Impact of inefficient quota allocation under the Canada-U.S. softwood lumber dispute: A calibrated mixed complementarity approach

• Published in: Forest policy and economics 2017-01, Vol.74, p.71-80
• Main Authors: Johnston, Craig M.T., van Kooten, G. Cornelis
• Format: Article
• Language: English
• Subjects: Auctions; Canada-U.S. lumber trade dispute; Complementarity; Consumers; Economic impact; Economic models; Global trade model; Impact analysis; International trade; Lumber; Lumber industry; Mathematical programming; Mixed complementarity programming; Model calibration; Prices; Quota trading; Sanctions; Tariff rate quota; Tariffs; Wood
• ISSN: 1389-9341; 1872-7050
• DOI: 10.1016/j.forpol.2016.10.013

In this paper, a spatial price equilibrium model developed to shed new light on the economic impact of restrictive trade sanctions adopted in the Canada-U.S. softwood lumber dispute. Mixed complementarity programming is used to solve a 21-region, global trade model that is calibrated to 2011 observed bilateral trade flows using positive mathematical programming. In addition, the model employs a mechanism for analyzing the effects of the tariff rate quota used in the 2006 Softwood Lumber Agreement (SLA). It is estimated that the SLA created an annual deadweight loss of $28 million, paid by U.S. consumers. The quota constrained Alberta lumber producers while BC producers had excess quota. The lack of a proper mechanism for capturing quota rent, such as a tradable quota scheme or quota auction resulted in the survival of high-cost firms, perhaps to the detriment of lower-cost firms in Alberta. In the absence of SLA, it is estimated that Alberta would supply an additional 9% of Canadian softwood lumber to the U.S., eroding the supply share of all other regions while improving aggregate welfare. •Mixed complementarity programming is used to solve a 21-region, global trade model, calibrated to 2011 bilateral trade•The model examines the effects of the tariff rate quota used in the 2006 Softwood Lumber Agreement (SLA)•It is estimated that the SLA created an annual deadweight loss of $28 million, paid by U.S. consumers•The lack of a proper mechanism for capturing quota rent creates incentives for high cost Canadian firms•In the absence of SLA, it is estimated that Alberta would supply an additional 9% of Canadian softwood lumber to the U.S.