07/10/1998
The Wall Street Journal
Page A15
(Copyright (c) 1998, Dow Jones & Company, Inc.)

By Greg Rushford

It didn't look like a sophisticated economic policy matter in February 1997, when Customs officials in the Port of New York classified wooden 2x4s from Canada with two holes drilled in them under heading number 4418 of the Harmonized Tariff Schedules. But that routine decision quickly became controversial in Washington. The bureaucrats in New York had unwittingly stepped directly into politics -- sparking a new political brushfire in one of the oldest, bitterest trade spats between the U.S. and its biggest trading partner.

While most people wouldn't think the top international economic-policy official in Washington would take much notice of the HTS classification of Canadian wood, it turns out that Deputy Treasury Secretary Lawrence Summers cares very much. Mr. Summers, who is otherwise occupied with weighty macroeconomic issues such as plunging Asian currencies, cares because he has heard from a dozen-plus lawmakers from timber producing states, including Sens. Max Baucus (D., Mont.) and Richard Shelby (R., Ala.). Now, pressed by Mr. Summers, Customs says the imported 2x4s properly belong in HTS number 4407.

This obscure classification dispute is attracting unusual attention partly because Mr. Summers's handiwork drives up the price of homes for Americans, while throwing some Canadian entrepreneurs out of work. More broadly, the lumber-import fight is (alas) a metaphor for how trade policy is made in Washington, where officials pick politically connected winners in the marketplace -- despite knowing full well that they are also inflicting economic pain on others.

What's the big fight over the HTS numbers about? As HTS 4418, the Canadian lumber -- termed "drilled studs" in lumber yards -- can be sold freely across the border at market prices. (The holes in the drilled studs are for the convenience of carpenters to run wiring through.) But as HTS 4407, drilled studs would fall under quotas associated with the 1996 U.S.-Canadian Softwood Lumber Agreement.

The bilateral lumber accord specifies that only the first 14.7 billion board feet of lumber that Canada exports to the U.S. are duty free. Export fees of $50 per 1,000 board feet are slapped on the next 650 million; beyond that, the fees double. As the U. S. consumes some 50 billion board feet of lumber annually, with Canada holding roughly one third of the $20 billion U.S. market, serious money is at stake.

American homebuyers would take the accord seriously, if they were aware of it. In November 1996 the National Association of Home Builders protested that the deal had sent lumber prices to near-record levels and could add as much as $3,000 to the price of a new home. While that estimate was overblown (since then lumber prices have fallen) the only dispute is over how much the quotas have raised prices. After all, raising prices is what quotas do.

To American consumers, lumber quotas and their higher prices are just one more hidden cost in the sticker price of a home; other protectionist schemes include carpets (textile quotas) and pipes and tubes (antidumping duties on steel). But to U.S. companies such as International Paper and Georgia Pacific, which spearhead the Coalition for Fair Lumber Imports, and their backers on Capitol Hill, the quotas offer much-desired trade protection. The U.S. members of the fair-lumber coalition have been accusing the Canadians of subsidizing their lumber exports since 1982 (through the so-called "stumpage" rights that provincial governments sell to harvest timber on public land).

Problem is, the American industry has never been able to prove that. After the last defeat in August 1994 -- when a three-judge panel convened under the U.S.-Canada Free Trade Agreement issued a 2-to-1 decision split along national lines to again uphold the subsidies -- the U.S. coalition persuaded Congress to change the definition of a subsidy. The Canadian timber industry, faced with the prospect of having to pay stiff countervailing duties to the Americans, came to the logical conclusion that it was better for them to strike a quota deal. After all, quotas are a lucrative deal for the Canadian companies that own them.

Of course, quotas always inspire creative schemes to get around them. Drilled studs, classified under HTS number 4418 and hence free of the trade restrictions, suddenly became popular exports. Last year Americans bought nearly $350 million in imported drilled studs, compared with negligible amounts in 1996. That's when the U.S. fair-lumber coalition swung into action, crying loophole to their friends on the Hill. Those politicians got Mr. Summers's attention, his critics contend, and he got Customs to reverse itself and reclassify the drilled studs under HTS 4407.

Outraged, the U.S. National Lumber and Building Materials Dealers Association -- whose members are hurt by higher lumber prices -- has hired Washington lawyer Ken Weigel to try to overturn the new Customs decision in federal court. "Any action by the United States to interpret the tariff schedule really for policy purposes is a bad precedent internationally," Mr. Weigel plans to argue.

Edward Knight, the Treasury Department's general counsel, insists that politics played no improper role in Mr. Summers's directives to Customs officials. A Treasury spokeswoman adds that "it's inappropriate to personalize this issue." And acting Customs Commissioner Samuel Banks says his decision to change the agency's initial HTS classification after being asked to intervene by Mr. Summers, although "a close call," was done "for technical reasons, not because of the political pressures." John Ragosta, the top Washington lawyer for the fair-lumber coalition, says he will be arguing in court that "there appears to be no significant commercial market for drilled studs other than to evade the U.S.-Canadian softwood lumber agreement."

While most people might look forward to seeing the lawyers hit each other with legal 2x4s, not everyone is laughing. Gian Sandhu, president of Jack Pine Forest Products, Ltd., in Williams Lake, British Columbia, says that some 65% of his business last year was in drilled studs. Mr. Sandhu says he will have to shut down his production line and fire about 60 people if he cannot offer the product to Americans.

If that unhappy event takes place, Mr. Sandhu will be a real-life example of what happens when government-led cartels punish entrepreneurs who try to avoid their restrictions.

As a former Harvard economics professor, Mr. Summers must know the lumber accord is bad policy. Economists consider quotas and cartels classic restraints on trade. Sadly, economists who go into government sometimes forget themselves.

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