Marketize B. C. Timber: British Columbia Is Artificially
Sustaining Its Lumber Industry With Low Stumpage Fees on Publicly Owned
Forestslands
It's Time to Cut It Loose
Copyright 2001 National Post
August 22, 2001
By HERBERT GRUBEL
The long-lasting dispute over Canadian softwood lumber exports involves many difficult issues. At its root, however, is the public ownership of forests. Historically, the publicly owned virgin forests of the United States and British Columbia have produced profits, or economic rent, which is the difference between the market prices of trees and the cost of harvesting them. This economic rent properly belongs to the taxpayers. The U.S. government obtains the rent through competitive bidding for cutting rights on public land. Winning firms, in effect, pay up front the present value of the rent.
In British Columbia, companies pay the rent after they have harvested the trees. They report their revenues and costs to the government under strict rules of disclosure and transparency. They pay the difference between the revenue and cost as something called "stumpage."
In theory, B.C. stumpage and U.S. rent payments should come to the same. Thiswas the finding of Yale economist William Nordhaus. The B.C. government widely cites his paper, and our federal government has used it in legal actions with the WTO. The government-mandated formulas used to calculate revenues and costs do not contain any element of subsidy. To the contrary, the costs of the B.C. companies historically have been inflated by requirements to build excessively durable roads and to replant trees where self-regeneration would be economically superior. The crucial difference between the U.S. and Canadian systems for collecting rent is that one pays in advance and the other after the fact. This difference is very important because profit-maximizing private sector firms raise output when prices go up and lower it when they fall. Therefore, when the price of lumber falls, U.S. firms reduce output. Canadian firms do not. The lower product price merely reduces the stumpage they owe. In effect, the B.C. taxpayer bears the brunt of the impact of lower prices.
It matters little to U.S. producers whether the automatic absorption of the impact of lower lumber prices by the government is considered to be a subsidy in the traditional sense used by Mr. Nordhaus. What is important to them is that lower lumber prices cause them to reduce output, lay off workers and suffer reduced profits, while B.C. producers keep up their supplies and maintain profits. In addition, the B.C. producers' actions cause lumber prices to be even lower, and increase their market share in the United States.
There is no doubt that the most recent U.S. lumber tariffs have imposed serious hardships on Canadian workers and firms. This is deplorable since the present workers and firms are not responsible for the historic legacy of rent extraction in British Columbia. However, B.C. does not have many ways to end this tragedy and settle the issue for good. Appeals to the WTO obviously have failed to satisfy the Americans in the past, and will again in the future. The only permanent solution is to make changes to the way in which B.C. collects the economic rent from its forests.
There are two ways to do this. One is to follow the U.S. example and sell very long-term cutting rights on public lands to the highest bidder while the ownership of the land remains with the government. However, since the bulk of U.S. lumber comes from privately owned land in the South, these U.S. interests might oppose this solution and instead fight for full privatization. That privatization is the preferred option for Americans may be inferred from the fact that lumber exports from privately owned forestlands in the Atlantic provinces have been exempted from the present tariffs.
The second method -- full privatization -- is simple in principle. The ownership of forestlands goes to the highest bidder. The open bidding process assures that the price paid equals the present value of the future rents from the forest. Public opinion surveys suggest that privatization is politically risky since many see it as a loss of control over how the forests are managed in the public interest. Public opinion can be changed on these issues. Privately owned forests in countries like Sweden, Germany and the United States are managed in accordance with public regulations and have better records of compliance than B.C. forests.
Much more difficult opposition to privatization will come through native land claims. Unless the claims are settled, bidders for the land will offer prices well below the value of the economic rent to compensate them for the risk that some future court ruling will nullify the deal. Some land may be impossible to sell. This problem can be dealt with by a government guarantee to refund the purchase price, plus interest and costs of improvement, if courts later assign the land rights to natives. Until land claims are settled, the government can set aside the funds received in an escrow account to make them available for refund. Some money might be lent to natives to let them enter bids of their own.
The biggest opposition to the privatization of B.C. forestlands will come from those who have benefited from the stumpage system in the past -- the workers and the politicians. Since wage increases only lowered stumpage incomes for the government, companies granted such wage increases readily. B.C. forestry workers have long been the highest paid in the world. Workers like the idea that the stumpage system insulates them from the vagaries of world lumber prices.
Politicians readily pleased special interest groups who demanded that the government impose economically unsound regulations on logging companies, like the construction of superb logging roads, replanting and other ecological measures. After all, the cost of these regulations never showed up on the government books. They simply reduced the size of stumpage revenues and created employment among unionized workers. Only time will tell whether B.C.'s newly elected Liberal government has the will break this historic practice and do what is right for the province.
The above description of stumpage as a residual is no longer fully accurate. B.C.'s NDP government imposed a "super stumpage," due regardless of profits, and mandated that companies cut a certain amount of wood on lands they had leased or forfeit the right to do so altogether. The latter provision undoubtedly is another irritant to the Americans since it increases lumber supplies even during slackening demand. In many regions of British Columbia, access to timber is now so costly and its quality so low that there is no longer any economic rent. The imminence of this condition has led unions to allow the introduction of labour-saving technology in the knowledge that otherwise they would lose their jobs altogether. As a result, during the last 20 years the demand for labour in the forestry sector has shrunk dramatically while output has increased.
The Americans are also unhappy about prohibitions on the export of unfinished logs. As a result, the B.C. price of raw logs has tended to be below the world price, permitting B.C. processors to undercut their U.S. competition in the lumber market. Of course, the lower timber prices reduced the government stumpage income, so that, in this sense, the B.C. government subsidized the timber processing industry and permitted workers to have higher wages than they would have had otherwise. This fact is another irritant to U.S. lumber companies, but they do not have a very strong case for its removal since the United States has a similar prohibition. Perhaps negotiators can agree to make Canadian and U.S. export restrictions identical. Canada has recently modified its absolute ban by permitting exports of raw logs after their availability has been advertised widely for 30 days and no Canadian bids have been received.
The open bidding for forest harvesting rights, the privatization of crown timber lands, and unrestricted bidding for raw logs by foreigners have been described as "marketization" of the forestry industry. The many who believe that the present "governmentization" of the industry necessarily always produces inferior results welcome the new B.C. government's expressed interest in this marketization, which will not only solve the softwood lumber dispute with the Americans, it will turn a challenge into an opportunity. It will rid the people of British Columbia of the burden of future damage from public ownership and management. And as a bonus, marketization could speed the settlement of native land claims, since it will become obvious that economic rents from remaining forests are much smaller than the natives and many others tend to believe.