Dec 13, 2019
Most U.S. forests are privately owned and are leased to lumber producers at market prices. In Canada, forests are government-owned and leased to lumber producers at low prices set by law.
U.S. producers say that Canadian producers receive a subsidy and “dump” their lumber on the U.S. market at a lower price than the cost of production and lower than the selling price in Canada.
Would U.S. lumber mills gain from a tariff on lumber imported from Canada?
Yes, they would. A tariff imposed on lumber imported from Canada raises the price of lumber in the United States. U.S. producers supply more lumber and their producer surplus increases.
Would everyone in the United States be better of with a tariff on lumber imported from Canada?
Not everyone gains from this tariff. U.S. consumers of lumber buy less lumber and pay a higher price. U.S. consumer surplus decreases and a deadweight loss arises.
How does a tariff work?
With no tariff, the price of lumber in the United States is the world price. When a tariff is imposed, the price of lumber in the United States rises to the world price plus the tariff. With the rise in price, the quantity of lumber supplied by U.S. producers increases. The quantity of lumber demanded by U.S. home builders and other lumber consumers decreases. Imports—the difference between the quantity demanded by U.S. consumers and the quantity supplied by U.S. producers—decrease.
Let’s make a graph to show this outcome.
Now take this short quiz to check that you understand what you have just read.
Multiple Choice Quiz—The Softwood Lumber Market