Welfare impacts of the 1996 United States - Canada Softwood Lumber (trade) Agreement

Abstract

This paper investigates welfare impacts of the 1996 United States – Canada Softwood Lumber (trade) Agreement (SLA), which set up a tariff-regulated quota system to restrict softwood lumber export from Canada to the United States. An aggregate price model is used to estimate the price impact of the SLA, and the implied quantity and welfare effects are examined. The results show that while the anticipated change in lumber price is about $59 in 1997 U.S. dollars or 16%, on average, for the first 4 years under the SLA, the gains to U.S. producers of softwood lumber are large and the losses to U.S. consumers are much larger. In addition, Canadian producers have benefitted from the SLA in the U.S. market, and the Canadian government has collected a small amount of additional export fees. As the overall efficiency costs of the SLA are modest, the SLA can be seen as an effective means of welfare transfer from U.S. consumers to the U.S. and Canadian producers. These results should provide a framework for ongoing trade policy debate.