Last week, President Trump announced a 20% tariff on Canadian lumber in an effort to boost domestic lumber production and protect American jobs in the lumber industry. The misguided economic thinking behind this type of protectionism goes like this: American companies, mainly home builders, are buying lumber from Canada for cheaper than they can buy domestic lumber. This hurts domestic lumber production and destroys American lumber jobs. By applying a tariff, effectively taxing Canadian lumber 20% as it crosses the border, more companies will instead buy the now artificially cheaper American lumber, thus boosting domestic production and saving jobs.
The problem is that tariffs don’t work like that. The tax, and after all, a tariff is nothing more than a tax on imports, isn’t being paid by the Canadian lumber companies. The tax is paid by American companies when they bring the lumber across the border.
So, in reality, what happens is this: regardless of whether American homebuilders buy Canadian lumber and pay the 20% tariff, or decide to purchase domestic lumber at an artificially “lower” cost, the price of lumber rises. Homebuilders pass this cost on to consumers leading to increased new home production prices, which, in turn, leads to a fall in the demand for new home sales. As the demand continues to fall, homebuilders are forced to lay off workers, as are domestic lumber companies whose demand is economically tied to homebuilder sales.
Instead of saving domestic lumber production and homebuilding jobs, market prices get distorted, and two economically linked industries, lumber and homebuilding, suffer, along with all their consumers.
Protectionism is, at its core, a self-defeating, self-destructive idea based in economic falsehoods. This is evidenced by the fact that 96% of economists agree that free trade is a net positive for consumers. And if you know anything about economists, you know that getting that many of them to agree on something is not easy.
Mark Perry at Carpe Diem explains why:
“It shouldn’t really matter why foreign producers are better able to serve American consumers with lower prices than domestic producers. If China “manipulates” its currency to offer Americans lower prices than otherwise would be the case, that policy provides net benefits for Americans. If Canada “unfairly” subsidizes its lumber producers, that’s a form of foreign aid, and a gift from the citizens of Canada to the citizens of the United States. If we wouldn’t complain about free lumber from Canada, we shouldn’t complain about low lumber prices that might be subsidized by Canadian citizens.”
In other words, the same economic law of comparative advantage that applies to all individuals everywhere, also applies to nations. Imagine that, economic laws don’t cease to be true just because political demagogues need to curry favor with special interest groups. A better plan to stimulate growth in the lumber and home building industry is to relax the overly tight domestic production regulations that make American lumber so expensive in the first place.