Could the New Canadian Prime Minister Help Make Housing Affordable for Americans?
February 10, 2006
On January 31, 2006 Canadian voters chose Steven Harper as their new Prime Minister. On the top of the new Conservative PM's agenda is putting to rest a political hot potato that has embroiled US-Canadian relations for decades - the softwood lumber trade dispute. Unfortunately, some fear that an agreement to end the dispute could lead to higher building costs pricing many would-be home buyers out of the market while slowing Hurricane Katrina rebuilding.
The trade in Canadian softwood lumber to the U.S. has remained a contentious issue for over twenty years. U.S lumber mills claim that their Canadian competitors receive unfair subsidies from Ottowa and sell softwood lumber in the U.S. at below market rates. The U.S. government agrees and has slapped high tariffs on lumber from Canada used to frame homes. These high tariffs, in the form of dumping and countervailing duties, are designed to punish Canadian lumber exporters for injuring domestic producers.
These abnormally high border taxes hurt American consumers looking to buy a home. Import taxes on Canadian softwood used to construct homes such as 2X4s and floor joists runs at about 27%. This hidden sales tax has increased the price of new homes by about $1,000 each. Maybe not all that much on a house purchase, but a significant number for America's poorest homebuyers who are struggling to qualify for mortgages. While the US lumber industry claims they are injured by Canadian lumber imports, Americans looking to rebuild their homes in the wake of the Hurricanes Katrina and Rita disasters are injured even more by these hidden sales taxes, which, because these taxes that are simultaneously enriching big lumber interests in the United States.
A recent NAFTA trade panel - essentially a referee in cross border trade disputes - ruled in favor of Canada. The panel stated that Canadian subsidies do not amount to much and have not harmed US lumber mills. Likewise, the panel ruled that certain Canadian dimensional lumber producers did not "dump" their products in the U.S. market by selling at below market prices. The US was advised to reverse the 27% tariffs imposed on Canadian softwood lumber resulting in a "win" for US consumers looking to purchase a home or rebuild after this summer's hurricanes.
Unfortunately, the US government has effectually ignored the ruling by keeping in place duties on softwood lumber and protecting US producers. Washington seems intent on ignoring the ruling in the hopes of reaching a settlement with Canada whereby Ottawa would agree to restrict Canadian softwood lumber in the US through an export tax. And worst of all, the domestic lumber industry could receive all the taxes collected - over $4 billion - in a corporate welfare scheme that is nothing short of outrageous (see our story on the Byrd Amendment).
Will the new Prime Minister fight on or agree to settle with Washington? Political insiders believe that Mr. Harper remains intent on settling the dispute. According to the Conservative Party platform released after the swearing-in ceremony, the new government in Ottowa will attempt to repair the rift in US Canadian relations. Settling the lumber dispute will become a part of this feature of the platform. A settlement including an export tax on softwood lumber to the US will help mollify angry US lumber mills. Even more, the revenue generated from an export subsidy will also help many cash-strapped lumber-producing Canadian provinces.
Unfortunately, an export tax is no different than an import tax from the viewpoint of U.S. consumers. The only difference is who gets the extra money that consumers have to shell out. Under an export tax, Canada gets to keep the revenues. Under an import scheme the U.S. gets the revenues. If that's the choice, U.S. consumers are badly served by an export tax regime.
Why should US homebuyers and those impacted by hurricanes Katrina and Rita help shore-up cash strapped Canadian provinces, especially when a NAFTA panel says that no taxes should be applied at all? It doesn't make any sense. CWT has been urging the Mr. Harper not to settle the trade dispute through export taxes. And we continue to press the United States to adhere to the NAFTA dispute panel and drop its import taxes.
That is the only solution that makes any sense at all.