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

Published Date
January 2017, Vol.74:71–80, doi:10.1016/j.forpol.2016.10.013

Author 

Craig M.T. Johnston ^a,,

G. Cornelis van Kooten ^b

aDepartment of Forest and Wildlife Ecology, University of Wisconsin-Madison, United States

bDepartment of Economics, University of Victoria, Canada

Received 1 August 2016. Revised 1 October 2016. Accepted 30 October 2016. Available online 15 November 2016.

Highlights

• Mixed complementarity programming is used to solve a 21-region, global trade model, calibrated to 2011 bilateral trade
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  The model examines the effects of the tariff rate quota used in the 2006 Softwood Lumber Agreement (SLA)
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  It is estimated that the SLA created an annual deadweight loss of $28 million, paid by U.S. consumers
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  The lack of a proper mechanism for capturing quota rent creates incentives for high cost Canadian firms
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  In the absence of SLA, it is estimated that Alberta would supply an additional 9% of Canadian softwood lumber to the U.S.

Abstract

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.

JEL classification

C61

C63

F13

Q23

Keywords

Canada-U.S. lumber trade dispute

Tariff rate quota

Mixed complementarity programming

Global trade model

Model calibration

Quota trading

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  Corresponding author.
  
  

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