In
the latest stage of an old
dispute, the U.S.
Commerce Department
is pressing Canada to sell
timber by public auction
to prove that its lumber
exports are not
subsidized with cheap
wood.
If you look at the history
of U.S. Forest Service
auctions, that can seem
pretty funny.
A few highlights:
The Forest Service,
steward of 8.5 per cent of
the U.S. land area,
stopped publishing the
financial results of its
timber sales years ago
because it was tired of
being mocked for losing
money on them.
In the last four years for
which it gave figures,
1995 through 1998, it
reported losses totalling
$354-million (U.S.) after
expenses. These included
costs of planning access
roads, documenting the
timber being sold,
advertising and running
the sales, overseeing the
cutting, replanting forests
and dealing with disputes.
Buyers got extra wood
free for building roads.
The trees were sold, in
effect, for less than
nothing.
Even at that, the service
has often been accused of
understating its losses.
Eighteen months ago, the
General Accounting
Office, an investigative
arm of Congress, threw
up its hands and declared
the expense data so
"totally unreliable" that it was "impractical, if not
impossible, for
us or anyone to accurately determine the Forest
Service's timber
sales program costs."
In 1995, another agency, the Congressional Research
Service,
reported "persistent concern" about "timber sales in
which the
revenues generated are less than the cost to prepare
and
administer them." It also said there were indications
that up to 10
per cent of the wood was simply stolen by loggers who
took trees
not marked for cutting or trees outside sale
boundaries.
Forest Service auctions were vulnerable to bid-rigging
by groups
of timber buyers, which may help to explain why they
were so
unprofitable. Economists who have studied them disagree
on
whether the signs point to continuing collusion.
"There was another problem," says Jean-Francois
Richard, a
Belgian-born economist at the University of Pittsburgh,
"which is
that the Forest Service in the U.S. is incredibly
inefficient and
basically was no match for the mills."
In selling timber, "you need to be extremely careful in
setting the
rules of the auctions," he says. "You need to have
people who are
familiar enough with the industry. Mills want to
maximize profit
and they are going to exploit every possible loophole
in the auction
design to maximize profit, and you'd better be aware of
that."
At the University of Toronto, forest economist Shashi
Kant sums
up: "The auction system is a total failure in the U.S.,
and I don't
know why people don't talk about it."
There may be lessons in this for Canada's big
lumber-producing
provinces, notably British Columbia, which is pondering
a deal
that would require it to auction off cutting rights in
some of its
forests each year to set prices for the rest. It would
also have to
scrap policies designed to protect jobs and towns,
including
minimum annual cutting requirements and minimum periods
of
mill operation.
The aim: to satisfy U.S. demands for "market-based"
pricing and
escape special import duties costing Canadian lumber
companies
about $2-billion (Canadian) a year.
The alternative: to hang tough and hope for victory
later this year
in appeals to international trade bodies, something not
every
company can afford to do.
On the Canadian side, the Commerce Department is seen
as
demanding textbook-style free timber markets found
nowhere in
the world, including the United States, as an antidote
to what it
says is predatory underpricing of wood.
In this argument, Canada has an accidental ally in
Washington: an
eight-year-old lobby group called Taxpayers for Common
Sense,
whose vice-president of policy, Keith Ashdown, happens
to have
grown up in Saskatoon.
He accuses U.S. officials of getting indignant about
Canadian
subsidies while selling federal trees below cost.
"We've argued it's an apples to oranges comparison and
in fact
there are hundreds of millions of dollars in subsidies
going to
timber companies that log on public land in the U.S.,"
he says.
"We've been very vocal about that."
His group styles itself a non-partisan foe of
government waste.
William Proxmire, honorary chairman of its advisory
committee,
is a former Democratic senator famous for his Golden
Fleece
awards to what he saw as taxpayer-financed boondoggles.
Mr. Ashdown also accuses the Forest Service of
tolerating chronic
bid-rigging.
"In a lot of these areas, there's an old boys' club
where these guys
are getting the best deal because they're sort of
negotiating over
steaks at the local steak house, you know what I mean?"
In Canada, where most forests are public, key timber
prices are set
by provincial bureaucrats, guided partly by price data
from lumber
markets and/or private timber sales. Whatever the
method, U.S.
officials say the prices are generally too low.
The Commerce Department, pursuing the trade quarrel on
behalf
of U.S. timber interests, is not promoting auctions in
Canada in
order to let prices fall lower. It wants safeguards
against collusion
-- including sealed rather than oral bids -- and makes
it clear
that the fight will not end until prices rise.
What sort of auction is best? Economic theory suggests
that
collusion is trickier with sealed bids but oral
auctions yield higher
prices if there is real competition. The Forest Service
traditionally
held oral auctions but more recently has used a mix.
Rod Sallee, a forester working out of the service's
national
headquarters, says that most sales now begin with a
call for sealed
bids. If there is just one, it wins, but if there are
two or more, an
oral auction is held to see whether anyone will raise
the ante. The
sales are monitored for patterns of collusion, he says.
The service at one time published an elaborate annual
report on
timber sales (the last, for 1998, ran to more than 150
pages), but
stopped doing so "because of the way it was being
misinterpreted
by so many people," Mr. Sallee says, and because "they
were only
using one section of it, which is the dollars spent."
In contrast to the businesslike attitude Canada is
being asked to
adopt, the Forest Service declared in the 1998 report
that it has "a
different mandate than a private timber-growing
business," and
that its sales yield many benefits, including forest
industry jobs
and wages, beyond the price for the wood.
There is no doubt that the service pursues goals other
than profit.
According to the report, most of the year's
$125.9-million (U.S.)
loss flowed from sales designed to thin or clear
overgrown tracts
to reduce the risk of fire, grow healthier trees and
improve wildlife
habitat, not just to produce lumber.
"I would not call it a loss," Mr. Sallee says. "I would
describe it as
an investment in forest restoration or wildlife or
other
stewardship."
If nothing else, the results of auctions are hard to
predict. What
would happen if B.C., for example, auctioned off a
representative
fraction of its timber each year to set cutting charges
throughout
the province?
The gaudiest theory on the Canadian side is that U.S.
timber
operators would step in to bid up the prices, leaving
the big B.C.
industry benched for the season with unpayable wood
costs.
Philip Haile, a University of Wisconsin economist who
studies
auctions and generally considers them efficient, says
this "does
not seem like a crazy worry," despite the obvious
difficulty of
organizing such a scheme.
Another theory is that the auction plan is a just smoke
screen.
"The goal is not really to get Canada to have a
free-market
approach," says Carl Grenier, general manager of the
Montreal-based Free Trade Lumber Council, the industry
group
most openly skeptical of U.S. motives in the dispute.
"The goal is to control the way in which we manage
this, but with
a very clear purpose, which is to increase the cost to
the industry
in Canada so that we're less competitive in the U.S."
He says the U.S. industry would be happier if Canada
returned to
the kind of self-imposed limits on timber shipments it
lived with
between 1996 and 2001.
"I think the purpose behind all these vexatious details
is basically
to get us, at some point, to conclude that this is all
getting so
complicated that we won't be able to evaluate the cost
of the deal
based on this, that and the other thing, so why don't
we simply do
another quota deal?"
