Substitutability of U.S. and Canadian softwood lumber: A threshold modeling approach

Abstract

The U.S.-Canada softwood lumber dispute stands as the most protracted trade conflict between the two countries, with its history dating back to the early 1980s. U.S. lumber producers claim that Canadian lumber imports are unfairly subsidized, thereby, harming the domestic lumber industry. The U.S. has imposed countervailing and antidumping duties on Canadian softwood lumber imports to protect the domestic market. An important aspect of this trade dispute is the substitutability of lumber products between the two countries. Canadian lumber imports are detrimental to the U.S. industry only when the products are substitutes. In such a scenario, the imposition of trade restrictions would have a significant influence on the domestic market. Motivated by this consideration, we investigate dynamic relationships between prices for Spruce-Pine-Fir, a softwood species primarily imported from Canada, and Southern Yellow Pine, one of the most popular softwood species domestically produced in the U.S. We apply threshold models in an evaluation of the degree of substitutability. Our empirical findings indicate that within the $+/-$3.4 % price differential band, the two lumber products demonstrate a higher degree of substitutability.