The White House’s tariff hike on Canadian softwood lumber will almost surely exacerbate inflation at the worst possible time.
The White House’s tariff hike on Canadian softwood lumber will almost surely exacerbate inflation at the worst possible time.
T he U.S. is coming to terms with an inflation problem. The U.S. CPI reached 6.2 percent in October, its highest level since the 1990s and currently one of the highest inflation rates in the OECD. Rising housing costs represent an increasing contributor to inflation as shelter makes up about 33 percent of the CPI basket. As of August, the U.S. Case-Shiller home-price index has risen at a 20 percent year-over rate but is only slowly appearing in inflation measures, since the official CPI measures rent, which typically lags home-price increases by about a year.
Despite rising shelter costs, the Biden administration has shockingly doubled the tariff on Canadian softwood lumber to 17.9 percent from the current rate of 8.99 percent. This tariff hike will almost surely be passed on to consumers in the form of higher lumber and housing prices and will almost certainly exacerbate current supply-chain problems. Just as lumber prices are beginning to fall from the all-time highs reached this past summer, the Biden tariffs will almost certainly slow the process. Worse, White House policy looks likely to set off a broader trade dispute with Canada. On Friday, Canada’s deputy prime minister threatened retaliatory tariffs on the auto sector and “and several other sectors of the U.S. economy.”
Softwood lumber has been the focus of a long-standing trade dispute between Canada and the U.S., with Washington arguing that Canadian government subsidization of the country’s softwood-lumber industry (which employs hundreds of thousands) and associated exports into the U.S. constitute unfair trade practices. Most timber in Canada is owned by the Canadian provincial governments and sold at government-set administrative rates (known as stumpage fees).
Beginning in 1982, the U.S. Department of Commerce, at the urging of the U.S. softwood-lumber lobby, argued that the stumpage fees at which the Canadian government was selling lumber were unfair, and began imposing countervailing tariffs on Canadian softwood-lumber imports.
The two countries have intermittently tried to resolve such disputes with agreements on what stumpage fee the Canadian government will set in exchange for no retaliatory tariffs. Nevertheless, these agreements break down or expire over time, with the U.S. reimposing tariffs in 1986, 1991, 2002, 2017, and now again in 2021.
Tariffs are an age-old response to support domestic industry at the expense of domestic consumers. This was no different under the Trump-administration tariffs, whose trade policy increased prices in America.
Unlike in 2018, however, America in 2021 has a serious inflation problem, which makes hiking tariffs a considerably worse idea.
U.S. policy-makers have been slow to react to inflation. On the monetary side, the Federal Reserve is playing catch-up with rising inflation uncertainty, by tapering its asset purchases and slowly signaling short-term interest-rate increases in 2022. Central bankers in both developed and emerging countries have also been commencing interest-rate hikes as the recent inflation phenomenon has been truly global in nature. It’s no excuse that the Fed is behind the curve, given that one of the highest inflation rates in the OECD. Only recently, Fed chair Jay Powell conceded that he will no longer use the word “transitory” to describe inflation.
Meanwhile, on the fiscal side, the Biden administration is still attempting to increase government spending by passing its Build Back Better plan. Despite many well-intentioned components of such legislation that may be more palatable in ordinary low-inflation times, the current inflation uncertainty makes now a very inopportune time.
This trade-policy folly has created a trifecta of policy supporting continued price increases in the U.S. The Biden administration should seriously consider reversing these tariffs if it wishes to support price stability, an issue that is already starting to drive disapproval toward the president and congressional Democrats as they head into a midterm election year.