products. This
Gaston Chapter Seven Page 142
discussion is offered below (Sections 7.1.2 and 7.1.3), following a brief summary of the
research findings.
7.1.1 Summary of the Results
This study began with four primary research hypotheses. The first was that BC
wood species, in the form of logs, lumber or further processed products, behave as distinct
economic goods. As discussed in Chapters 5 and 6, and summarized below, this
hypothesis is clearly accepted for species of softwood lumber, including imports of
softwood lumber fmm Canada in aggregate compared to imports from other sources.
The second hypothesis was that the market share of individual BC products in
Japan is dependent on relative prices with substitute products. This hypothesis is
accepted insofar as it was detemined that individual wood product imports are substitutes,
aibeit imperfect. At the same tirne, however, while some products were shown to have a
high own-price elasticity of demand in Japan, the cross-price effects were shown to be very
low. This suggests that Japanese buyers do not adjust their import rnix as a result of
relative price changes, rather that they adjust their overall level of wood product imports.
Due to the noted limitations of the two-stage methodology employed, however, this result
should be interpreted with caution.
The third hypothesis was that Japan's wood product import rnix is effected by its
domestic log supply and non-wood alternatives. The first part of this hypothesis is clearly
accepted; non-wood alternatives, however, were shown to act as complements, not
substitutes.
Gaston Chapter Seven Page 143
The final hypothesis was that a structural change over the course of the study period
affected the Japanese demand for logs, lumber or further processed products. This
hypothesis could not be accepted for any of the direct estimates of wood product irnports,
either for various levels of aggregations or as individual products.
The main conclusions of the analysis offered in this study, discussed in detail in the
previous two chapters, are:
Individual wood products, whether aggregated by product type, country of origin . or species, behave as distinct economic units. This was quanfitatively extended to include quality insofar as trade detail was available for planed versus non-planed lumber. This was quaiitatively extended to quality through the knowledge and informal judgements about the nature of wood products typical of individual sources.
In terms of product type, the own-price elasticity of demand was found to be the smallest for softwood logs, largest for panel products. with lumber's elasticity lying somewhere in between. Said another way, softwood logs displayed the fewest number of substitutes, and panel products displayed the greatest number of substitutes.
In terms of the county of origin for softwood lumber, the own-price elasticity of demand was found to be the smallest for Canada (not including the former Soviet Union, which represented a small proportion of soihivood lumber imports), largest for NZIChile, with softwood lumber frorn other sources lying sornewhere in between.
In terms of the species of softwood lumber form Canada, planed lumber (such as S-P-F) was shown to have by far the highest own-price elasticity, while yellow cedar showed the smallest.
In the case of softwood logs, the lowest own-price elasticity was for US logs, and the highest was for NZlChile logs. The own-price elasticity for the former Soviet Union has a positive sign, a non-intuitive result which may be explained by the presence of long-term contracts. Campared to lurnber, there was little difference by species shown for the own-price elasticities for US logs.
The cross-pdce elasticities were found to be highly inelastic, demonstrating a
Gaston Chapter Seven Page 144
willingness to substitute one wood product for another to some degree (impeffect substitutes). Generally, it was found that the substitution effect was offset by a market expansion effect. Japanese buyers appear to be more willing to substitute more processed products in response to price increases for less processed products than the other way around. This may reflect changes in the product mix of domestically processed logs.
lncreases in the price of Japan's domestic logs cause the Japanese to substitute imported wood products. Given the significance of the Japanese domestic log supply over the course of the study period, symmetry would suggest that increases in the prices of imported wood products lead to significant substitution with domestic logs.
In spite of the increasing purchasing power of the Yen over the period covered by this study, it was determined that Japanese buyers have remained price sensitive, yet have been willing to pay considerable price premiums for certain products.
There was no evidence of structural change in the Japanese market for wood imports.
In Japanese markets, ironlsteel and wood inputs appear to be complementary, Iikely due to the importance of both non-wood housing starts and non-residential construction.
Implications of the Research for BC Wood Product Marketing
An obvious application of the results of this study is in BC's choice of markets. While
BC has been a significant source of softwood lumber for the Japanese market over the
entire period of this study, a little over a decade ago Canadian softwood lumber exports
to Japan as a percent of al1 markets was only 8% by value, or fess than 4% by volume
(Canadian Forestry Service, 1984). At this time, lumber produced from old growth coastal
timber largely found its way to the mix of dimension lumber destined for the US housing
market. Further, high grades of lumber from the BC lnterior were not commonly separated
from the S-P-F mix destined for this same US market. This US market has remained a
Gaston Chapter Seven Page 145
"commodity" market where it is difficult to differentiate the product to price advantage. It
is for this reason that the coastal forest industry, fuelled by the recession of the early 1980s
and falling tirnber supplies, realized the need to diversify its customer base. This
realization materialized in the BC lnterior industry shortly thereafter. Over the past decade,
the forest industry has indeed become more market oriented. Scarcity induced price
premiums for certain grades or attributes of lumber have led to better log sorting, cutting
to customer dernanded sizes, the adoption of kiln drying and international quality
certification, etc. Recognizing the difficulties in employing a diversification strategy in the
US, Canada (primarily BC) increased its share of soffwood lurnber exports to Japan to 21 %
by value in 1992 (Natural Resources Canada, 1993), as well as increasirig exports to
Europe.
The overall market mix in 1992 is shown in Table 7.1. The difference in the nature
of the lumber product shipped to the US versus Japan is supported by examining the
average price per cubic metre, with shipments to Japan being worth more than twice per
cubic metre than those to the US. While this is not shown to be true in the case of
softwood logs, any cornparison here is likely to be obscured by Canada's log export
restrictions. Note that Canada (primarily BC) exported only 22% of its lumber, by volume,
to non-US destinations. Of this 22%, it can also be seen that roughly 60% of these exports
went to Japan, with the balance destined mostly to Europe. It is this emphasis on the
Japanese market that this section will now address.
First of all, it should be made ciear that Japan is not BC's only potential market for
differentiated lurnber products. As shown in Table 4.1, exports to most off-shore
Gaston Chapter Seven Page 146
Ï Table 7.1 ~estination of Canadian ~oftwood ~umber and Log Exports, 1992. Sofhnood Lumber
O00 $ m3 $ per m3 l
us 4,195,276 65.76% 30,848,622 78.42% 136
Africa 15.846 0.25% 89.766 0.23% 1 77
Algeria 1 1.942 0.19% 5 1.975 0.13% 230
l Europe 629,209 9.860h 2,549,763 6.48% 247
Belgium 69.548 1 .09% 206.774 0.53% 336
France 26.517 0.42% 78,263 0.20% 339
Gem~any 67.736 1.060h 114,996 0.29% 589
I ltaly 77.537 1 22% 146,458 0.37% 529
UK 349,393 5.48% 1,847,858 4.70% 189
Asia 1,464.601 22.96% 5,598,317 14.23% 262
Japan 1,325,474 20.78% 4,732,838 12.03% 280
Australia 62.164 0.97% 201 -21 8 0.51% 309
Other 12.533 0.20% 51-46 0.13% 244
W0dd 6,379.629 100.00% 39.339.1 32 100.00% 162
us 20.951 14.04%
Asia 128.082 85.83%
Japan 124,148 83.19%
Other 203 0.14%
W0rld 149,236 186.10% 1.107,OOO 100.OOOh 135
destinations in 1992 were at higher average prices than for sales to Japan (in the case of
Germany, in fact, more than twice as high as the average export p r ie to Japan). Further,
growing Asian economies hold promise for adding to the list of potential markets for BC's
wood products. Given the advantages of trading in non-commodity markets, the
advantages of further diversification seems justified. When one introduces the uncertainty
of future prices in Japan, to which the discussion now turns, the potential advantages
Gaston Chapter Seven Page 147
become even more clear.
From a BC marketing point of view, perhaps the single most important element in
trying to predict what the future holds in ternis of wood product prices sold to Japan (vis-a-
vis premiums over the other BC markets) is the JapaneseiCanadian exchange rate2'. As
has been noted, Japan has actually been paying less each year, on average, for even high
quality products such as softwood logs from the PNW and soffwood lumber from the BC
Coast. The question that cannot help but corne to mind is whether they would be willing
to pay more? What is likely to happen if the Japanese Yen stabilizes or weakens in the
future?
There are three possible scenarios which could unfold given this eventuality. The
first is that Japan will start paying higher real prices for at least the higher quality
commodities which are, after all, becoming more and more scarce, technological advances
notwithstanding. From the Canadian or Amencan point of view, there would be little
change in the Canadian or US dollar price trends that have been seen al1 along (down for
low quality, up for high quality).
The second possibility is that Japan will resist higher Yen prices by substituting
other comrnodities. Unless the Yen does not depreciate equally over al1 currencies, this
could mean substituting appearance quality wood with structural quality wood andlor non-
wood substitutes. As was suggested in the previous chapter, this would also include
q h e Canadian-Japanese exchange rate is not the only rate BC exporters should be worried about. It has been estimated that a 1 cent increase in the Canadian dollar relative to the US dollar, maintained for one year, translates into a loss in revenues to the Canadian forest industry of $450 million (Pnce Waterhouse, 1 995).
Gaston Chapter Seven Page 148
continued substitution of lumber and panel products against nsing log prices. The growing
acceptance of platform-frame construction would support this possibility.
The third possibility is that Japan reverses its growing dependence on wood imports,
and invests in its domestic forest resource. In fact, it has been proposed in this study that
the only reason that Japan imports as much wood as it does is because the vast rnajority
of its domestic suppIy lies outside the extensive margin. But this tignt extensive margin is
a direct result of "cheap imports" (in Yen terrns), with which domestic sources have
difficulty in competing. Remernbering the resource description offered in Chapter 3,
including the extensive post war plantings which would become merchantable in Iight of
rising prices, it is possible that BC's biggest future cornpetitor for the Japanese market will
be Japan ifselfgo. This observation should, however, be ternpered with Japan's growing
non-timber valuation of its forest resource.
The results of the present study suggest that al1 three possibilities could come into
play. Given the very small own-price elasticities shown for many of the wood products
imported by Japan, the scenario of higher real Yen prices is certainly possible for these
wood products. The second and third possibility are best supported when taken together.
The present study suggests that price rises for those wood products with high own-price
elasticities lead to substitution with domestically produced lumber and panel products (from
imported and domestic log supplies). Given that all three possibilities are supported,
qhere is some doubt, however, as to Japan's ability to harvest significant quantities of appearance grade timber, at least in the short- to medium-nin. As there has been little financial incentive to do so, it has been suggested that Japan's forest plantations have not been rnanaged to maximize value (personal communication, John Powles, Director for Asia, Council of Forest Industry).
Gaston Chapter Seven Page 149
depending on the wood product under consideration, this suggests that the existence of
a price premium for some wood products over others is Iikely to persist.
However, it must be cautioned that the elasticity values offered in this study were
estimated over a period of declining real Yen prices, with an overall down trend. Is the
incidence of low own-price elasticities for selected wood products likely to hold at higher
real pnces than Japan has historically paid? It is possible that the only reason the PNW
and BC have enjoyed price premiums for high grade logs and lumber is because of the
strength of the Japanese Yen. In spite of the fact that BC has sold similar products for
even higher prices to European buyers (Table 7.1), there is some validity to the argument
that the Japanese have driven up the world price as a direct result of their strong currency,
and would drive down this world price in the advent of a falling Yen. Even the preliminary
evidence offered in this study, however, caste considerable doubt on this hypothesis. It
is more likely that Japan has made every effort to pay as little as necessary to secure these
fibre supplies. This was confirmed by the range of own-price elasticities presented in this
study. Had Japan been willing to "pay anything" as a result of its strong purchasing power
(in the incorne sense, leading to "cheap" irnports), own-price elasticities would have al1
been low, regardless of species or origin. To the contrary, wood products such as planed
lumber from the US and Canada, and logs from NaChile display highly elastic demands.
If the price goes up even a little (due to a falling Yen) the quantity demanded goes down
considerably. ln short, Japan has been shown to be price conscious in spite of its "wealth".
Gaston Chapter Seven Page 150
7.1.3 Implications of the Research for BC Forest Policy
When describing the motivation for this research in the introductory chapter, it was
pointed out that over the next couple of decades, BC is going to witness a significant
reduction in the volume of available timber. Given the selected forest rotations for BC's
second growth stands and the existing siIvicultural efforts, it was also pointed out that the
quality of timber is also going to be lower.
These facts contribute to the market implications discussed in Section 7.1.2 insofar
as they describe the nature of the future pmduct. Given that the BC Crown controls the
vast majority of the forest land base, it is primarily forest policy, not industry market
strategies, that will impact on the future ability to adopt a market orientation.
It was argued in the previous section that there is no reason to expect that the
market premium for certain wood products will disappear. While there may be no way to
predict what attributes of the wood in the future will comrnand such price premiums, one
fact does remain: ifthe level of silviculture andlor length of forest rotations does not change
from present practices, there will be no old growth quality timber available at some point
in the future. In addition to this study's implications for a more diversified BC forest product
market, then, the related implication is for a continued diversity in the product itself. Even
if there is not a premium market for products produced from clear, slowly grown, large
timber in the long-run, this tirnber can always be used for alternative purposes (including
the potentiaf of the forests for the production of non-timber values). Without provision for
these products, however, the option will be iost.
While there are a nurnber of governrnent initiatives which could help facilitate the
Gaston Chapter Seven Page 151
p reseivation of future product diversity , discussion of such initiatives is clearly beyond the
scope of this thesis. There is a need for considerably more research in this area. which
will be briefly sumrnarized later in this chapter, following a discussion of the limitations of
the present study.
7.2 Limitations
The most obvious limitation cornes from the investigation of the second hypothesis
of this study, being to quantify the degree and nature of import substitution as a result of
a price increase in a specific product. Due to reasons of multicollinear data, detenining
such cross-price effects requires a unique rnethodology, one which Armington (1969)
provided and which has largely been accepted in the literature. However, it has been
shown here that this methodology is not without its own limitations, centred around overly
restrictive assumptions, and that these translate directly into limitations for the present
study. While Hseu and Buongiorno (1993) attempted to deal with the problem of the
restrictive assumptions used by Armington, it has been shown that this was not done
successfully.
The second limitation of this study is the lack of adequate secondary data on the
quality of wood products traded in the Pacific Rirn market. This fact limited quality aspects
of the discussion to planed versus non-planed lumber, with further comparisons by species
or source being largely a matter of judgment. As a related point, detail on highly processed
products (beyond wood-based panels) was not included in the present analysis due to the
small historical volumes reported. The volumes of such products, including engineered
Gaston Chapter Seven Page 152
wood, has been growing rapidly over the last few years of the data set, and will
undoubtably be an important component in the future.
Limitations resulting from the lack of data can be broken down into two components:
the treatment of wood input supply, and the use of a single output production function.
In the estimation of the Japanese wood factor demands, it was assumed that the
market supply was completely elastic, with Japanese buyers behaving as a "price takers".
In other words, Japan cannot affect the price of its wood purchases by varying the amount
purchased. The "price taker" assumption, while common practice in demand studies of this
nature, may not be justified. Japan is one of the world's largest wood product importers,
and may indeed exercise some level of market power in its purchases. In fact, if Japan
does indeed face an upward sloping supply function (global excess supply) for particular
products, it would effect the elasticities of substitution discussed in the present study. This
would included Japan's choice between imported and domestic products, and, where the
degree of market power varies, in one imported product relative to another.
Unfortunately, potential limitations created by the supply assumption can not be
addressed without data which allows for the estimation of supply functions by geographic
source, by product, and by species.
The second methodological limitation of this study involves the underlying
production functian from which the derived demand equations for the factor demands were
obtained. It was proposed that the Japanese demand for wood products is derived from
the per capita GNP in Japan, regardless of the differing species and implied quality. This
assumption was supported by the recognition that Japanese housing construction, being
Gaston Chapter Seven Page 153
the largest single end use for wood imports3', requires a range of qualities. Appearance
grades are required for posts and beams, panelling, and so on; structural grades are
required for the non-visible house components of post and beam construction, and for a
growing percentage of platform fiame and prefabricated housing construction; and "utility"
grades are required for sub-flooring, filler for laminated posts, concrete moulds, and so on.
It is possible, however, that this single output production function is overly simplistic to
adequately deal with quality issues, particularly when quantifying substitutions (cross-price
elasticities). For example, the buyer of structural or utility grades, which are "capital" or
"producer" goods, will likely treat the demand for fibre in the true "derived" sense. That is,
if the sale p r ie of a house goes up, al1 else being equal, the house builder woutd be willing
to pay that much more for the inputs. Appearance grades, however, may more closely
resemble "consumer" goods, insofar as consumer income, tastes, education, tradition, etc.,
are al1 capable of shifting the quantity demanded independent of price. The buyers of this
fibre would be exhibiting direct willingness to pay for specific characteristics.
It was shown in Chapter 3 that the growing percentage of platform-frame and
prefabricated housing relies on construction grade imports, and could largely explain the
demand for Japan's imports of S-P-F and other planed, dimension lumber. In the context
of the present study, it could be suggested that in response to higher softwood log prices,
Japan has shown a willingness to substitute one form of housing construction for another.
The limitations of this study, however, do not allow this to be quantified. Aside frorn the
31Further, imported wood products are used outside of the construction sector, such as imported logs as pulpwood.
Gaston Chapter Seven Page 154
requirement of more detailed trade data3', it must be recognized that al1 three construction
types use both appearance and structural grades of lumber.
A further limitation to the production function employed in this study, is that wood
inputs were expressed in their cubic metre equivalents. regardless of the product type.
This fails to recognize the range of costs associated with the Japanese processing of logs
versus lumber versus further processed inputs. Although this treatment can be justified by
using a general output indicator such as GNP as opposed to housing starts, and by noting
Japan's preference for re-manufacturing even processed imports, added detail on the
Japanese cost structure could prove insig htful.
The choice of Japan as the dernand focus could be considered a further limitation
to this study. Although there were good reasons for making this choice, as discussed in
Chapter 1, it may limit the overall applicability of the results.
The first potential limitation is that real prices for alrnost all of Japan's wood product
imports dropped over the course of the study period, corresponding to a fairly consistent
increase in the purchasing power of the Japanese Yen. This suggests that it was not
possible to define more than a fairly narrow price range within the demand functions
characterising Japanese wood purchases. In other words. it is possible that the estimated
demand elasticities would have been significantly different in the absence of a strong Yen.
A second, and related limitation, is that in light of Japan's growing purchasing
power, this country rnay not be representative of other markets. Further, given that Japan
32As a reminder, there exists a wide range of quality within both appearance and structural classifications of lumber.
Gaston Chapter Seven Page 155
is rather unique in its post and beam construction preferences, the nature of the demand
for appearance grade wood products outside of this country has not been identified.
7.3 Implications for F urther Research
Given what has been learned about the negative effect of Armington's needed
assumptions for his two-stage approach to product demand within a market, there is a
strong need to continue to challenge its application. This is particularly important in light
of the wide acceptance of his approach, and the potentially misleadhg published results.
The difficulty in dealing with multicollinear data problems has more than likely contdbuted
to the lack of research dealing with heterogeneous product trade to be found in the
literature. This is obviously not a trivial problem, and its solution is well beyond the scope
of the present research. Yet the importance of developing methodologies that better
address the unique nature of products must be stressed.
In addition to the methodological problems associated with rnodelling heterogenous
products, it must be pointed out that the underlying limitation discussed in the previous
section, being the lack of disaggregated wood product trade data, is likely to Iimit potential
extensions of this study. As a qualifying recornmendation for further research, then, it is
suggested that the place to start is in overcoming these data obstacles. It is hoped that
a continued recognition of the importance of these data will expose primary sources andfor
the future availability of better secondary sources.
As stated, most of the limitations of this study could be addressed in the absence
of these data restrictions. Given the noted limitation of not recognizing the different
Gaston Chapter Seven Page 156
demand characteristics of structural lumber, for example, as compared to appearance
grade lumber, more detailed data would allow for a more sophisticated, multiple output
production function. Due to its importance, this point deserves additional consideration in
the context of its implications for further research.
As was apparent from the data on lumber grades from a major produceriexporter
from the BC Coast (Section 6.3), there exists a considerable range in prices within the
definition of "appearance" or "structural" lumber, or even within dstailed grade
classifications. Keeping in mind that these data represent exports of coastal production
only, this range in price would be even wider if one were to include interior production. In
other words, the necessity to describe "quality" as planed versus non-planed lumber in this
study, for example, can be misleading. It must be recognized that planed and non-planed
lumber alike can be of high or low quality, and that the implications for BC's marketing
strategy must take these quality ranges into account. It is possible, for example, that the
higher quality S-P-F lumber from the BC lnterior is demanded for post and beam
construction in Japan, while the lower quality green squares from the BC Coast are not.
Aside from the quality of the resource, future studies should also include attention
to the quality of the product. By this it is meant that there has been a growth in the
production of, and the demand for, further processed products, such as panels and
engineered products. While the present study has included an analysis of veneer and
panel products, data were not available to document the demand for further value-added
products such as engineered wood products, wood "systemsn, and other further
manufactured products such as door and window frames. In fact, it is also an important
Gaston Chapter Seven Page 157
implication for further research that the present study was notable to differentiate between,
for example, S-P-F lumber from the BC interior cut to metric sizes, compared to S-P-F
lumber from the US which, if destined for the Japanese market, likely requires a higher
degree of remanufacture. In short, 'value-added" may evolve in small, rather than
dramatic, steps (Cohen, 1992).
More generally, as the present study has focussed on the demand for wood
products by category, species and source for a single buyer, a natural extension of this
research would be to broaden the level of detaif to include product grade within a species,
and to investigate other international demanders.
It is further recommended that future research include an analysis of the major wood
producing countries' supply functions with as much attention to product detail as possible.
Aside from improving extensions of the present analysis as noted, this would allow for a
better understanding of future trade flow scenarios, and offer price forecasting abilities.
Finally, as this study has utilized a static analysis, estirnating short-run (one-year)
demand responses, it would be desirable to utilize a dynarnic approach to obtain longer-run
demand elasticities.
In summary, this thesis has shown that there has been a wide range in the strength
of the Japanese demand for various wood products. To the extent possible, it was shown
that the Japanese have been willing to pay for quality, and that this it is not likely to change
in the future. From the dernand side, this research needs to be extended to further
quantify this demand for quality, and to extend the analysis beyond Japan. This includes,
but is not limited to, developing better rnethodologies for investigating cross-price effects.
Gaston Chapter Seven Page 158
Even more importantly, this research should be complernented with research on the supply
of wood products by category, species, and by grade, concentrating initially on BC. Only
at this point will it be possible to utilize more powerful tools, such as spatial trade
modelling, as an aid in price forecasting, identrfying future market potentials, and as a tool
in forest policy.
Gaston Bibliography Page 159
Adams. D.M. 1977. Effects of National Forest Timber Harvest on Softwood Stumpage, Lumber, and Plywood Markets: An Econometric Analysis. Oregon State University, School of Forestry, Research Bulletin 15, Corvallis. 50 pp.
Adams, D.M., R. Boyd and J. Angle. 1992. Evaluating the Stability of Softwood Lumber Demand Elasticity by End-Use Sector: A Stochastic Parameter Approach. Forest Science 38(4): 825-841.
Allen. R.D.G. 1953. Mathematical Anawsis for Economists. Macmillan and Co., Limited (London. England). 548 pp.
Alston. LM., C.A. Carter. R. Green and D. Pick. 1990. Whither Amington Trade Models. Amencan Ag~fcultural Economics Association, May: 455-467.
Armington, P.S. 1969. A Theory of Demand for Products Distinguished by Place of Production. International Monetary Fund Staff Paper 1 6: 1 59-1 77.
Babula. R. 1 978. An Armington Model of US. Cotton Exports. Journal of Agncultural Economics Research 39: 72-22.
Brooks, D. 1993. Market Conditions for Tropical Timber Products, appendix in The Economic Linkages Between the International Trade in Tropical 7imber and the Sustainable Management of Tiupical Forests, Barbier. et a/., London Environmental Economics Centre, London, U.K.
Buongiomo, J. 1979. lncome and Price Elasticities of Demand for Sawn Wood and Wood-based Panels: a Pooled Cross-section and Time-series Analysis. Canadian Journal o f Forest Research 9(2): 141 -147.
Buongiorno, J., J.P. Chavas and J. Uusivuon'. 1988. Exchange Rates, Canadian Lumber Imports, and United States Prices: A TirneSeries Analysis. Canadian Joumal of Forest Resources 1 8: 1587-1 594-
Canadian Global Almanac. 1995. MacMillan Canada, Toronto, Ontario. 792 pp.
CardeIlichio. P.A., C.S. Binkley and V.K. Zausaev. 1989. Potential Expansion of Soviet Far East Log Exports to the Pacific Rim. Working Paper PI, Center for International Trade in Forest Products, University of Washington, Seattle. 23 pp.
Chen. N. J., G.C.W. Ames and A.L. Hammett. 7988. Implications of a Tariff on lrnported Canadian Softwood Lumber. Canadian Journal of Agncultural Economics 36: 69-81.
Chou. J.J and J. Buongirno. 1982. United States Demand for Hardwood Plywood Imports: a
Gaston Biblbgraphy Page 160
Distributed Lag Model. Ag~cultural Systems 8: 225-239.
Chou, J.J. and J. Buongiorno. 1983. United States Demand for Hardwood Plywood lmports by Country of Origin. Forest Science 29(2): 225-237.
Cohen, David H. 1992. Adding Value Incrementally: A Strategy to Enhance Solid Wood Exports to Japan. Forest Products Journal 42(2): 40-44.
Constantino, Luis F. 1986. Modelling Wood Quality, Productivity, Demands and Supplies in the Sawmilling Industry: British Columbia Coast and the Pacific Northwest Westside. Unpublished Ph.D. Thesis, Department of Forest Resources Management, University of British Columbia. 289 pp.
Constantino, Luis F. 1988. Analysis of the International and Domestic Demand for lndonesian Wood Products. Report to the Food and Agriculture Organization (mimeo.), Dept. of Rural Economy, University of Alberta, Edmonton.
Constantino, Luis F. and David Haley. 1988. Wood Quality and the Input and Output Choices of Sawmilling Producers for the British Columbia Coast and the United States Pacific Northwest, West Side. Canadian Journal of Forest Research i 8(2): 202-208.
FA0 Yearbook. Various Issues. FA0 Forestty Senés No. 27. Food and Agriculture Organization of the United Nations, Rome, Italy.
Flora, Donald F. 1986. An Equilibrium Model of Pacific Rirn Trade in Srnall Softwood Logs. Canadian Journal of Forest Research 16: 1000-1 006.
Flora, Donald F. 1991. Trade Issues in the Northem Pacific Rirn Countries. Presented at the Society of Arnerican Foresters: Econornics, Policy and Law Working Group, San Francisco, California. 7 pp.
Flora, Donald F. 1992. A Mesoeconomic Perspective on Wood Quality. Paper presented at "Pruning Conifers in Northwestern North America: Qpportunities, Techniques, Impacts", Olympia, Washington. 7 pp.
Flora, Donald F. 1993. Forest Sustainabilrty and the Pacifc Rim. Presented to the Sustainable Development in the Pacific Rirn International Exchange Conference, Lewis-Clark State College. 6 pp.
Flora, Donald F., Andrea L. Anderson and Wendy J. McGinnis. 1991-a. PacÏfic Rim Log Trade: Determinants and Trends. USDA Research Paper PNW-RP-432, Forest Service, Pacific Northwest Research Station, Seattle, Washington. 72 pp.
Flora, Donald F., Andrea L. Anderson and Wendy J. McGinnis. 1991-b. Future Pacific Rim Flows and Prices of Softwood Logs, Differentiated by Grade. USDA Research Paper PNW-RP- 433, Forest Service, Pacific Northwest Research Station, Seattle, Washington. 22 pp.
Gaston Bibliography Page 161
Flora, Donald F. and Wendy J. McGinnis. 1989. Alaska Midgrade Logs: Supply and Offshore Dernand. Research Paper PN W-RP-411, Forest Service, Pacific Northwest Research Station, Seattle, Washington. 13 pp.
Flora, Donald F. and Christine Lane. 1994. Timber Trade Forecasting and Policy Analysis w#h Non-Optimizing EquilibnÜm Models. Presented at conference, "Current Issues in International Trade", Oregon State University, Corvallis, Oregon. 6 pp.
Flora, Donald F., Christine Lane and Richard Haynes. 1993. Wood Products Trade, Forest Replanning and Forest Habitat Conservation in the US. Northwest. Review Draft, USDA Forest Service, Pacific Northwest Research Station, Seattle and Portland. 8 pp.
Flora, Donald F., Wendy J. McGinnis and Christine L. Lane. 1993. The Export Premium: Why Some Logs are Worth More Abroad. USDA Research Paper PNW-RP-462, Forest Service, Pacific Northwest Research Station, Seattle, Washington. 18 pp.
Flora, Donald F., Ulla Woller and Michael Neergaard. 1990. Tradeoffs and lriterdependence in the Alaska Cant and Log Markets. Research Paper PNW-RiJ-422, Forest Service, Pacific Northwest Research Station, Seattle, Washington. 11 pp.
Gaston, C.W., O. Cohen and R. Prins. 1994. Environmentalism as a Driver for Wood Product QuaMy. Working Paper 204, Forest Economics and Policy Analysis Research Unit, University of British Columbia, Vancouver. 22 pp.
Gellner, B., L. Constantin0 and M. Percy. 1991. Dynarnic Adjustments in the United States and Canadian Construction Industries. Canadian Journal of Forest Research 21 : 326-332.
Grennes, T., P.R. Johnson and M. Thursby. 1978. The Economics of Worjd Trade. Praeger Publishers (New York). 129 pp.
Haley, D. and M.K. Luckert. 1990. Forest Tenures in Canada: A Framework for Policy Analysis. Forestry Canada Information Report E-X-43, Ottawa, Ontario
Haley, D. and M.K. Luckert. 1995. Tenures as Economic Instruments for Achleving Objectives of Forest Policy in British Columbia. Executive Workshop on Economic Instruments for Protection of Forest Resources, Faculty of Law, University of Victoria, British Columbia. 36 PP-
Haynes, Richard W. and Roger D. Fight. 1992. Price Projections for Selected Grades of Douglas- Fir, Coastal Hem-Firl lnland Hem-Fir, and Ponderosa Pine Lumber. Research Paper PNW- RF-447, Forest Service, Pacific Northwest Research Station, Portland, Oregon. 20 pp.
Hseu, J. and J. Buongiomo. 1992. Price Elasticities of Substitution Between Species in the Demand for U.S. Softwood Lumber lmports from Canada. Canadian Journal of Forest Research 23: 591 -597.
Gaston Bibliography Page 162
Iwai, Yohsiya. 1986. Timber Producing Districts in Japan and the demand for Housing Ttmber. Paper in IUFRO, Division 4, The Curent State Of Japanese Forestry (V), The Japanese Forest Economic Society, Tokyo: 1-1 1.
Jacques, R., M. Martin and R. Samson. 1982. Analysis of the Demand for Canadian So&vooo Lumber. Canadian Forest Service, Environment Canada, Ottawa. 11 pp.
Japan Tariff Association. Various Issues. lmports of Commodities by Source. Tokyo, Japan.
Japan Wood Products Information and Research Centre. Various Issues. Wood Supply and Demand Information Sentice, Tokyo, Japan and Seattle, Washington.
Johnston, J. 1 984. Econometk Methods. Third Edition, McGraw-Hill Publishing (New York). 568 PP-
Judge, G.G., R.C. Hill, W.E. Griffiths, H. Lütkepohl and T. Lee. 1988. Introduction to the Theory and Practice of Econometrics. Second Edition, John Wiley & Sons (New York). 1 024 pp.
Kalt, J.P. 1994. Report for the First Administrative Review in Certain Softwood Lumber Pmducts from Canada. Prepared for the International Trade Administration, United States Department of Commerce. 291 pp.
Kato, Takashi. 1982. Comparison of Softwood Lumber Manufactunng and Selling Costs Between the Pacific Coast of North America and Japan. Paper in IUFRO, Division 4, The Current State Of Japanese Forestly (Il), The Japanese Forest Economic Society, Tokyo: 30-39.
Kennedy, P. 1992. A Guide to Econometrics. Third Printing, The MIT Press (Cambridge). 410 PP-
Lewandrowski, J. 1989. A Regional Mode1 of the US. Softwood Lumber Industry: lncluding the Role of Price Expectations, the Role of Finished Product Inventory, and the Impacts of Trade Restrictions on Canadian Softwood Products. Ph.D. Thesis, North Carolina State University. 220 pp.
McKillop, W.L.M, T.W. Stuart, and P.J. Geissler. 1980. Cornpetition Between Wood Products and Substitute Structural Products: An Econometric Analysis. Forest Science 26(1): 134 - 148.
Mochida, Haruyuki. 1989. Problems of Cost Reduction in Japanese Forestry. Paper in IUFRO, Division 4, The Current State Of Japanese Forestry (VI), The Japanese Forest Economic Society, Tokyo: 39-49.
Moffett, Jeffrey L. 1993. A Comparison of Product Diffusion and Distributed Lag Modefs for Estimating WoodINon-wood Substitution in the US Window Market. Working Paper 42, Center for International Trade in Forest Products, University of Washington, Seattle. 29 pp.
Moffett, Jeffrey L. And Thomas R. Waggener. 1992. The Development of the Japanese Wood
Gaston Bibliography Page 161
Trade: Historical Perspective and Current Trends. Working Paper 38, Center foi International Trade in Forest Products, University of Washington, Seattle. 125 pp.
Mon, Yoshiaki. 1992. Timber Market in Japan: An Econometric Analysis. Mernoirs of tne Colleg~ of Agriculture 139: 179-1 91, Kyoto University, Japan.
Nicholson, W. 1989. Micmeconomic Theory: Basic Pnhcipies and Extensions. Fourth Edition. The Dryden Press (Chicago), 793 pp.
Otsuka, Fumiko. 1992. Japanese Market fir Dimensional Lumber a Gravity Mode1 Approach. Unpublished MSc. Thesis, University of British Columbia, Vancouver. 92 pp.
Pearse, Peter H. 1993. Deteminafion of Harvest Rates in the Transition to Sustained Yield. Mimeo., Department of Forest Resources Management, University of British Columbia, Vancouver. 19 pp. plus appendix.
Penson, J. And R. Babula. 1988. Japanese Monetary Policies and U.S. Agricultural Exports. Journal of Agricultural Economics Research 40: 1 1 -1 8.
Perez-Garcia, J.M. 1993. Global Forestry Impacts of Reducing Softwood Supplies from North America. CINTRAFOR Woricing Paper, #43, University of Washington, Seattle, Washington. 35 pp.
Pesonen, Miikka. 1993. Japanese Market for Scandinavian Wood Products. Deparfment of Forest Economics Reports, No. 1, University of Helsinki. 116 pp. plus appendix.
Phelps, Susan E. 1993. A Summary of Elasticities of Demand and Supply for North Arnerican Softwood Lumber. Research Note, Forestry Canada, Economic Studies Division, Policy and Economics Directorate, Ottawa. 13 pp.
Price Waterhouse. 1995. Analysis of Recent British Columbia Govemment Forest Policy and Land Use Initiatives. Prepared for the Forest Alliance of British Columbia, Vancouver. 66 pp. plus appendix.
Prins, Robert G. 1993a. The Economic and Environmental Impacts of Reduced Timber Harvests and Increased Softwood Lum ber Prices. Workrng Paper, Forestry Canada, Economic Studies Division, Policy and Economics Directorate, Ottawa. 39 pp.
Prins, Robert G. 1993b. Substitution Between Tropical and Temperate Wood Products: A Literature Review. Research Note, Forestry Canada, Economic Studies Division, Policy and Economics Directorate, Ottawa. 12 pp.
Random Lengths. Various Issues. Yeaibook, Random Lengths Publications Inc. Eugene, Oregon.
Robertson, Guy and Thomas R. Waggener. 1995. The Japanese Market for Softwood Sawnwood and Changing Pacific Rim Wood Supply Conditions: Implications for US Paeific
Gaston Bibliography Page 164
Northwest Producers. Working Paper 52, Center for International Trade in Fores1 Products, University of Washington, Seattle.71 pp. plus appendix.
Robinson, V.L. 1974. An Econometric Model of Sof&wood Lumber and Stumpage Markets, 1947- 1967. Forest Science 20(2): 171 -1 79.
Rockel, M L and J Buongiorno. 1982. Derived Demand for Wood and Other Inputs in Residential Construction: a Cost Function Approach. Forest Science 28(2): 207-21 9.
Savin, N.E. and K. J. White. 1977. The Durbin-Watson Test for Serial Correlation with Extreme Sample Sires or Many Regressors. Econometnca 45: 1989-1 996.
Sedjo, Roger A., A. Clark Wiseman, David J. Brooks and Kenneth S. Lyon. 1994. Changing Timber Supply and the Japanese Market. Discussion Paper 94-25, Resources for the Future, Washington, D.C. 31 pp.
Singh, B.K. and J-C. Nautiyal. 1986. An Econometric Analysis of Markets for Canadian Lumber. Wood and Fiber Science 1 8(3): 382-396.
Smith, Ramsay. 1989. Use of Pacific Northwest Wood Products in Japan. Reprint Series 78, Center for International Trade in Forest Products, University of Washington, Seattle. 7 pp.
Sohngen, B.L. and R.W. Haynes. 1994. The Great Pnce Spike of '93: An Analysis of Lumber and Stumpage Prices in the Pacific Northwest. Research Paper PNW-RP-476, USDA Forest Service. 20 pp.
Spelter, H. 1985. A Product Diffusion Approach to Modelling Softwood Lumber Demand. Forest Science 31 (3): 685-700.
Spelter, H. 7992. Technology-driven Substitution in the Forest Sector - the Variable Price Elasticity Model Revisited. In Forest Sector Analysis - Proceedings of IUFRO Centennial Conference, Berlin, Germany: 24 -29.
Sutton, W.J.R. 1994. The World's need for Wood. In Proceedings No. 7319, The Globalization of Wood Supply: Supply. Processes, Products and Markets, Madison Wisconsin: 21 -29.
van Kooten, G.C. 1993. Land Resource Economics and Sustainable Development: Economic Policies and the Common Good. UBC Press (Vancouver). 450 pp.
Varian, H.R. 1984. Microeconomic Analysis. Second Edition, WW Norton & Company (New York). 348 pp.
Varian, H.R. 1993. Intermediate Microeconomk A Modem Approach. Third Edition, WW Norton & Company (New York). 623 pp. plus appendix.
Vincent, Jeffrey R., David J. Brooks and Alamgir K. Gandapur. 1991. Substitution Between
Gaston Bbliography Page 165
Tropical and Temperate Sawlogs. Forest Science 37: 1484-1491.
Waggener, T.R., G.F. Schreuder, and H.M Hoganson. 1978. Elasticities of Demand for Forest Products over Tirne. Office report on file at the Pacific Northwest Forest and Range Experiment Station, Portland, Oregon. 1 12 pp.
Webb, A.J., E.E Figueroa, W.E. Wecker and A.J. McCalla. Impact of the Soviet Grain Embargo; a Cornparison of Models. Journal of Policy Modelling 1 1 :361-89.
Youn, Y.C. and SC. Yurn. 1992. A Study on the Demand and Supply of Timber in South Korea. Paper presented at the Symposium on Forest Sector, Trade and Environmental Impact Models: Theory and Applications, CINTRAFOR, Seattle, Washington.
Yu, Xiaoming and Yoshiaki Mon. 1990. Timber Oemand in Japan. Paper in International Trade in Forest Products Around the Pacific Rim, Y.C. Youn and G.F. Schreuder, editors, lnstitute of Forestry and Forest Products, Seoul National University: 206-216.
I i v i n u r c v n L u n l lY lY TEST TARGET (QA-3)
APPLJED A IMAGE. lnc 1653 Easî Main Street - -. - Rochester, NY 14609 USA -- -- -, Phone: 716/4û2-0300 -- -- - - Fm 716/28&5989