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Impact of inefficient quota allocation under the Canada-U.S. softwood lumber dispute: A calibrated mixed complementarity approach

Craig Johnston and Gerrit van Kooten

Forest Policy and Economics, 2017, vol. 74, issue C, 71-80

Abstract: In this paper, a spatial price equilibrium model developed to shed new light on the economic impact of restrictive trade sanctions adopted in the Canada-U.S. softwood lumber dispute. Mixed complementarity programming is used to solve a 21-region, global trade model that is calibrated to 2011 observed bilateral trade flows using positive mathematical programming. In addition, the model employs a mechanism for analyzing the effects of the tariff rate quota used in the 2006 Softwood Lumber Agreement (SLA). It is estimated that the SLA created an annual deadweight loss of $28 million, paid by U.S. consumers. The quota constrained Alberta lumber producers while BC producers had excess quota. The lack of a proper mechanism for capturing quota rent, such as a tradable quota scheme or quota auction resulted in the survival of high-cost firms, perhaps to the detriment of lower-cost firms in Alberta. In the absence of SLA, it is estimated that Alberta would supply an additional 9% of Canadian softwood lumber to the U.S., eroding the supply share of all other regions while improving aggregate welfare.

Keywords: Canada-U.S. lumber trade dispute; Tariff rate quota; Mixed complementarity programming; Global trade model; Model calibration; Quota trading (search for similar items in EconPapers)
JEL-codes: C61 C63 F13 Q23 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.forpol.2016.10.013

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