The Effect of Trade Restriction The Effect of Trade Restriction on the Downstream Industry: on the Downstream Industry: Evidence from the US-Canada Evidence from the US-Canada Softwood Lumber AgreementSoftwood Lumber Agreement

Nisha Malhotra & Sumeet GulatiNisha Malhotra & Sumeet Gulati

ObjectiveObjective

Trade Restriction: US Lumber Trade Restriction: US Lumber Industry is sheltered. Industry is sheltered.

Downstream Industry: Downstream Industry: • Lumber using (or downstream) Lumber using (or downstream)

industries and consumers bear the industries and consumers bear the burden burden

Softwood lumber disputeSoftwood lumber dispute US ClaimUS Claim

• Artificially low Provincial stumpage fees - Artificially low Provincial stumpage fees - Countervailable subsidies.Countervailable subsidies.

• Softwood Lumber I: 1982Softwood Lumber I: 1982 US authorities decided no subsidyUS authorities decided no subsidy

• Softwood Lumber II: 1986Softwood Lumber II: 1986 15% provisional duty15% provisional duty Replaced by 15% export tax in MOUReplaced by 15% export tax in MOU

• Softwood Lumber III: 1991Softwood Lumber III: 1991 Canada unilaterally terminates MOUCanada unilaterally terminates MOU

• Canada wins appeal against countervailing duty in Canada wins appeal against countervailing duty in CUSTA (1993 and 1994)CUSTA (1993 and 1994)

• US revokes duties against Canadian lumber (Aug 1994)US revokes duties against Canadian lumber (Aug 1994)

Softwood Lumber AgreementSoftwood Lumber Agreement April 1996-Softwood Lumber Agreement finalized. April 1996-Softwood Lumber Agreement finalized.

(Tariff Quota System)(Tariff Quota System)• First 14.7 Billion Board Feet (BBF) of softwood lumber First 14.7 Billion Board Feet (BBF) of softwood lumber

exports from Alberta, British Columbia, Ontario, and exports from Alberta, British Columbia, Ontario, and Quebec would enter the US market duty free. Quebec would enter the US market duty free.

• The first 650 million board feet over 14.7 BBF -tax of The first 650 million board feet over 14.7 BBF -tax of $50 per thousand board feet. $50 per thousand board feet.

• Any further exports were subject to a tax of $100 per Any further exports were subject to a tax of $100 per thousand board feet. thousand board feet.

Other provinces- Unrestricted access to the US market.Other provinces- Unrestricted access to the US market.

The Softwood Lumber The Softwood Lumber AgreementAgreement

US ClaimUS Claim• Artificially low stumpage fees- Countervailable subsidies. Artificially low stumpage fees- Countervailable subsidies.

April 1996-Softwood Lumber Agreement finalized. April 1996-Softwood Lumber Agreement finalized. • First 14.7 Billion Board Feet (BBF) of softwood lumber First 14.7 Billion Board Feet (BBF) of softwood lumber

exports from Alberta, British Columbia, Ontario, and exports from Alberta, British Columbia, Ontario, and Quebec would enter the US market duty free. Quebec would enter the US market duty free.

• The first 650 million board feet over 14.7 BBF -tax of $50 The first 650 million board feet over 14.7 BBF -tax of $50 per thousand board feet. per thousand board feet.

• Any further exports were subject to a tax of $100 per Any further exports were subject to a tax of $100 per thousand board feet. thousand board feet.

Other provinces- Unrestricted access to the US market.Other provinces- Unrestricted access to the US market.

TimelineTimeline President Clinton visits Ottowa in post-NAFTA President Clinton visits Ottowa in post-NAFTA

Euphoria (Feb 1995)Euphoria (Feb 1995)• Highlights worlds biggest trading relationshipsHighlights worlds biggest trading relationships• Bilateral trade irritants considered minorBilateral trade irritants considered minor• Bilateral Trade at record highBilateral Trade at record high

Late 1995 - Pressure rises on US government to Late 1995 - Pressure rises on US government to limit softwood exports – progress in consultationslimit softwood exports – progress in consultations

February 2, 1996: The Coalition for Fair Lumber February 2, 1996: The Coalition for Fair Lumber Imports (CFLI) announces intentions to petition if Imports (CFLI) announces intentions to petition if no pact by Feb 15no pact by Feb 15thth

February 15February 15thth 1996: The basic Softwood Lumber 1996: The basic Softwood Lumber agreement announcedagreement announced

April 3April 3rdrd 1996: Details on Softwood Lumber 1996: Details on Softwood Lumber Agreement FinalizedAgreement Finalized

Event Study Event Study

An event study is used to examine the reaction of An event study is used to examine the reaction of investors to positive or negative news (also called investors to positive or negative news (also called events). events).

abnormal’ changes in a firm’s stock price can be interpreted as the present discounted value of future gains or losses expected due to the agreement.

A simple event study involves the following steps: A simple event study involves the following steps: • Event of interest (event window) Event of interest (event window) • Selection of firmsSelection of firms• Predicting "normal" return during the event window in the absence of Predicting "normal" return during the event window in the absence of

the event the event • Abnormal Return=Actual Return-Predicted ReturnAbnormal Return=Actual Return-Predicted Return• Testing whether the Average Cumulative Abnormal return is Testing whether the Average Cumulative Abnormal return is

statistically different from zero.statistically different from zero.

The U.S. Census Bureau :The U.S. Census Bureau :• Fees on additional shipments through the SLA Fees on additional shipments through the SLA

amount to more than US$1,000 for the lumber amount to more than US$1,000 for the lumber in an average new home. in an average new home.

• For every $50 increase in the price of 1,000 For every $50 increase in the price of 1,000 board feet of framing lumber, 300,000 potential board feet of framing lumber, 300,000 potential homeowners are priced out of the housing homeowners are priced out of the housing market.market.

Event Study Event Study Events of InterestEvents of Interest Feb 2Feb 2ndnd 1996: Warning by the US Group 1996: Warning by the US Group

““The coalition for fair lumber imports warned The coalition for fair lumber imports warned that they would petition the US Govt. to that they would petition the US Govt. to impose duties if no pact is reached by Feb 15impose duties if no pact is reached by Feb 15th”th”

Feb 16Feb 16thth 1996: Agreement in Principle 1996: Agreement in Principle““US Lumber Industry welcomes agreement in US Lumber Industry welcomes agreement in

principle over subsidized Canadian Softwood principle over subsidized Canadian Softwood Lumber Imports”Lumber Imports”

April 3April 3rdrd 1996: Finalizing of the agreement 1996: Finalizing of the agreement““Canada agrees to tax softwood exports to Canada agrees to tax softwood exports to

US….”US….”

Source: LexisNexis AcademicSource: LexisNexis Academic

Event Study Event Study Selection of FirmsSelection of Firms

Downstream Industry/ Users of Softwood LumberDownstream Industry/ Users of Softwood Lumber Firms belonging to the groups that are members in Firms belonging to the groups that are members in

American Consumers for Affordable homes (ACAH) form American Consumers for Affordable homes (ACAH) form the sample of firms belonging to our downstream the sample of firms belonging to our downstream industryindustry

Short listed firms that fell under lumber using 4-digit Short listed firms that fell under lumber using 4-digit SICsSICs(home builders, manufactured-home builders and lumber dealers (home builders, manufactured-home builders and lumber dealers

who supply home builders and manufacturers ) who supply home builders and manufacturers ) Checked the website to reconfirmChecked the website to reconfirm Centre for Research on Security Prices (CRSP) Centre for Research on Security Prices (CRSP)

database-database-(AMEX, NYSE)(AMEX, NYSE)

Event Study Event Study

Standard market model to predict Normal ReturnsStandard market model to predict Normal Returns

RRitit =firm i’s return at date t=firm i’s return at date t

RRmtmt = The return of the value weighted = The return of the value weighted NYSE/AMEX index at date t. NYSE/AMEX index at date t.

RitRit = j + j RmtRmt + jt

Table 1: TACAR for all the three events at 3 digit Table 1: TACAR for all the three events at 3 digit

SIC Industry (Event Window (-1,+1)SIC Industry (Event Window (-1,+1)

Table 2: TACAR for all the three events at 3 digit Table 2: TACAR for all the three events at 3 digit

SIC Industry (Event Window (-2,+2)SIC Industry (Event Window (-2,+2)

SIC-3 Industries TACAR Z STAT

152Single-family Housing Construction & Residential Construction, Nec -3.73% -1.42

153 Operative Builders -5.60% -1.19

245Mobile Homes & Prefabricated Wood Buildings -0.74% 0.00

521 Lumber and Other Building Materials -4.61% -0.951 Others -6.67% -1.80

ALL ALL -4.07% -2.10

Table 1: AAR for all the three events at 3 digit SIC Table 1: AAR for all the three events at 3 digit SIC

Industry (Event Window (0.0)Industry (Event Window (0.0)

SIC-3 Industries AAR Z STAT

152Single-family Housing Construction & Residential Construction, Nec -2.65% -3.68

153 Operative Builders -2.14% -1.83

245Mobile Homes & Prefabricated Wood Buildings 1.31% 0.81

521 Lumber and Other Building Materials -4.56% -4.431 Others -2.46% -2.99

ALL ALL -1.75% -3.54