Do Protectionist Trade Policies Integrate Domestic Markets? Evidence from the Canada-U.S. Softwood Lumber Dispute
Jinggang Guo and
Staff Working Papers from Bank of Canada
We consider the effects of protectionist trade policies on international and domestic market integration, using evidence from the long-standing softwood lumber trade dispute between Canada and the United States. The benefits of trade liberalization are widely acknowledged, including better home-to-foreign price transmission due to reduced tariffs and lower trade costs between countries. Yet in recent years we see efforts to protect specific domestic groups, including producers, through a revival of protectionist trade policies. Such policies could improve the home-to-home price transmission across domestic markets as consumers may seek lower-cost alternatives domestically. We investigate these ideas using a bi-variate threeregime threshold vector error-correction model (TVECM) to examine the spatial price transmission between Canadian and U.S. markets and within U.S. domestic markets. We do that by introducing a structural break at the start of an effective free trade period within our sample. The results suggest that duty-free treatment for imported Canadian softwood lumber substantially lowers the transaction costs between the two nations. Prices are more easily transmitted from the Canadian market to the U.S. at a higher speed, but the speed of price transmission in the reverse direction is not statistically significant. The U.S. domestic market experienced a higher speed of price adjustment across domestic regions prior to the free trade period, which provides evidence that protectionist policies lead to better domestic market integration.
Keywords: International topics; Market structure and pricing; Trade integration (search for similar items in EconPapers)
JEL-codes: F13 Q17 (search for similar items in EconPapers)
Pages: 24 pages
New Economics Papers: this item is included in nep-agr and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:20-10
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