Trade Wars are Not Good, nor Easy to Win · Individual Income Tax $1,698 . Corporate Income Tax $216 . Social Insurance Taxes $1,242 . Excise Taxes $99 . Customs Duties $70 . Business

Trade Wars are Not Good, nor Easy to WinWASHINGTON HARDWOODS COMMISSIONAnnual SymposiumJune 13, 2019

Dr. Kent WheilerAssociate Professor and DirectorCenter for International Trade in Forest Products

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3

2018

1969

0 10 20 30 40 50 60 70

Trillion U.S. Dollars

Global GDP 1969 vs. 2018Rest of the World U.S.

U.S. is 24% of the total

The global GDP was less than $3 trillion in 1969. Today it is over $85 trillion.

U.S. is 38% of the total

This is a test

• In 2018 the United States imposed a 20% import tariff on Chinese washing machines, which led to:

a) deforestation in the Amazonb) higher lead content in the U.S. water supplyc) Sears declared bankruptcy d) the un-retirement of the Maytag repairman

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7

8

0

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

10,000,000,000

12,000,000,000

14,000,000,000

16,000,000,000

2016 2017 2018 MAR 2018 YTD MAR 2019 YTD

US

Dol

larsU.S. Soybean Exports to China

March YTD is down 29% from 2018

2018 down 74% from 2017

Source: USA Trade Online (U.S. Census Bureau)

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0

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

7,000,000,000

Washington Louisiana Illinois Ohio

US

Dolla

rsU.S. Soybean Exports to China

Top Four States

2016 2017 2018

Source: USA Trade Online (U.S. Census Bureau)

August 14, 2018

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Tariffs 101• Tariffs are a tax on imported goods • Paid by the U.S. importer • Collected by U.S. Customs• Tax revenue for the U.S. Treasury

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Individual Income Tax$1,698

Corporate Income Tax $216

Social Insurance Taxes$1,242

Excise Taxes $99

Customs Duties $70 Business Revenue

$49 Other Revenue $64

U.S. Federal Government Revenues FY 2019 $3.4 Trillion

• Tariffs provide 2% of Federal tax revenue • Est. $70 billion in 2019

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The tariffs are not helping.

Who Pays the Tariff?• Tariffs are paid by the importer of record (e.g. WalMart)• Who ultimately “pays” depends on market conditions

• If the foreign supplier reduces prices by the amount of the tariff, they effectively pay

• If the supplier doesn’t reduce prices, either the importer cuts their profit margin (i.e. the importer pays) or they raise prices and the consumer pays

• If consumers pay the tariff via higher prices, it is a regressive form of taxation

• Often the supplier, importer and consumer share some portion of the tax

• Or the importer switches to a domestic or non-tariff foreign supplier

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• A nearly complete passthrough of tariffs to the total price paid by importers suggests the tariff incidence has fallen largely on the US.

• Analyses of retail prices preliminarily shows the higher cost of imports passed through to consumers for some goods but absorbed by lower retailer profit margins for others.

• In contrast to imports, US exports subjected to retaliatory tariffs exhibited declines in their ex-tariff prices relative to equivalent but non-targeted goods.

17

Federal Reserve Bank of New York, Princeton University, and Columbia University, respectivelyMarch 1, 2019

Trade Wars• A unilateral increase in tariffs is usually reciprocated• Domestic companies and non-targeted foreign suppliers

producing similar goods benefit, but…

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Trade Wars• In war there are casualties on both sides

• Supply chains are disrupted• Consumer prices usually increase, and choice decreases• Investment is retarded• Non-tariff barriers increase• International trade is restrained• Distrust bred by the trade war spills into other areas• There will be unintended consequences

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• China’s average tariff on U.S. imports is now 20.7% (up from 8%)

• China’s average tariff on everyone else is now down from 8% to 6.7%

22

Larry SummersA Revealing Puzzle in the China Tariffshttp://larrysummers.com/2019/05/15/theres-a-revealing-puzzle-in-the-china-tariffs/

• On Monday May 13, 2019, following news of increasing tariffs in the U.S.-China trade war, the Dow dropped 617 points or 2.4%. With a total value of U.S. stocks around $30 trillion, this decline represents more than $700 billion in lost wealth.

• The actual amount of the tariffs is a small fraction of this lost value.

• It is the greater risk of catastrophic medium-run outcomes, rather than the proximate impact of trade conflicts, that is driving the outsize market reactions to trade negotiation news.

• The current trade conflict is a possible prelude to a far larger conflict between the two nations with the largest economies and greatest power for as far as can be foreseen.

• A world where relations between the United States and China are largely conflictual could involve a breakdown of global supply chains, a splinternet (as separate, noninteroperable internets compete around the world), greatly increased defense expenditures and conceivably even military conflict. All of this would be catastrophic for living standards and would also have huge adverse effects on the value of global companies.

• It is risky to turn the pursuit of even vital national objectives into an existential crusade. Rather, even when nations haveobjectives that are in conflict, it is important to seek compromise, to avoid inflammatory rhetoric and to confine rather than enlarge the areas where demands are being made. Establishing credibility that promises will be kept and surprises will be avoided is as or more important with adversaries as with friends.

• There is no greater threat to the success of our national enterprise over the next quarter-century than mismanagement of the relationship with China. It is not just possible but essential to be strong and resolute without being imprudent and provocative.

23

Walter Russell MeadAmericans Aren’t Ready for Cold War IIThe Wall Street Journal, June 11, 2019

• Neither we nor the Chinese can predict the scale, scope or consequences of the emerging rivalry. • How will the competition affect Americans in their daily lives? • How will it change the technology and higher-education sectors? • What impact will cyber technology and other forms of asymmetrical warfare have on the balance of power? • Will the deep economic ties between the countries soften diplomatic and military competition -- or sharpen it?

• It's difficult to prepare for a contest with so many uncertainties, but the ancient Chinese strategist Sun Tzu offered advice that is still sound:

• If you know the enemy and know yourself, you need not fear the result of a hundred battles. • If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. • If you know neither the enemy nor yourself, you will succumb in every battle.

• Americans should start by deepening our understanding of how Beijing’s policy makers see themselves and the world.

• Red America, blue America and establishment America don't understand one another very well; the resulting division makes stable, long-term foreign policy hard to sustain. One of Washington's highest priorities should be creating an approach to China policy that can endure from one administration to the next.

• It's impossible to know how the marked shift in U.S.-China relations will develop. The clouds now assembling on the horizon could dissipate or build into a storm of historic proportions. Either way, it is past time for Americans to heed Sun Tzu's advice. We do not know either China or ourselves as well as we should.

24

Trade War Casualties

• Consumers• Farmers• Ports• Dock workers• Auto industry• etc. etc., and…

• The U.S. Hardwood Industry

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Domestic Markets

54%Exports to China24%

Exports to the Rest of the World

22%

U.S. Hardwood Grade Lumber Consumption 2018

China is the Largest Market for U.S. Hardwoods

Source: American Hardwood Export Council

Chronology of the U.S.-China Trade War

27

DATE ACTION

Apr 7, 2017 Presidents Trump & Xi agree to a 100-day plan to address trade issues

Jan 22, 2018 U.S. imposes 30% tariff on imported solar panels, 20% on washing machines

Mar 23, 2018 U.S. imposes 25% tariff on imported steel, 10% on aluminum

Apr 2, 2018 China retaliates by imposing 15-25% tariffs on 128 U.S. products ($3 billion value)

Apr 3, 2018 U.S. announces 25% tariff on $50 billion of Chinese goods; China retaliates in proportion

July 6, 2018 U.S. implements 25% tariffs on $34 billion; $16 billion delayed; China retaliates in proportion

July 10, 2018 U.S. announces plans for 10% tariff on $200 billion of Chinese goods

Aug 1, 2018 President Trump instructs USTR to increase proposed tariff to 25% on $200 billion

Aug 3, 2018 China retaliates by announcing plans for tariffs of 5-25% on $60 billion of U.S. goods

Aug 23, 2018 Both U.S. & China implement 25% tariffs on remaining $16 billion announced in April

Sep 7, 2018 President Trump threatens tariffs on remaining $267 billion as yet untargeted Chinese goodsUp to this point there is a looming threat, but no tariffs on hardwood logs or lumber have been implemented.

Chronology of the U.S.-China Trade War

28

DATE ACTION

Sep 24, 2018 U.S. imposes 10% tariff on $200 billion of Chinese goods; will increase to 25% on January 1.China retaliates with 5-10% on $60 billion.

China’s tariffs include 10% on N.A. hardwood logs, 10% on Oak, Cherry & Ash lumber, and 5% on Maple, Walnut, Poplar, and Alder lumber.

Dec 1, 2018 January 1 deadline is extended 90 days.

Feb 24, 2019 Deadline is postponed again.

May 5, 2019 President Trump declares that the 10% tariffs will be increased to 25% effective May 10, and that his administration will impose new tariffs of 25% on all remaining Chinese goods.

May 10, 2019 U.S. increases tariffs to 25% on Sep 24 targeted items ($200 billion) that were at 10%.

June 1, 2019 China retaliates by increasing tariffs on $60 billion of U.S. goods up to 25%.

Oak logs and lumber increased from 10% to 25%.

N.A. hardwood logs, Cherry & Ash lumber increased from 10% to 20%.

Maple, Walnut, Poplar, and Alder lumber stays at 5%.

Chinese Currency to U.S. Dollar

29

China’s currency has depreciated 5-9% during the ”trade war”, offsetting some of tariff impact for exporters, but compounding the penalty for hardwood lumber (and other) importers.

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17.3% drop in volume

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0

100

200

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500

600

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800

Oak Ash Cherry Alder Maple

Mill

ion

US

Dolla

rs

U.S. Hardwood Lumber Exports to China2017 2018

Down 17%

Down 17% Up

6% Down 23% Down

13%

Data source: Global Trade Atlas

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300

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600

700

800

900

1000

US

Dolla

rs/C

ubic

Met

erU.S. Hardwood Lumber Exports to China

Average Monthly Unit Value (US$/m3)Cherry Maple Ash Oak Yellow Poplar Western Red Alder


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500,000

1,000,000

1,500,000

2,000,000

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3,000,000

2007

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US Hardwood Lumber Exports to ChinaBlue Columns = 2018 Red Line = 2019 YTD

Source: Global Trade AtlasDown 39.8%

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Oak Ash Cherry Alder Maple

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Dolla

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U.S. Hardwood Lumber Exports to ChinaMarch 2018 YTD vs March 2019 YTD

2018 2019

Down 43%

Down 40%

Down 27% Down

33% Down 58%

10% Tariff 5% Tariff

Tariff as of June 1, 2019: 25% 20% 20% 5% 5%


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0

200,000

400,000

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US Hardwood Logs Exports to ChinaBlue Columns = 2018 Red Line = 2019 YTD

Source: Global Trade AtlasDown 48.3%

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0

200,000

400,000

600,000

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1,000,000

1,200,000

2007

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Cubi

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US Softwood Lumber Exports to ChinaBlue Columns = 2018 Red Line = 2019 YTD

Source: Global Trade Atlas Down 67%

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10,000,000

20,000,000

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70,000,000

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90,000,000

Alder Maple Oak Ash

US

Dolla

rs

Exports of Hardwood Lumber through Washington Ports

2017 2018

Data source: USA Trade Online (U.S. Census Bureau)

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0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Alder Maple Oak Ash

US

Dolla

rs

Exports of Hardwood Lumber through Washington Ports

March YTD 2018 March YTD 2019

Down 44%

Data source: USA Trade Online (U.S. Census Bureau)

39

China (incl. Hong Kong)58%

European Union 10%

Canada 10%

Mexico 4%

All Other Markets18%

U.S. Hardwood Lumber Exports to "Trade War" Countries

No Other Markets Can Absorb the China Volume

Source: American Hardwood Export Council

But in addition, the U.S. has ongoing trade disputes with the largest of our alternative markets.

40

Frank StewartExecutive DirectorW.Va. Forestry Assoc.

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0

50,000

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US Hardwood Lumber Exports to MexicoBlue Columns = 2018 Red Line = 2019 YTD

Source: Global Trade Atlas

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100,000

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600,000

2007

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FEB

MAR APR

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JUL

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Cubi

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US Hardwood Lumber Exports to Vietnam

Blue Columns = 2018 Red Line = 2019 YTD

Source: Global Trade Atlas

What the U.S. gained in export volume to Vietnam in 2018 is one tenth of what we lost in China.

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Editorial, May 17, 2019• Hardwood lumber exports to Asia in the last half of 2018 were back down to

2014-2015 levels, and first-quarter totals this year were the lowest in at least the last 21 quarters.

• Shipments to Asia from 2016 through mid-2018 averaged 20 mmbf higher per month than in 2014 and 2015. That’s 600 million additional board feet (50,000 more containers) than at the current or the 2014-2015 pace.

• Splitting a 5% or 10% tariff was a workable solution for many American suppliers and their Chinese buyers, but splitting a 25% tariff will not be.

• Higher domestic demand will help during the summer, but the best option for the 20 mmbf/month that is no longer shipping to China is to not make it.

• As such, absent a quick resolution to the trade dispute, the summer doldrums are coming early and heavy this year. Overproduction is likely again, for the first time in years, and Red Oak will be the hardest hit.

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Last year I encouraged you to plant more alder because China will be a good and growing market for it. I still believe that. But we have got to convince our political leaders that the hardwood industry should not be the sacrificial casualty of the trade war.

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sU.S. Imports of Hardwood Plywood

World China

Preliminary CVD announced in April 2017


0%

10%

20%

30%

40%

50%

60%

70%

2014 2015 2016 2017 2018 Nov YTD

U.S. Hardwood Plywood Imports Sources of SupplyIndonesia China Russia Canada Vietnam Malaysia Cambodia

Preliminary CVD on Chinese hardwood plywood was announced in April 2017


0

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eter

sU.S. Imports of Hardwood Plywood

Vietnam volume up 25,000 m3/month


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1,000

1,200

1,400

1,60001

/201

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US$

/Cub

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eter

sU.S. Imports of Hardwood Plywood: Dollars/Cubic Meter

World Average Vietnam

Rapid fall in the price of imports from Vietnam


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01/2

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sChina Exports of Hardwood Plywood to Vietnam


58

Plaintiff

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“The faking of origin and the illegal transshipment of goods happens most often in the sectors of textiles, seafood, agricultural products, tiles, honey, steel and iron, aluminum and timber products,” Vietnamese Customs said in a statement.

June 9, 2019

October 2013: S. Korea imposes 4-38% antidumping duties on Chinese plywood

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200,000

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600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cubi

c M

eter

sChina and Vietnam Plywood Trade with S. Korea

China Exports to S. Korea S. Korea Imports from Vietnam


Thank you!

61

APPENDIX

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0

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Billio

n US

$

US Wood Furniture Imports from ChinaBlue Columns = 2018 Red Line = 2019 YTD

Source: Global Trade Atlas Down 16.3%

USMCA vs. NAFTA

• The U.S. International Trade Commission (ITC) studied the proposed U.S. Mexico Canada Agreement (USMCA).

• They concluded that the USMCA will raise U.S. real GDP by 0.35% and increase U.S. jobs by 0.12% compared to the status quo.

64

Bush Obama Trump

66

-50,000

50,000

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Canada Mexico China Japan U.K. Germany S. Korea Netherlands Brazil Hong Kong France

Mill

ion

U.S

. Dol

lars

U.S. Merchandise Trade in 2018Arranged in order of largest exports (from left to right)

Imports Exports Deficit

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-50,000

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China Mexico Canada Japan Germany S. Korea U.K. Ireland Italy India France

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U.S. Merchandise Trade in 2018Arranged in order of largest imports (from left to right)


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China Mexico Germany Japan Ireland Vietnam Italy Malaysia India Thailand Canada

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U.S. Merchandise Trade in 2018Arranged in order of largest deficit (from left to right)


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-

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Mill

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U.S. Merchandise Trade with CanadaExports Imports

NAFTA signed December 8, 1993

70

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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U.S. Merchandise Trade with MexicoExports Imports

NAFTA signed December 8, 1993

71

-

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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U.S. Merchandise Trade with ChinaExports Imports

China joins WTO December 11, 2001

72

-

20,000

40,000

60,000

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100,000

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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U.S. Merchandise Trade with JapanExports Imports

73

-

100,000

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400,000

500,000

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Mill

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U.S. Merchandise Trade with the E.U.Exports Imports

President Bush President Obama Pres Trump


President Bush President Obama Pres Trump$27.77/hr

President Obama President Trump

President Bush President Obama President Trump


Documents

Trade Wars are Not Good, nor Easy to Win · Individual Income Tax $1,698 . Corporate Income Tax $216 . Social Insurance Taxes $1,242 . Excise Taxes $99 . Customs Duties $70 . Business