Canadian Softwood Lumber Export to the United States: A Cointegrated and Errorcorrected System

Canada and United States recently signed a five year deal called “Softwood Lumber Agreement”. For almost a decade softwood lumber trade was at the centre of a heated trade dispute between these two countries. The alleged stumpage subsidy in Canada was the main focus of this dispute. Various investigations by the ITA and USITC ignored factors other than the alleged stumpage subsidy in Canada that drive softwood lumber export. This paper investigates the effects of five major excess demand side factors on Canadian softwood lumber exports to the U.S. using Johansen’s maximum likelihood cointegration analysis. The results suggest that there is only one long-run equilibrium relationship among Canadian lumber exports, U.S. lumber price, U.S. disposable income, U.S. housing starts, U.S. construction wage rate and the exchange rate. The error-correction models are used to generate both shortrun and long-run elasticities. The results suggest that five excess demand side factors explain about 70% of the variations in softwood lumber exports and that 70 to 74 percent of deviations from the long-run equilibrium is corrected within one quarter. Although the results do not negate the possibility of alleged stumpage subsidy influencing exports, they strongly suggest that excess demand side factors are the major determinants of softwood lumber trade between Canada and United States.