“Log export restrictions do not improve economic performance”, reads the subheading of a recent Financial Post article by Jack Mintz.

Mr. Mintz’s article highlights the Trans-Pacific Partnership (TPP) as an opportunity to wipe out protectionist policies in the forestry sector. He doesn’t mince words (we couldn’t resist) when he says, “log export restrictions should be on the hit list”.

Here at the PFLA blog, we often write about log export policy because it directly and significantly impacts our members.

Because the article does a nice job of articulating the situation in British Columbia we’ve included a portion of the text below, for your interest.

Jack M. Mintz: TPP should raze forest protectionism

[…] Supply management is not the only issue that the TPP could address to Canada’s benefit. We have engaged in other trade-distorting policies that have diminished our standard of living. Federal and British Columbian policies that restrict log exports are another example.

With the advent of another round of softwood lumber negotiations with the Americans this fall, Canada could use TPP as an opportunity to rid itself of a policy that restrict exports. The current system has federal and BC governments in cahoots with each other to restrict log exports so that logs are sold to BC wood producers at a discounted price.

The federal government restricts log exports from federal lands, including Aboriginal holdings and private land granted before March 12, 1906. The BC government regulates Provincial Crown Land and private land granted after March 12, 1906. Currently, most log exports come from the BC coastal region.

Log exports are restricted by a “surplus test,” which applies in British Columbia and not other provinces (the federal government has a memorandum of understanding with BC). An exporter advertises logs on a bi-weekly notification to give opportunities for log processors to offer a domestic price for the logs. If no offer is made, the logs are determined to be surplus and could be sold to the international market. BC further restricts exports from its land by applying an export tax that is 12 to 16 per cent of the domestic selling price.

Logs are not auctioned off to processors. Instead, a government-appointed committee determines whether an offer is “fair.” This Soviet-type approach to price determination is largely based on historical prices and is advantageous to the processors.

For some forest companies, domestic sales are below cost today – they make money only on exported logs. Chinese landed prices in Vancouver have been twice domestic prices in the past three years. Both federal and BC export restrictions have therefore imposed a large “tax” on value-added that would accrue to workers and owners of BC forestlands.

An argument in favour of restricting log exports is that it subsidizes the forest processing industries and employment. However, Peter Pearse, who headed a Royal Commission on forest industry, argued in 2006 testimony that log export restrictions do not improve economic performance. As he states, “in a predominantly market economy, you cannot get more value out of something by restricting the market for it.”

My colleague, Trevor Tombe at the University of Calgary Economics, made a similar observation in a must-read 2015 paper on “value-added jobs.” Some of the lowest value-added industries in Canada are wood products and paper (forest and logging actually has higher value-added per dollar of output despite the BC trade distortion). These processing industries also produce less value-added per job than the national average. Providing these processing industries with “subsidized” logs is shooting the BC economy in the foot by shifting production from higher to lower value-added jobs.

Such clear thinking by Peter Pearse and other economists will not be found at the table of committees determining fair prices for logs sold to domestic processors. Restricting log exports by both federal and BC governments is as nonsensical as supply management policies.

A TPP agreement should do away with these trade-distorting policies used by Canada and our treaty partners that encourage processing, whether forestry, mining or oil and gas. For example, some U.S. states impose regulations requiring forest companies to sell to domestic processors first, similar to federal and provincial rules in BC.

If TPP cannot be employed to rid us of these trade distortions in BC forest products, perhaps some changes consistent with U.S. policy could be used. If BC had a regime similar to that in the United States, the Canada-U.S. Softwood Lumber Agreement expiring October 2015 could be easily settled in Canada’s interests (as opposed to the interests of the BC wood processors).

Unlike Pacific Northwest states, the U.S. federal government does not impose restrictions on private timberland log exports. Canada could mimic the U.S. regime by the federal government eliminating its limitations on log exports, which would primarily assist companies operating on private lands. If BC decides to maintain its value-added reduction scheme, so be it. At least the federal government does not need to participate in a trade-restricting regime.

TPP provides an opportunity to improve trade opportunities for Canada. Canada also can rid itself of some of its worse trade distortions. Log export restrictions should be on the hit list.

Follow the link to the full article.