CINTRAFOR

Working Paper Abstract

Changing Export Trends and the Health of the Pacific Northwest Forest Sector

Bruce Lippke, Rose Braden, Scott Marshall. (86 pp)

US Export Losses in the Face of Structural Change

Deep-water port access to Asia has provided the Pacific Northwest (PNW) with a comparative advantage in serving what was until recently, the region with the world's highest sustained growth. The Asian financial crisis, which began in 1997, substantially reduced US exports to Asia, and has compounded the negative impacts of the harvest restrictions, which began in 1990 and were intended to protect endangered species habitat. Both the Asian financial crisis and the harvest constraints are forcing long-term structural changes.

US forest product exports to Japan, the largest export market, declined from $4.8 billion in 1996 to $2.8 billion in 1998 (-42%). And exports to South Korea, the third largest market for US wood products, declined from $963 million to $538 million (-52%). The only Asian market to avoid the crisis was China. US exports to China increased from $474 million in 1996 to $538 million in 1998 (+13%). While recovery began in some countries in 1999, the impact on different products is very uneven.

The Impact of Harvest Restrictions

Since timber harvest restrictions were first implemented in 1990 to protect endangered species, harvest volumes have declined 30% in Washington, and over 40% in Oregon, from what were thought to be sustainable harvest levels. Lower harvest volumes resulted in substantial losses to logging and lumber processors and raised the cost of wood for secondary processors, reducing their competitiveness. Prior to the Asian crisis, the higher prices resulting from the reduced harvests mitigated some of the economic losses to timber producers, but they also motivated investments and increasing production rates by suppliers of wood from around the world. Since the Asian crisis ended the period of tight markets, the second round of long-term structural adjustments to restore cost competitiveness at reduced harvest levels is now beginning.

Primary product export volumes have declined significantly. Much of the decline in log exports is linked to worldwide restructuring followed higher log prices during the early 1990s. Export premiums once paid for hemlock logs may never be restored as the market has shifted to other suppliers such as Russia, New Zealand, and Chile. Even spruce and fir export prices may not be fully restored by economic recovery in Asia, as Japan's emphasis on pre-cut construction has shifted to more stable wood, such as dried lumber from Europe and engineered products.

The countervailing duty and quota agreement between the US and Canada has affected both US primary and secondary product competitiveness in international markets. The agreement limits the amount of lumber Canada can export to the US duty free. While this quota provides protection for US lumber manufacturers, it forces Canadian producers to sell excess supply at lower prices to offshore markets, taking away the transportation and quality advantages the PNW once held. As Canada's domestic lumber prices have dropped, Canadian producers exported more lumber and secondary products to the Pacific Rim. The quota limitation on Canadian lumber to the US accelerated the shift from US log exports to lumber exports from Canada and Europe as Japanese buyers saw high US log and lumber prices relative to other suppliers. When US markets ultimately weaken PNW log and lumber producers will feel the full effects of this loss in competitiveness in the Asian markets they once dominated. The US market share of logs and lumber in Japan has declined from 56% in 1989 to 31% in 1998, a 25% decline, as Europe gained share by 11%, Canada by 7%, and other suppliers by 7%.

While US secondary exports to Japan were increasing rapidly with deregulation of their housing market, the PNWÕs share of the Japanese market declined 23% as Canadian producers' share increased. Higher regional wood costs, fluctuating exchange rates, and higher levels of support to the forest sector provided by the Canadian government and forest products industry have helped Canadian producers catch up to the PNW and become a formidable competitor. US producers opened the Japanese market for manufactured wood products, yet Canadian competitors have now captured considerable market share.

The shift in Japanese market share can be attributed in part to lower wood prices in Canada and the strength of the US dollar. Revenue from secondary manufacturing in Washington State (inflation adjusted) has grown at nearly 3% per year, with a substantial portion of that growth due to increasing exports. While growth has continued, revenue from secondary manufacturing appears to have fallen below potential by as much as 15%. Even so, the sector has not been nearly as severely constrained as the primary processing sector. While exports could potentially increase by several billion dollars with only modest penetration of the Asian markets, declining competitiveness with Canada and other supplier regions may substantially reduce the PNW's growth potential.

This commentary is based on the report: Changing Export Trends and the Health of the Pacific Northwest Forest Sector (CINTRAFOR WP75).

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