Economic Analysis of the Canada–United States Softwood Lumber Dispute: Playing the Quota Game

The Canada-U.S. Softwood Lumber Agreement (SLA) was the latest measure to restrict Canadian exports of softwood lumber to the United States. Rather than a countervail duty or export tax, SLA employed a quota that provides a large windfall (quota) rent to Canadian lumber producers in addition to extra quasi-rents to U.S. producers, all at the expense of U.S. consumers. However, Canadian producers have not taken full advantage of the quota regime to maximize their overall gains, which exceed what they could earn under free trade or an export/import tax. This is demonstrated using a theoretical framework and numerical illustration. It is shown that the net gain to Canadian producers does not occur when the quota rent is maximized, but rather when the sum of producer surplus and quota rent is maximized. It is also argued that the existence of resource rents from logging does not constitute a subsidy to lumber producers. It is concluded that, from Canada's perspective, export quotas are preferred to both free trade or an export/import tax, at least in the short run, but only if all provinces and all softwood lumber products are included in the Agreement and a means for sharing the windfall rents can be found.