"we have sold the stumps, plus a long-term support contract"
Babble on.
In the comments to this post, Deaner lays out the best argument I've yet seen justifying low Canadian stumpage fees. It really deserved its own post:
...there is a given value in standing timber (or oil, gas, gold in the ground, etc). The province, deliberately or otherwise, said: "whoever develops this resource has to do so under these conditions" - and set an industry structure that emphasised continued employment, high levels of unionization and high tax rates. These are all policy choices that governments are free to make - whether we like them or not, I think we agree that they are within the purview of a sovereign government. In respnse, the industry placed a low cash value on the standing timber - the government had already extracted the value in the conditions of development. How is that a subsidy? - the owner of the resource extracts the same value (in their mind) - it just comes in the form of high wage employment and a high tax rate - and the buyer gets no more value; they just write the cheques to different people.
If you quote a customer for a job and don't extract immediate top dollar because you insist on value (for you) in other ways, like relaxed delivery schedules or an extended support contract that you and the customer know is inflated, you have not subsidized the customer - you have just structured the deal in a way that meets your needs, and presumably those of your customer. That's what the Province and the industry have done - we have sold the stumps, plus a long-term support contract, because the Province saw more value in that long-term cash flow (via mill employment) than in a higher stumpage fee. We are free to argue whether that is the right trade-off for the province. The Yankees are not free to argue that the Privince is not entitled to make that trade-off; but that is exactly the Coalition's line of attack.
The Coalition's position (which is common for Americans in trade deals) is that any deal structure that doesn't match the structures used in the USofA is prima facie a "subsidy." After all, the US does things perfectly, so the only reason to deviate would be to cheat somehow. (Babbler's bold)
As regular readers (enough to field two competitive curling teams!) already know, I'm no expert on the softwood lumber file. But the idea that the provinces extract full value from producers for the resource by means other than stumpage fees is the first argument for the Canadian position that makes sense to me.
Babble off.
posted by Babbling Brooks @ 10:06 a.m.
10 comments
10 Comments:
But the idea that the provinces extract full value from producers for the resource by means other than stumpage fees is the first argument for the Canadian position that makes sense to me
What it is is squishy feel-good left-coast over-regulation. The very notion that the government is in a position to know what exactly is full value is frankly scary.
I have a better idea. Charge fair market value for the trees, use the excess royaties to cut taxes and stimulate the economy for the benefit of everyone.
It should also be pointed out that this is BC's practice and is not necessarily practiced in the other provinces.
Dr. Strangelove, with respect, you're missing the point. I agree with you that government isn't in a position to know what full value is. But they can say that they, as representatives of the resource owner (province's population), are getting more than just the stumpage fees as value out of the resource, and that as such, the producers aren't being subsidized.
Whether or not this is good policy is a completely different ball of yarn.
Anne (happier in ontario), your perspective is a welcome glimpse into the front-line realities of this industry. I have no doubt that some of the structural problems built into the regulation of Canadian forestry amount to subsidization of one aspect of it over another. But that's not the American argument. And if these abuses happen up here, do you not think similar or equivalent ones happen south of the border? Neither side has a monopoly on manipulation of the system.
What's worse than that, Anne, is that 80% now in real US dollars is what it is. In five years, and at the rate the US dollar is in decline, it is significantly less.
Finally BB, I am not missing Deaner's point at all. Like so many trumped up left wing ideas, it has all the hallmarks of feelgoodism. But part of its impact is to subsidize higher wages for unionized employees and immediately calls into question the motivation for its existence in the first place. So who is benefitting? The owners, or the representatives of the owners.
It is a nebulous arrangement that is distortive and is easily vulnerable to challenges.
Having said all of that, I'm rather confident a deal will get done. Much of this fooferaw is media generated. The divisions don't appear to be as cavernous as is being portrayed. This industry will never be happy on either side of the border until it consolidates in Canada's ownership favour and, by definition, the US lobby grows weaker. I think this is a last ditch effort by the lawyers who are compensated by furthering the arguement. Business people are more pragmatic and their better judgement will prevail.
Like so many trumped up left wing ideas, it has all the hallmarks of feelgoodism.
Dr. S, you're still not addressing Deaner's core argument: that the structure of the industry in Canada means that producers pay for the resource in ways that go well beyond stumpage fees. Deaner and I are not left-wingers, and we're not arguing that the way the industry is regulated and structured is good policy. All that we're saying is that looking at stumpage fees alone and screaming "SUBSIDY!" is only considering part of the picture, and that the American argument is flawed on that count.
I welcome your input, but if you're going to insist we're wrong, I'm going to insist you actually support your assertion instead of spouting meaningless jargon like left-wing feelgoodism.
I'm sure American grievances are far more numerous and complex than simply yelling 'subsidy' in the face of BC's complex pricing structure. And my assertion is that by structuring their industry in this fashion they are sceaming to be f'd with by a society that's far more inclined towards free-market practices.
BC can say, "we're looking out for organized labour." Well you know what? There's labour laws for that. You don't need to impose a pricing mechanism to abet the organization and enrichment of labour unions. And exactly how do you quantify those costs and equate them back to stumpage? And that's just one of the haircutting measures related to the reduction in stumpage.
But helping the little guy sounds great for sure. Particularly to a province with a rich NDP history. Thus my suspicion that this aspect of the pricing structure is meant to subsidize votes for labour-friendy politicos. They gain. Labour gains. It's a win win for everyone. Well except for everyone else in BC. But I digress.
I'm a free-market guy. I don't always claim it's a perfect system but it's the closest one can get to pricing purity. So please don't try to tell me that all these measures intruding into the pricing of stumpage in BC is not distortive and invitive of suspicion and objection. And when you chose to orchestrate it like this, the burdon of proof is on you to show why detracting form the relative simplicity of the free-market is fair. Deaner explained why it's done. But ironically he has not illustrated how it is not a subsidy.
I believe I have illustrated one example. American lawyers and lobbyist have far more resources and brainpower behind them to exploit the finest minutae (we all know, for example, that "is" may mean either "is" or "is" depending on the state of undress).
On the overall fairness scale as to who's right and who's wrong between the two nations, I humbly abstain. I know the yanks or more than capable of throwing their weight around and of unfair trade practices. But Canadian sanctimony often knows no bounds. And when one can be so abruptly dismissive of subsidization with a "bullshit" after articulating a scheme so far removed from free-market forces, and if this is symptomatic of the back and forth on this file over so many years, about the only thing I can come away with is that it is time to move beyond all the self-absorbtion and just shake hands on the deal.
By the way, I know you are not left of centre and if the deaner who rebutted me is the same one I've read on other blogs, I know he is certainly no lightweight. If anything, I'd say he sounds like he's being defensive of his home province for better or for worse. Power to him.
Speaking for myself, I don't know how often I've read something I've posted only to tell myself to lighten up in future. Probably happen after I hit 'publish'. Here we go...
Thus my suspicion that this aspect of the pricing structure is meant to subsidize votes for labour-friendy politicos.
And my assertion is that by structuring their industry in this fashion they are sceaming to be f'd with by a society that's far more inclined towards free-market practices.
I'd say you've hit the nail on the head there, with both statements.
It would be much easier to cut out the social-engineering aspect of the industry structure and price stumpage higher. I suspect it would also eliminate some of the opportunity for abuse of the system that Anne describes.
But the bottom line for me is that Canadian lumber companies pay for timber in more ways than just stumpage. Their costs are higher than they otherwise would be because of government regulation.
Put it this way: if we raised our stumpage fees to American levels, but kept our labour laws, our industry regulation, etc. the same, would we really be creating the level playing field the Americans say they want?
No, the arguments from the other side of the border that our stumpage fees are too low don't hold as much water for me as they did a few days ago.
Boy - too many comments have piled up (in 18 hours!) to respond to them individually.
Anne (Happier in...) - I agree that past government practice in BC (stumpage rates and cutting requirements in particular) did not provide incentives (or the right incentives) for long-term sustainable forest management. That is changing (albeit slowly) and I will be happy to see better policies take hold. I don't in any way dismiss your experiences - I think the industry has a real problem with the vertical structure (in BC, following the break up of some of the integrated forest companies) and the opportunity for abuse within the supply chain.
Dr S:
"Charge fair market value for the trees, use the excess royaties to cut taxes..."
Or to pay unemployment insurance to the loggers and mill workers during off-season or cyclical shut downs. Six of one, half dozen of the other; except by requiring the mills to operate you "harness the creativity of the private sector" to come up with ways to be profitable (or at least, less unprofitable) through the whole cycle. In other words, you throw the burden of a cyclical commodity onto the economic actor who is exploiting the resource, instead of the public at large - absorbing that cost doesn't detract from the value of the resource - it merely illustrates that the value may not be as high as otherwise thought. It is not clear to me that this is the wrong trade-off.
One of the (justified) complaints about the Atlantic fishery is the reliance on EI as an ongoing support mechanism. The argument is that having the general taxpayer pay the fishermen for most of the year represents a subsidy to the fishing industry: if you can't extract enough value from the resource to fund a year-round employee (or private operator) that is the economy's way of telling you that exploitation of the resource is uneconomic. The rational response would either be to reduce the number of workers (which may mean increasing the capital investment) until the value extracted is sufficient to support the workforce required, or to find a counter-seasonal industry (or industries) such that the value extracted from the two (or more) resources can support their combined (and overlapping) workforces. In effect, that's what the BC "cut it or lose it" policy did.
"I'm sure American grievances are far more numerous and complex than simply yelling 'subsidy' in the face of BC's complex pricing structure."
Not really.
"And my assertion is that by structuring their industry in this fashion they are sceaming to be f'd with by a society that's far more inclined towards free-market practices."
But the US practice is to absorb the costs of fluctuating employment either by welfare or EI equivalents - I don't see that as a free-market practice.
If you had a resource that was incredibly valuable and is expected to be long-lasting, but of very short annual duration - say like diamond mining in the arctic, where it can only be done for part of the year - which is more of a "free-market" policy, and which one is more of a subsidy:
1) Mining licensees must pay a full year's salary to all employees;
2) The government will pay EI to employees during down time.
In any event, as Damian pointed out - the real issue is not whether these are good or bad policies; it is whether they are policies that each political subdivision can rightfully determine for themselves.
Sorry: Lance asked a question in the last thread that I have not responded to: "Are the Canadian companies selling 'below market' - and if so, why in the name of everything holy are they doing so?" ...or words to that effect.
That's a very good question. In part, it is probably to maintain market share - both vis a vis each other, and their non-Canadian competitors. They may also feel that if they are able to sell below the Coalition members' prices that this will encourage others (like the National Homebuilders Association, who were vocal -if ineffective- supporters of the Canadian industry) to see the value in Canadian supply and rally to the cause. Other than that, I really don't know - and I am not sure, if I were the VP of Marketing for one of these guys, that I would find either of these arguments persuasive enough to deliberately leave any money on the table.
In response to another post above, I am the same person who posts as Deaner or DCardno - it depends on which computer I am posting from. When I notice, I try to conform them - but not always; neither one is intended to be a sock-puppet for the other!
"Given that, _how_ can any company sell below fair market value? The _only_ way is a difference in the price points between two markets."
That wasn't what you asked (or what I thought you asked) originally: we weren't talking about "fair market value" but "market value." The difference is important - no one has any idea what the "fair market value" of lumber is, other than the price at the moment a transaction is struck; presumably that price is "fair" to both parties, or the deal would not be reached. More importantly, your comment implies that every compnay that obtains services from a government (and that means every compnay, since they all get municipal services, as well as security services via police, fire department, National Defense, etc) is subsidized - they can't sell above "fair market price" - nobody will buy; but if they sell below that price their government has subsidized them by failing to suck all the value out of their operations....
The Canadian companies are beating the Coalition members on price - they are deliberately selling at a price below at least one segment of the competition: "below market" if you like. This is no different than -say- California wine makers beating BC vinyards on price here in BC, although there is much more product differentiation in wine than lumber. The question I thought you were asking is whether it is economically rational for the Candian producers to be doing so. In part, due to longer supply lines, they have to: they can't offer as tight a JIT shipping operation, so they have to discount the price. I mentioned some of the other factors in the last post. I don't know - but as you say, these companies are run by some sharp guys; I am sure they think they are serving long-run profit maximization...
This theory stifles innovation. if the value of the stump is that low that the taxation or unions or whatever are such a large proportion of the total, it leaves little or no room to "Build a Better Mousetrap" and be an industry leader.
I think the industry really needs to relook at itself and determine if all the subsidization is just a makework program. If Canadian timber can't succeed in the global market at fair comparisons, then perhaps people should move a province over and dig for some oil or get one of them $200,000/year drywalling jobs or $20/hr grocery clerk jobs.
This is not an issue of supply and demand for lumber but of oversupply of workers in the lumber industry.
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