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Log export restriction in British Columbia : an economic examination Davies, Duncan Kenneth 1977

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LOG EXPORT RESTRICTION IN BRITISH COLUMBIA: ECONOMIC EXAMINATION by DUNCAN KENNETH DAVIES B.A. (Economics), University of V i c t o r i a , 197 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE i n THE FACULTY OF FORESTRY We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September, 1977 Duncan Kenneth Davies In presenting t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r reference and study. I further agree that permission f o r extensive copying of t h i s thesis f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s representatives. It i s understood that copying or p u b l i c a t i o n of t h i s thesis f o r f i n a n c i a l gain s h a l l not be allowed without my wri t t e n permission. Department of f^6~Y/R/ The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada Date (QCJ^JUY / f 7 7 i i ABSTRACT The r e s t r i c t i o n s imposed on the export of unmanufactured f o r e s t products from B r i t i s h Columbia are examined from an economic standpoint. The subject i s divided into two major areas: the l e v e l of r e s t r i c t i o n (the p r i c e protection afforded the domestic processing industry as a r e s u l t of the policy ) and the method of r e s t r i c t i o n (the structure of the regulatory system used to control the flow of exports). In the f i r s t area, the issue underlying the r e s t r i c t i o n / n o n - r e s t r i c t i o n debate i s c l a r i f i e d ; the way the p o l i c y works to a s s i s t the domestic process-ing industry i s described; and the economic consequences of a s s i s t i n g the processing sector through export r e s t r i c t i o n s are i d e n t i f i e d . Most s i g n i f i c a n t l y , the opportunity cost imposed on the log producing sector i s i d e n t i f i e d as negating some of the benefits achieved through the induced growth of the processing sector. It i s concluded that these often unrecognized consequences are of sub s t a n t i a l importance and should be considered e x p l i c i t l y i n any examination of the r e s t r i c t i o n s . In the second area, the administrative procedures and timber tax charges that form the basis of the export control system are described. The system i s found to be based on the a r b i t r a r y and u n i l a t e r a l view that domestic processing i s the best use of the province's timber. The procedure f o r determining export e l i g i b i l i t y i s i d e n t i f i e d as being cumbersome, time-consuming, risk-inducing and expensive; the timber tax i s i d e n t i f i e d as being i n e f f i c i e n t , inequitable and counterproductive. It i s concluded that the method of export regulation should be res t r u c -tured to include incentives for economic e f f i c i e n c y . The revisions to the export control system proposed by the Royal Commission on Forest Resources are considered as an a l t e r n a t i v e to the administrative r e s t r i c t i o n s . The advantages of a system of export con t r o l that i s t i e d d i r e c t l y to the export market, along with the possible c o n s t i t u t i o n a l and i n t e r n a t i o n a l questions that introduction of the proposed controls would r a i s e , are discussed. Estimates of the early-round e f f e c t s of the proposed controls and suggested tax rate on log exports, Crown revenue, timber u t i l i z a t i o n and timber harvests are presented. It i s concluded that the proposed system of export regula-t i o n o f f e r s a v i a b l e a l t e r n a t i v e to the e x i s t i n g controls but that c e r t a i n modifications to the Commission's proposal would be appropriate p r i o r to the recommendation's implementation. In addition, the evolution of the p o l i c y i n B r i t i s h Columbia i s described and areas for further research are i d e n t i f i e d . I V TABLE OF CONTENTS ABSTRACT i i TABLE OF CONTENTS i v LIST OF TABLES v i ACKNOWLEDGEMENTS v i i Chapter 1 INTRODUCTION AND OBJECTIVES 1 2 THE LEGISLATIVE BASIS FOR EXPORT RESTRICTION 5 2.1. Present L e g i s l a t i o n 6 2.2. Evolution of the P o l i c y 7 3 B.C. LOG EXPORTS AND THE WORLD MARKET FOR SOFTWOOD LOGS 13 3.1. B.C. Log Exports 13 3.1.1. Exports Relative to Tot a l P r o v i n c i a l Harvest 13 3.1.2. Exports by J u r i s d i c t i o n of Origin 14 3.1.3. Exports by Region of Or i g i n 15 3.1.4. Exports by Species 16 3.1.5. Exports by Grade 18 3.1.6. Export by Destination and Value 19 3.2. The World Market f o r Softwood Logs 20 3.2.1. Growth of the Market 20 3.2.2. Sources of Japan's Imports 20 3.2.3. The Japanese Market 23 3.3. Log Exports from the U.S. P a c i f i c Northwest . . . 27 3.3.1. Volumes 27 3.3.2. Re s t r i c t i o n s on Exports 28 3.3.3. Species and Grades 28 3.4. Export/Domestic P r i c e D i f f e r e n t i a l s 30 4 THE QUESTION OF LOG EXPORT RESTRICTION 35 4.1. Arguments i n Favour/in Opposition 36 4.2. C l a r i f i c a t i o n of the Issue 38 4.3. Economic Consequences of Export R e s t r i c t i o n . . . 39 4.3.1. Redi s t r i b u t i o n of Income 39 4.3.2. Economic E f f i c i e n c y 43 4.3.3. D i s t r i b u t i o n of Losses and Gains from R e s t r i c t i o n 47 4.4. Summary and Implications f o r P o l i c y 48 5 THE METHOD OF EXPORT REGULATION 50 5.1. Method of Control 50 5.1.1. Review Procedure . . 50 5.1.2. Timber Tax 54 5.2. Interpretation of the Export Provisions 55 6 THE ECONOMIC RATIONALITY OF THE METHOD OF EXPORT REGULATION 58 6.1. P h y s i c a l Interpretation of 'Surplus 1 59 6.2. Demonstration of 'Surplus' 62 6.3. Abuses of the System 65 6.4. D i s t r i b u t i o n of Gains from Export 66 6.5. Summary and Implications f o r P o l i c y 71 7 THE PEARSE COMMISSION'S PROPOSAL TO REVISE THE METHOD OF EXPORT REGULATION 73 7.1. The Price-Related System of Control 74 7.2. C o n s t i t u t i o n a l and International Implications . . 78 7.3. E f f e c t s of a Forty Percent Tax 81 7.3.1. Volumes, Species and Grades 82 7.3.2. Crown Revenues 84 7.3.3. Timber U t i l i z a t i o n and Timber Harvests . . . 86 7.3.4. Conclusions and Possible Revisions 87 8 SUMMARY, CONCLUSIONS AND FURTHER RESEARCH 91 BIBLIOGRAPHY 96 APPENDIX A: EXPORT/DOMESTIC PRICE DIFFERENTIALS, 1973-1974 . 104 APPENDIX B: CONVERSION FACTORS, EXCHANGE RATES AND LOG GRADES 106 APPENDIX C: ESTIMATES OF INCOME REDISTRIBUTED, 1975 108 vx LIST OF TABLES Table 3-1 Annual Volumes of B.C. Log Exports, 1914-1975 16 3-2 Proportions of B.C. Log Exports—by Species, 1914-1975 . 17 3-3 Proportions of B.C. Log Exports—by Grade, 1930-1975 . . 18 3-4 B.C. Log Exports by Destination and Value, 1969-1975 . . 19 3-5 The World Market f o r Softwood Logs, 1950-1974 21 3-6 The Primary Sources of Japan's Softwood Log Imports 1950-1974 22 3-7 Japan's Consumption of Softwood Logs, 1950-1974 24 3-8 P a c i f i c Northwest Domestic and Export Log S a l e s— b y Species, 1972 29 3-9 P a c i f i c Northwest Domestic and Export Log S a l e s— b y Grade, 1973 30 3-10 Export/Domestic P r i c e Comparison—by Species, 1950-1975 32 3-11 Export/Domestic P r i c e Comparison—by Grade, 1975 . . . . 34 6-1 'Timber Tax' Revenues, 1966-1975 68 6-2 The Effectiveness of the 'Timber Tax', 1975 69 A - l Export/Domestic P r i c e Comparison—by Grade, 1973 . . . .104 A-2 Export/Domestic P r i c e Comparison—by Grade, 1974 . . . .105 v i i ACKNOWLEDGEMENT S Much of the material presented i n t h i s thesis was developed as a research project for the Valuation D i v i s i o n of the B r i t i s h Columbia Forest Service and l a t e r extended for the Royal Commission on Forest Resources. In t h i s regard, I would l i k e to acknowledge the assistance of a number of:.individuals. S p e c i f i c a l l y , D. R. Glew, H. Waelti, and Mrs. H. Cullimore of the B.C. Forest Service f o r so f r e e l y giving of t h e i r time during the early stages of the project; Dr. P. H. Pearse and R. S. Campbell of the Royal Commission for t h e i r i n s i g h t and i n s p i r -ation; and e s p e c i a l l y , Dr. H. V. Lewis of the B.C. Forest Service for his continuing i n t e r e s t , support and advice. While t h i s group should receive much of the c r e d i t for the work presented here, they must be absolved completely of the r e s p o n s i b i l i t y f or the opinions and conclu-sions expressed w i t h i n — t h a t burden i s mine alone. Special thanks are due also to the members of my advisory commit-tee. Drs. D. Haley (chairman), J . H. G. Smith and R. W. Wellwood have each made p a r t i c u l a r l y important contributions to not only t h i s thesis but to my e n t i r e graduate program. The assistance of former colleague R. N. Byron and the F i n a n c i a l support of the Van Dusen Foundation, the National Research Council and the Faculty of Forestry are also g r a t e f u l l y acknowledged. F i n a l l y , I would l i k e to thank the lady with whom I share my l i f e . Her encouragement, motivation, understanding and assistance have provided the support so necessary for the completion of t h i s project. CHAPTER 1 INTRODUCTION AND OBJECTIVES V i r t u a l l y from i t s inception, f o r e s t p o l i c y i n B r i t i s h Columbia has included measures designed to encourage the manufacture of timber within the province. While these measures consisted i n i t i a l l y of d i r e c t incentives to manufacturers, by the turn of the century the basis of the p o l i c y had s h i f t e d to l e g i s l a t i v e r e s t r i c t i o n s against the export of unmanufactured forest products. This p o l i c y remains i n e f f e c t today; log and chip exports are r e s t r i c t e d by both p r o v i n c i a l and f e d e r a l l e g i s l a t i o n and exports are confined to a very small percentage of p r o v i n c i a l timber production. The underlying objective of the r e s t r i c t i v e export p o l i c y i s to promote the development of B r i t i s h Columbia's timber processing industry and, i n turn, to create employment and income opportunities i n the pro-vince. T r a d i t i o n a l l y , the p o l i c y has received strong support; i n f a c t , members of B r i t i s h Columbia's economic community have referred to the p o l i c y as being a major factor i n the fo r e s t industry becoming the province's greatest s i n g l e source of wealth ( W i l l i s t o n , 1968). Examination of the p o l i c y i n an economic context suggests, however, that neither the way i n which i t works to stimulate domestic processing nor the implications of r e s t r i c t i n g the export of raw materials are well understood. Recent studies by Lewis (1976) and by Scott and Shearer (1975) have indicated that s i g n i f i c a n t economic 1 2 costs are associated with the p o l i c y of export r e s t r i c t i o n . The p o l i c y was examined also by the 1976 Royal Commission on Forest Resources"*" which described i t as "misdirected and contrary to a constructive i n d u s t r i a l strategy" (p. 312). The Pearse Commission proposed sub s t a n t i a l r e v i s i o n s to both the p o l i c y of export r e s t r i c t i o n and to the method by which the r e s t r i c t i o n s are imposed (pp. 312-316). The objectives of t h i s thesis are f i v e f o l d . F i r s t , to document the evolution of the p o l i c y . Second, to c l a r i f y the issues surrounding the imposition of the r e s t r i c t i o n s . Third, to provide i n s i g h t into the existence, the magnitude and the d i s t r i b u t i o n a l considerations of some of the most important—but yet often unrecognized—economic consequences of export r e s t r i c t i o n . Fourth, to examine from an economic standpoint the method of r e s t r i c t i n g the flow of exports. And f i f t h , to analyze the effectiveness of the a l t e r n a t i v e method of control proposed by the Pearse Commission. The underlying concern of t h i s examination of B r i t i s h Columbia's log export r e s t r i c t i o n s i s that of economic e f f i c i e n c y ; s p e c i f i c a l l y , to what extent does the p o l i c y encourage the minimization of the t o t a l costs of forest industry production r e l a t i v e to the value of i t s output or, viewed more broadly, to what extent does the p o l i c y encourage (or discourage) the a l l o c a t i o n of the timber resource to the uses which w i l l maximize i t s contribution to the B.C. economy. Techniques of t r a d i t i o n a l economic analysis which use market p r i c e s as i n d i c a t o r s of r e l a t i v e values provide the basis for the examination (Scitovsky, 1971; Leftwich, 1973). ^Hereinafter referred to as the 'Pearse Commission'. 3 The importance of public p o l i c y to encourage e f f i c i e n c y i n resource a l l o c a t i o n and production cannot be overstated. The a b i l i t y of the B r i t i s h Columbia forest industry to compete i n world markets i n the long run and the a b i l i t y of t h i s province to achieve i t s economic p o t e n t i a l are dependent upon i t (Deutsch et a l . , 1959; Shearer, 1968; Scott and Shearer, 1975). The thesis deals i n d i v i d u a l l y with the l e v e l and the method of export r e s t r i c t i o n . The l e v e l of r e s t r i c t i o n r e f e r s to the degree of protection afforded the domestic processing industry as a r e s u l t of the p o l i c y ; the method of r e s t r i c t i o n r e f e r s to the structure of the regulatory system used to con t r o l the flow of exports. While the former i s dependent to some extent upon the l a t t e r , the separation of the issues i n the manner described provides a convenient means for examining the r e s t r i c t i o n s and t h e i r implications. Although the method of r e s t r i c t i o n provides the most r e a l i s t i c area for p o l i c y r e v i s i o n , i t has never been subjected to rigorous economic an a l y s i s . For t h i s reason, the emphasis i n t h i s thesis i s placed on the examination of the export c o n t r o l system. For the sake of s i m p l i c i t y the thesis i s concerned s o l e l y with the r e s t r i c t i o n s imposed on the export of logs (as opposed to chips and other minor unmanufactured forest products that are also subject to export r e s t r i c t i o n s ) . The exigencies of the d i f f e r e n t markets make the r e s t r i c t i o n s on log exports the most important and the most e a s i l y i d e n t i f i e d . Nevertheless, the conceptual arguments presented i n t h i s thesis apply equally to the other products. The thesis i s divided into eight chapters. Chapter 2 outlines the l e g i s l a t i v e basis f o r export r e s t r i c t i o n and describes the 4 evolution of the p o l i c y at both the p r o v i n c i a l and federal l e v e l s . Chapter 3 provides the s t a t i s t i c a l s e t t i n g for the discussion by describ-ing exports i n the contexts of the B.C. forest industry and the world market for softwood logs; by considering exports from the P a c i f i c North-west region of the United States; and by documenting the important d i f -ferences between log prices on the export and domestic markets. Chapter 4 r e l a t e s to the question of log export r e s t r i c t i o n : a l i s t i n g of the arguments that have been expressed both i n favour of and i n opposition to the export r e s t r i c t i o n s i s given; the issue underlying the r e s t r i c t i o n s i s placed i n the proper perspective; and indications of the magnitude and d i s t r i b u t i o n a l considerations of the economic consequences of export r e s t r i c t i o n are provided. Chapter 5 describes the method of export regu-l a t i o n and how i t i s based on the i n t e r p r e t a t i o n of the p o l i c y . Chapter 6 examines the co n t r o l mechanism from an economic standpoint. Chapter 7 outlines the recommendations of the Pearse Commission with regard to the export r e s t r i c t i o n s and examines the e f f e c t s of introducing the Commis-sion's recommendations on the volume, species and grades of log exports; on Crown revenue; and on timber u t i l i z a t i o n and timber harvests. Chap-ter 8 summarizes the material presented and draws conclusions with respect to the adequacy of both the e x i s t i n g p o l i c y and the proposed changes. By examining the subject of export r e s t r i c t i o n i n the manner out-l i n e d above, t h i s thesis provides information that should enable the pro-v i n c i a l government to reach a more informed and s o c i a l l y responsible d e c i s i o n with respect to whether the r e s t r i c t i o n s on log exports should be maintained as presently structured or replaced by an a l t e r n a t i v e system that would be more cognizant of the need to encourage economic e f f i c i e n c y i n the a l l o c a t i o n of timber resources. CHAPTER 2 THE LEGISLATIVE BASIS FOR EXPORT RESTRICTION Control over the export of unmanufactured forest products from B r i t i s h Columbia i s shared by the p r o v i n c i a l and federal governments— a consequence of the d i v i s i o n of l e g i s l a t i v e powers provided for by the B r i t i s h North America Act. Under the terms of t h i s Act, matters of i n t e r n a t i o n a l trade were assigned e n t i r e l y to the federal Parliament while the provinces received c o n s t i t u t i o n a l authority over the natural resources located within t h e i r boundaries. Through t h e i r respective j u r i s d i c t i o n s the two l e v e l s of government have each introduced l e g i s l a -t i o n to r e s t r i c t the export of unmanufactured forest p r o d u c t s — t h e objective of both being to encourage the development of secondary industry by ensuring the domestic manufacture of raw materials. This chapter establishes the l e g i s l a t i v e s e t t i n g for the follow-ing discussion. In the f i r s t section, the statutes which form the basis of the e x i s t i n g export p o l i c y i n B r i t i s h Columbia—both p r o v i n c i -a l l y and f e d e r a l l y — a r e described and the differences i n t h e i r j u r i s d i c -tions outlined. The second section examines the evolution of the p o l i c y . Emphasis i s placed on the more important p r o v i n c i a l l e g i s l a -t i o n , with the discussion undertaken within the context of the develop-ment of the province's land tenure system. 5 6 2.1. Present L e g i s l a t i o n While the government of B r i t i s h Columbia does not have the authority to i n t e r f e r e d i r e c t l y with i n t e r n a t i o n a l trade, i t has trans-l a t e d p r o v i n c i a l authority over natural resources into r e s t r i c t i o n s on the export of unmanufactured wood products by imposing s p e c i f i e d terms 2 and conditions on the sale of Crown timber. The enabling p r o v i n c i a l 3 l e g i s l a t i o n i s contained i n Part X of the Forest Act which provides: " A l l timber cut on Crown lands, or on lands granted a f t e r the twelfth day of March 1906 . . . s h a l l be used i n the Province, or be manufac-tured i n the Province . . .". These provisions r e l a t e to i n t e r n a t i o n a l and i n t e r p r o v i n c i a l shipments and apply to timber harvested from both p r o v i n c i a l l y t i t l e d land and private land granted a f t e r the l e g i s l a t i o n was adopted. They do not apply, however, to timber harvested on private land granted p r i o r to 1906 or to timber cut on land c o n t r o l l e d by the fed e r a l government. The statutory power of the fe d e r a l government to co n t r o l exports i s embodied i n the provisions of the Export and Import Permits Act. This Act provides that the fe d e r a l government may e s t a b l i s h an 'Export Control L i s t ' on which i t may include, and thereby r e s t r i c t the export of, any a r t i c l e . The c r i t e r i a f o r e s t a b l i s h i n g the l i s t include the s p e c i f i c objective of promoting further processing of natural resources i n Canada, and unmanufactured wood products such as logs have been included on i t . In contrast to the p r o v i n c i a l l e g i s l a t i o n , the federal 2 According to the Canadian Council of Resource and Environment Mini s t e r s Task Force on Forest P o l i c y (1976), most of the other Canadian provinces have introduced s i m i l a r l e g i s l a t i o n . 3 The name of t h i s Act was changed to the Min i s t r y of Forests Act i n 1977. For the sake of b r e v i t y , the previous t i t l e i s used through-out t h i s t h e s i s . 7 p o l i c y r e l a t e s only to trade across the borders of C a n a d a — i t does not apply to i n t e r p r o v i n c i a l trade. Furthermore, the fe d e r a l l e g i s l a t i o n applies to a l l i n t e r n a t i o n a l shipments of unmanufactured forest prod-ucts, whether they are covered by or exempted from the p r o v i n c i a l controls. These respective j u r i s d i c t i o n s and l e g i s l a t i v e provisions r e s u l t i n a complementary system of control over the export of unmanufactured wood products. Timber cut from the early Crown grants and from a l l f e d e r a l land i s subject to the federal export r e s t r i c t i o n s only; timber harvested from a l l other land i n the province i s subject to both the fed e r a l and p r o v i n c i a l controls. This l a s t group i s the most import-ant—accounting for 91 percent of the t o t a l p r o v i n c i a l timber harvest i n 1975 (Forest Service, 1975a). Neither the p r o v i n c i a l nor the fe d e r a l l e g i s l a t i o n p r o h i b i t s the export of unmanufactured wood products. The conditions of Part X of the Forest Act allow export upon the authority of the Lieutenant-Governor i n Council. Section 7 of the Export and Import Permits Act authorizes the Minister of Industry, Trade and Commerce to issue export permits for goods included on the Export Control L i s t . 2.2. Evolution of the P o l i c y The objective of promoting the domestic processing of raw materials has been an i n t e g r a l part of forest p o l i c y i n B r i t i s h Columbia since the l a t e 1800's. O r i g i n a l l y , the p o l i c y was based on d i r e c t incentives to manufacturers. Some early forms of Crown timber r i g h t s were issued only to m i l l operators and, for a time, monetary incentives under roy a l t y arrangements were used to encourage domestic sawmilling. 8 However, i n a s e r i e s of steps beginning i n 1891, the provisions for encouraging domestic manufacturing s h i f t e d to d i r e c t l e g i s l a t i v e r e s t r i c t i o n s on the export of unmanufactured timber. This s h i f t was culminated i n 1906 with the passing of the l e g i s l a t i o n which forms the basis of the e x i s t i n g p r o v i n c i a l p o l i c y . The f e d e r a l l e g i s l a t i o n as i t r e l a t e s to forest products was not introduced u n t i l the 1940's. L e g i s l a t i o n enacted i n 1888 established, for the f i r s t time, the p r i n c i p l e of a l i e n a t i n g the harvesting r i g h t s for Crown timber for the expressed purpose of encouraging the development of the p r o v i n c i a l saw-m i l l i n g industry. Timber leases granted under amendments to the Land  Act required the lessee to maintain a sawmill with a capacity not l e s s than 1,000 board feet per day for each 400 acres held under lease (Sloan, 1945). Previous leases, issued under the authority of the 1865 Land Ordinance, had not distinguished between the m i l l i n g and logging sectors. In addition to the s p e c i f i c m i l l requirements, the 1888 l e g i s l a t i o n empowered the Lieutenant-Governor i n Council to allow a r o y a l t y rebate (equal to one-half of royalty) on the export of manu-factured timber on which roy a l t y had been paid. Due, however, to d i f f i c u l t i e s encountered i n the enforcement of t h i s l e g i s l a t i o n (Pearse et a l . , 1974a), a number of r e v i s i o n s were passed to make the objective of domestic manufacture more e x p l i c i t . In 1891 the f i r s t measures p r o h i b i t i n g raw material exports were i n t r o -duced. Land Act amendments passed i n that year required a l l timber cut from land held under lease to be used or manufactured i n the province (Sloan, 1945). The d i r e c t encouragement of the domestic processing industry was strengthened during the same period as w e l l . In 1892 i t was required 9 that the m i l l be appurtenant to the lease and a deposit equivalent to IOC per acre was necessary to guarantee the m i l l ' s construction within two years. In 1895 the p o l i c y of granting leases to m i l l operators only was revised, and non-mill owners became e l i g i b l e to acquire them. Even s t i l l , the p o l i c y of encouraging the p r o v i n c i a l sawmilling industry was maintained by granting leases to operators at lower r e n t a l rates than to non-operators. In 1897, amendments to the Land Act required that m i l l s be kept i n operation for s i x months each year unless excused by the Lieutenant-Governor i n Council. In the same year, the allowed s i z e of the lease for each 1,000 board feet of d a i l y m i l l capacity was reduced to 100 acres (Sloan, 1945). Further amendments to the Land Act i n 1901 required that, unless s p e c i f i c a l l y exempted, a l l timber cut from Crown land be manufactured or used i n the province (Sloan, 1945). This l e g i s l a t i o n supported that of 1891 by extending the domestic manufacturing requirements to a l l forms of Crown tenure including the Timber Licences which had been introduced i n 1884. This l e g i s l a t i o n can be considered to be the second step i n s h i f t i n g the basis of the p o l i c y to d i r e c t r e s t r i c t i o n s against exports. In 1903 the p r o v i n c i a l government introduced measures which applied the p r i n c i p l e of encouraging domestic manufacturing to timber harvested from non-provincially c o n t r o l l e d land. Amendments to the Land Act passed i n that year imposed a tax on a l l timber cut from non-4 royalty bearing land which was e n t i r e l y refundable (except for 1<? per 1,000 board feet) when the timber was used or manufactured i n the 4 This land included Crown grants issued p r i o r to 1887 and a number of important railway grants. 5 provxnce. At the turn of the century, the a t t r a c t i o n of investment c a p i t a l was considered c r u c i a l to B r i t i s h Columbia's future. The lease and l i c e n c e systems had been designed to induce investment but had been l a r g e l y unsuccessful. In 1905, the p r o v i n c i a l government introduced a revised form of Timber Licence. The innovative features of these licences coupled with the changing economic environment i n North America spurred the desired flow of c a p i t a l into B.C. When the granting of these lice n c e s was suspended i n 1907, some 11.4 m i l l i o n acres were held i n the form of temporary Crown tenures—an increase from less than 2 m i l l i o n acres i n 1904 (Pearse et a l . , 1974a). Throughout t h i s period the B.C. government maintained i t s b e l i e f that p r o v i n c i a l economic development should be stimulated through investment i n the sawmilling industry. To supplement the 1905 p o l i c y and to lay the f i n a l step i n the imposition of the d i r e c t r e s t r i c t i o n s against the export of unmanufactured timber, the government, i n 1906, introduced the Timber Manufacture Act. This Act incorporated the requirements of the 1901 l e g i s l a t i o n r e l a t i v e to Crown land but also included, for the f i r s t time, e x p l i c i t provisions pertaining to Crown-granted land. That i s , land Crown-granted a f t e r the date of the l e g i s l a t i o n was granted subject to the provision that the timber be used or manufactured i n the province. The r a t i o n a l e underlying the passing of the l e g i s l a t i o n was ^This tax was declared u l t r a v i r e s of the P r o v i n c i a l L e g i s l a t u r e i n 1929—see section 7.2. 1906 i s often considered to be the year that B.C.'s log export r e s t r i c t i o n s were introduced (Austin, 1969). As the preceeding d i s -cussion i n d i c a t e s , the r e s t r i c t i o n s a c t u a l l y date back to 1891. 11 c l e a r l y to n a t i o n a l i z e the benefits of resource e x p l o i t a t i o n . The Honourable W. R. Ross re f e r r e d to these benefits i n a speech to the P r o v i n c i a l L e g i s l a t u r e i n 1912 when he s a i d : . . . to make sure that our forest resources should not merely be the foundation, but should also b u i l d up the whole f a b r i c of the lumbering industry and strengthen the whole commercial system of the Province . . . (and to insure) . . . that the p r o f i t i n manufacturing raw materials should benefit our c i t i z e n s . . . (the Government) . . . clinched the p o l i c y of 1905 by an emphatic p r o h i b i t i o n of timber export. (Ross, 1912: p. 8) As a r e s u l t of the enactment of t h i s l e g i s l a t i o n , the only land i n B r i t i s h Columbia which did not f a l l within the purview of the province's export r e s t r i c t i o n s was that which had been Crown-granted p r i o r to 1906 and that (such as Indian Reserves) which f e l l under the d i r e c t authority of the:federal government. The intent and a p p l i c a b i l i t y of the l e g i s l a t i o n have remained unaltered since the passing of the Timber Manufacture Act. The provisions of the Act, however, were incorporated into the Forest Act i n 1912. The r e s t r i c t i o n s on the export of unmanufactured timber imposed by the f e d e r a l government are much more recent than those of the pro-v i n c i a l government and were o r i g i n a l l y intended to serve national s e c u r i t y pruposes. In July 1940, under the provisions of the War  Measures Act, the Timber C o n t r o l l e r prohibited the export of unmanu-factured Douglas-fir (Pseudotsuga menziesii (Mirb.) Franco) logs (Forest Service, 1940). The ban was extended to true f i r (Abies species) saw-logs i n December 1940 and broadened further i n 1942 to include a l l un-manufactured wood products, unless s p e c i f i c a l l y exempted (Sloan, 1945). P r i o r to the imposition of these r e s t r i c t i o n s , timber not subject to the p r o v i n c i a l l e g i s l a t i o n was considered, from the federal point of view, to be f r e e l y exportable. In 1945 the f e d e r a l provisions were written into the National Emergency Transitions Power Act and i n 1947 transferred to the Export and Import Permits Act, where they remain today. CHAPTER 3 B.C. LOG EXPORTS AND THE WORLD MARKET FOR SOFTWOOD LOGS To place the examination of B r i t i s h Columbia's log export r e s t r i c t i o n s i n the proper perspective, the importance of B.C. log exports must be considered within the contexts of both the p r o v i n c i a l forest industry and the world market f o r softwood logs. The f i r s t two sections of th i s chapter contain a d e s c r i p t i v e analysis of these matters with p a r t i c u l a r emphasis placed on the examination of h i s t o r i c a l data. The t h i r d section r e l a t e s to log exports from the U.S. P a c i f i c Northwest — a region s i m i l a r to B.C. but from where the volume of log exports over the years has been s u b s t a n t i a l l y greater. The fourth section i s devoted to the important issue of the differe n c e i n log values on the export and domestic markets. In discussing these matters, t h i s chapter provides the s t a t i s t i c a l basis f o r the analyses contained i n Chapters 4, 6, and 7. 3.1. B.C. Log Exports 3.1.1. Exports Relative to Tot a l P r o v i n c i a l Harvest H i s t o r i c a l l y , log exports have constituted only a very small percentage of B r i t i s h Columbia's t o t a l log production. Table 3-1 (page 16) shows that the r e l a t i v e p h y s i c a l importance of exports reached i t s maximum l e v e l i n the 1930's when exports averaged 8.8 percent of t o t a l p r o v i n c i a l harvests. Since that time, exports as a percentage of 13 14 p r o v i n c i a l log production have declined. During the period from 1966 to 1975 exports averaged only 1.3 percent of the t o t a l harvest. The decrease i n the r e l a t i v e importance of exports has been a t t r i b u t e d to the e f f o r t s of the p r o v i n c i a l exports controls (Sloan, 1945) and to the introduction of the fede r a l export regulations i n the 1940's. Closer examination of the export and p r o v i n c i a l harvest s t a t i s t i c s indicates that the volume of exports has fluctuated widely from year to year, as has the percentage of p r o v i n c i a l harvest constituted by exports. This has been p a r t i c u l a r l y true during the l a s t decade. To a c e r t a i n extent at l e a s t , these f l u c t u a t i o n s are due also to the success of the p r o v i n c i a l export c o n t r o l system. Exports tend to vary inversely with the health of the North American lumber market: when lumber demand and pri c e s are high, the domestic industry consumes a l l log production and very l i t t l e material i s directed toward the export market; when the lumber market i s depressed more logs become a v a i l a b l e f o r export. For example, i n 1973, when U.S. housing s t a r t s and lumber p r i c e s reached record l e v e l s , B.C. log exports t o t a l l e d 47.5 thousand, c u r i i t s — t h e smallest volume since 1920 and only 0.19 percent of the t o t a l p r o v i n c i a l harvest. In 1970, when the U.S. lumber market was depressed, B.C. exports t o t a l l e d 500 thousand c u n i t s — t h e larges t volume ever, but s t i l l only 2.6 percent of the province's log production. 3.1.2. Exports by J u r i s d i c t i o n of Or i g i n As explained i n the previous chapter some log exports are subject to both fe d e r a l and p r o v i n c i a l l e g i s l a t i o n while others f a l l within the purview of the fede r a l statutes only. P r o v i n c i a l government records recognize t h i s j u r i s d i c t i o n a l d i v i s i o n by c l a s s i f y i n g exports as 'export-able' and 'exported under permit'; the former pertaining to logs 15 o r i g i n a t i n g on land not subject to the p r o v i n c i a l l e g i s l a t i o n . ^ Consid-era t i o n of exports by j u r i s d i c t i o n of o r i g i n provides some insig h t into the success of the export controls i n constraining the flow of exports. Examination of the s t a t i s t i c s i n Table 3-1 shows a lack of consis-tency i n recent years i n the r e l a t i v e d i s t r i b u t i o n of exports between the two j u r i s d i c t i o n s . In seven of the ten years between 1966 and 1975 the volume of exports requiring p r o v i n c i a l approval was greater than the volume subject only to the fe d e r a l controls. This i s a d e f i n i t e r e v e r s a l from past s i t u a t i o n s . Between 1914 and 1965 the volume of exports from f e d e r a l l y - c o n t r o l l e d land was greater than the volume of g exports r e q u i r i n g p r o v i n c i a l permits i n a l l but s i x years. The changes i n the volume of exports by j u r i s d i c t i o n can be explained by changes i n the r e l a t i v e volume of harvests from these areas, the introduction of the f e d e r a l export controls i n the 1940's and the tightening of the fe d e r a l regulations i n the l a t e 1960's. 3.1.3. Exports by Region of O r i g i n V i r t u a l l y a l l of B r i t i s h Columbia's log exports o r i g i n a t e from the coastal region, exports from the i n t e r i o r being severely constrained by high transportation costs and a lack of markets. Between 1966 and 1975, the Vancouver and Prince Rupert (coast) Forest D i s t r i c t s accounted for 96.5 percent of the province's log exports. Importantly, the Vancouver ^This c l a s s i f i c a t i o n ignores the existence of the fe d e r a l controls. The two categories are more appropriately r e - t i t l e d here as 'those logs subject to fe d e r a l j u r i s d i c t i o n only' and 'those logs subject to provin-c i a l j u r i s d i c t i o n ' r e s p e c t i v e l y . g It i s i n t e r e s t i n g to note that 1915 to 1918 accounted for four of the s i x years. This period of r e l a t i v e l y large export volumes from pro-v i n c i a l land l e d the government to e s t a b l i s h the Log Export Advisory Com-mittee to a s s i s t them i n overseeing the control of exports. The Committee and i t s r o l e i n export regulation i s discussed i n d e t a i l i n Chapter 5. 16 TABLE 3-1 ANNUAL VOLUMES OF B.C. LOG EXPORTS, 1914-1975 Logs Subject to: Exports as % fede r a l of T o t a l ^ j u r i s d i c t i o n p r o v i n c i a l T o t a l Log P r o v i n c i a l Year only j u r i s d i c t i o n Exports Harvest cunits 1914-19 30,696.4 61,652.5 92,348.9 4.0 1920-29 253,220.4 65,752.6 318,973.0 7.4 1930-39 312,201.1 61,573.1 373,774.2 8.8 1940-49 208,430.0 29,860.3 238,290.3 4.0 1950-59 117,232.1 22,061.7 139,293.8 1.5 1960-65 61,704.6 55,239.4 116,943.9 1.4 1966 73,488.2 163,189.2 236,677.4 1.5 1967 114,189.1 224,839.7 339,028.9 2.2 1968 162,651.3 146,446.7 309,098.0 1.8 1969 106,553.5 152,859.3 259,412.7 1.4 1970 134,557.3 365,929.3 500,486.6 2.6 1971 46,304.3 234,796.0 281,100.2 1.4 1972 30,058.5 71,819.5 101.878.0 0.52 1973 32,670.0 14,828.5 47,508.5 0.19 1974 113,267.5 96.763.8 210,031.3 0.99 1975 73,447.2 76,679.1 150,126.3 0.8 Source: Compiled from B.C. Forest Service Annual Reports, 1940-1975. ^"Statistics pertaining to the 6 groups covering the period from 1914 to 1965 show yearly averages. Forest D i s t r i c t i t s e l f accounted f o r 82.6 percent of the t o t a l (Forest Service, 1975a). 3.1.4. Exports by Species Over the years, a number of d i f f e r e n t species have played impor-tant roles i n terms of B.C. log exports. Western redcedar (Thuja p l i c a t a Donn) was o r i g i n a l l y the province's primary export species but gave way i n the mid-1920's to Douglas-fir. From the early 1940's, when Douglas-fir exports were r e s t r i c t e d by the Timber C o n t r o l l e r , through to the end of the 1960's, western hemlock (Tsuga heterophylla (Raf.) Savg.) constituted 17 B.C.'s most important export species. During the 1970's, the export market has not been dominated by one species; i n ad d i t i o n to hemlock, s i t k a spruce (Picea s i t c h e n s i s (Bong.) Carr) and cypress (Chamaecyparis  nootkatensis (D. Don) Spach) have emerged as valuable export species. These three species groups accounted for 72 percent of B.C.'s t o t a l log exports during the period from 1970 to 1975. Table 3-2 summarizes the decadal averages of the proportions of log exports constituted by i n d i v i d u a l species. TABLE 3-2 PROPORTIONS OF B.C. LOG EXPORTS—BY SPECIES, 1914-1975 Year Douglas F i r Cedar Spruce Hemlock "Balsam""'" Cypress percent of t o t a l exports 1914-19 14.1 65.2 6.1 10.5 0.9 -1920-29 40.6 38.3 2.7 14.2 1.7 -1930-39 53.9 17.0 3.2 20.7 2.0 -1940-49 14.8 25.4 2.3 47.3 9.5 -1950-59 11.6 12.8 0.6 58.5 15.3 0.7 1960-69 4.1 11.9 25.9 35.0 12.6 7.7 1970-75 2.9 10.7 29.6 24.6 9.5 17.8 Source: Compiled from B.C. Forest Service Annual Reports, 1940-1975. 1"True f i r s " are classed as "balsam" Comparing the export by species information with the species break-down of domestic market sales shows a s u b s t a n t i a l d i f f e r e n c e between the two markets. For example, i n 1975, cedar constituted 35 percent of t o t a l Vancouver Log Market (V.L.M.) transactions but only 11 percent of t o t a l exports. Spruce, on the other hand, accounted for only 7 percent of V.L.M. sales while comprising 42 percent of export sales (C.O.F.I., 1975; Forest Service, 1975a). 3.1.5. Exports by Grade The a v a i l a b l e s t a t i s t i c s show that the grade d i s t r i b u t i o n of B.C.'s log exports has remained r e l a t i v e l y consistent over the years. Since 1940, when the fe d e r a l a u t h o r i t i e s began to p a r t i c i p a t e i n export regulation, log exports from the province have been concentrated i n low grade material. As summarized i n Table 3-3, l e s s than.25 percent of B.C.'s log exports during t h i s period were c l a s s i f i e d as No. 1 or No. 2 grade material. TABLE 3-3 PROPORTIONS OF B.C. LOG EXPORTS—BY GRADE, 1930-1975 ungraded or Grade lumber Year #1 #2 #3 r e j e c t - - percent of t o t a l exports - - -1930-39 4.4 46.9 24.7 23.9 1940-49 4.1 19.5 33.2 43.1 1950-59 3.8 12.7 64.0 19.6 1960-69 6.5 18.1 61.9 13.5 1970-75 6.8 17.7 64.3 11.2 Source: Compiled from B. C. Forest Service Annual Reports, 1940-1975. Comparison of the proportions of the export and domestic markets constituted by i n d i v i d u a l log grades shows a s l i g h t difference between the two. In 1975, 36 percent of Vancouver Log Market sales were graded as No. 1 or No. 2, while only 28 percent of log exports f e l l into the same grade categories. 19 3.1.6. Export by Destination and Value The P a c i f i c Northwest region of the United States and Japan con-s t i t u t e the two primary markets f or B.C. log exports, with Japan having been the largest purchaser i n terms of both volume and value i n each year since 1961 (Dept. of I n d u s t r i a l Development, 1968; Table 3-4). A 9 summary of B.C. log exports by dest i n a t i o n and value from 1969 to 1975 i s provided i n Table 3-4. TABLE 3-4 B.C. LOG EXPORTS BY DESTINATION AND VALUE, 1969-1975 Japan U.S. Year Volume Value Volume Value - c u n i t s - — $ 000 -c u n i t s - — $000-1969 97,940 5,971.9 • 58,583 2,699.7 1970 247,815 16,436.6 198,020 9,008.7 1971 160,195 10,973.2 95,881 3,912.0 1972 75,972 4,899.0 9,793 576.8 1973 48,829 4,509.5 7,786 462.5 1974 126,681 12,853.6 112,945 8,604.1 1975 100,795 16,765.7 37,638 4,618.2 Source: Compiled from Dept. of Economic Development External Trade Reports, 1969-1975. The only p u b l i c a t i o n which provides information on both the destination and value of B.C. log exports i s the Department of Economic Development's External Trade Report. The t o t a l volume figures presented i n t h i s p u b l i c a t i o n (and i n Table 3-4) d i f f e r from those c o l l e c t e d by the B.C. Forest Service (see Table 3-1).. O f f i c i a l s of both the federal and p r o v i n c i a l governments were questioned about t h i s discrepancy and sug-gested that the B.C. Forest Service s t a t i s t i c s would be the more accur-ate of the two. For t h i s reason the s t a t i s t i c s presented i n Table 3-4 should be looked upon as in d i c a t o r s of the r e l a t i v e d i s t r i b u t i o n of export destinations and values. 3.2. The World Market for Softwood Logs 3.2.1. Growth of the Market Since the early 1950's, the world market f o r softwood logs has expanded at an extremely rapid pace. From a t o t a l of 875 thousand cunits i n 1950, con s i s t i n g mostly of trade amongst European countries and between Canada and the U.S., the market increased to an average of 9.8 m i l l i o n cunits i n 1973 and 1974 (F.A.O., 1974: p. 6 1 ) . 1 0 The primary source of t h i s expansion has been increased purchases by Japan. As shown i n Table 3-5, Japan has accounted for almost 70 percent of the world's purchases of softwood logs i n recent years; European countries, Canada and many other small importers have accounted for the remainder of the market. 3.2.2. Sources of Japan's Imports A small number of c o u n t r i e s — i n p a r t i c u l a r the U.S., the U.S.S.R. and New Zealand—have increased t h e i r softwood log exports i n response to the developing Japanese market. Table 3-6 outlines Japan's imports from each of these countries since 1950 and includes the Canadian s t a t -. . r . 11 i s t i c s f o r comparative purposes. The table shows that Japan's imports of softwood logs from the U.S., the U.S.S.R. and New Zealand have increased s t e a d i l y since 1955 although some l e v e l l i n g o ff has been evident i n the mid-1970's. The imports from B r i t i s h Columbia, on the other hand, while e x h i b i t i n g "^Recorded i n 'thousands of cubic metres'; converted to cunits using a r a t i o of 2.8316 : 1. ''""'"F.A.O. s t a t i s t i c s record 'Canadian' export volumes. While there i s some discrepancy between the F.A.O. s t a t i s t i c s and those compiled by the B.C. government, i t seems reasonable to assume that Canada's log exports to Japan o r i g i n a t e i n B.C. TABLE 3-5 THE WORLD MARKET FOR SOFTWOOD LOGS, 1950-1974 Imports of Softwood Logs Year World Japan —thousands of c u n i t s — 1950 875.8 0 1955 971.2 36.0 1958 1082.4 201.3 1959 1349.0 342.9 1960 1720.2 435.4 1961 2256.6 943.6 1962 2541.6 1116.3 1963 3191.7 1525.6 1964 3557.2 1890.7 1965 4221.9 2100.2 1966 4829.6 2669.4 1967 5794.8 4053.4 1968 7492.4 5501.3 1969 7363.8 5489.3 1970 8568.8 6496.1 1971 7624.8 5647.2 1972 9357.7 6990.5 1973 10363.1 7375.8 1974 9292.0 6212.2 Source: Compiled from F.A.O. Yearbook of Forest Products, 1950-1974. TABLE 3-6 THE PRIMARY SOURCES OF JAPAN'S SOFTWOOD LOG IMPORTS, 1950-1974 Country of Or i g i n Year Canada U.S. U.S.S.R. New Zealand thousands of cunits 1950 - - - -1955 5.3 27.5 - -1958 1.8 56.2 131.7 9.2 1959 2.5 86.2 209.8 39.9 1960 3.5 116.2 256.0 51.9 1961 45.9 88.3 308.3 85.1 1962 88.3 503.2 418.1 90.1 1963 103.1 841.9 480.6 82.3 1964 73.1 1051.3 619.1 112.3 1965 57.2 1146.3 718.7 145.5 1966 95.3 1448.3 903.4 69.9 1967 182.9 2186.3 1402.3 227.1 1968 182.9 3016.2 1762.6 453.1 1969 78.4 2792.3 1891.1 564.3 1970 188.6 3364.1 2177.9 595.1 1971 228.5 2503.4 2177.2 620.9 1972 89.0 3672.0 2401.8 638.5 1973 32.8 3698.2 2758.4 585.5 1974 55.4 2994.3 2533.5 409.7 Source: Compiled from F.A.O. Yearbook of Forest Products, 1950-1974. 23 c y c l i c a l f l u c t u a t i o n s , have shown no d i s c e r n i b l e upward or downward trend. At present, the U.S. and the U.S.S.R. constitute Japan's two most important sources of softwood l o g s — h a v i n g accounted, r e s p e c t i v e l y , f or 50 percent and 37 percent of Japan's imports since 1970. During the same period, exports from B.C. accounted for only 1.8 percent of Japan's t o t a l imports. As well as softwood logs, Japan imports s u b s t a n t i a l quantities of hardwood. In 1974, for example, Japan imported almost 9 m i l l i o n cunits of hardwood—with Indonesia, Malaysia and the P h i l i p p i n e s being the primary sources of supply. 3.2.3. The Japanese Market The Japanese have r e l i e d to an increasing degree on imports to meet t h e i r growing requirements for softwood logs. As shown i n Table 3-7, imports had increased to over 45 percent of Japan's consumption of softwood logs by 1970 and reached nearly 50 percent i n 1973. The increase i n both the volume and the r e l a t i v e importance of Japan's log imports r e f l e c t s two basic f a c t s : rapid economic growth— e s p e c i a l l y during the 1960's—and reduced domestic softwood harvests. In the period from 1960 to 1968, nation a l income i n Japan increased by 370 percent and the index of manufacturing production by 290 percent. More importantly, the l e v e l of r e s i d e n t i a l construction rose by 270 percent (McKillop, 1973: p. 64). During the same period, Japan's annual softwood harvests declined s u b s t a n t i a l l y as the government introduced harvest r e s t r i c t i o n s to counteract the overcutting which occurred during and a f t e r World War II (Shand, 1968). The importation of softwood logs has enabled Japan to meet i t s 24 TABLE 3-7 JAPAN'S CONSUMPTION OF SOFTWOOD LOGS, 1950-1974 Apparent ^ Consumption Imports of Softwood To t a l as % of Year Logs Imports Consumption thousands of cunits 1950 3,497.9 . 0 0 1955 5,972.1 36.0 0.6 1960 8,678.9 435.4 5.0 1965 9,978.2 2,100.2 21.0 1970 14,346.6 6,496.1 45.3 1971 13,176.3 5,647.2 42.9 1972 14,685.3 6,990.5 47.6 1973 14,939.9 7,735.8 49/4 1974 13,776.3 6,212.2 45.1 Source: Compiles from F.A.O. Yearbook of Forest Products, 1950-1974. ^Apparent consumption consists of domestic production plus imports of sawlogs and veneer logs. growing demand for softwood lumber pr i m a r i l y from domestic production. In 1974, for example, imports accounted for only 8.5 percent of Japan's softwood lumber consumption—a r e l a t i v e l y minor increase from the l e v e l s of 3.7 percent i n 1963 and 6.7 percent i n 1968 (F.A.O., 1974: pp. 120-2). As these s t a t i s t i c s r e f l e c t , the Japanese have shown a d e f i n i t e preference f or importing raw materials as opposed to importing f i n i s h e d or semi-fi n i s h e d products.' There has been, i n f a c t , - a conscientious e f f o r t by the Japanese government to encourage the development of domestic industry. These measures have included d i r e c t f i n a n c i a l support programs, subsi-dized financing, close co-operation between industry and government, and the maintenance of r i g i d t a r i f f d i f f e r e n t i a l s between manufactured. 25 and unmanufactured wood product imports (Ogawa, 1963; Shand, 1968; Hamilton, 1971; Darr, 1975b; Jung, 1976). In 1974, over 24,000 saw-m i l l s were operating i n J a p a n — v i r t u a l l y the same number as i n 1960— although average s i z e (based on power input) had more than doubled (Forestry Agency, 1974). To t a l output of, Japanese sawmills was 45.0 m i l l i o n cubic metres i n 1973 compared to 26.7 m i l l i o n cubic metres i n 1960 ( i b i d : p. 4). In addition to the contribution to economic development, other factors influence the preference of the Japanese for domestically manu-factured lumber. For instance, the Japanese tend to place a greater importance on wood as a decorative material than do North Americans and the r e l a t i v e l y slow but precise production techniques used by many Japanese m i l l s allow f or a generally higher recovery of higher-valued, s p e c i a l i z e d products than can be obtained from North American lumber producers (Q.C. Timber, 1975). Members of the B.C. forest industry, together with the federal and p r o v i n c i a l governments have invested s u b s t a n t i a l time and expense, espec-i a l l y during the l a s t two decades, to promote the sale of manufactured B.C. forest products i n Japan. These e f f o r t s have met with some success: the volume of B.C.'s lumber exports to Japan increased from 1.6 m i l l i o n board feet i n 1960 to 155.6 m i l l i o n board feet i n 1961 (Shand, 1968; Dept. of I n d u s t r i a l Development, 1968) to a c y c l i c a l high of 732.1 m i l -l i o n board feet i n 1970 (C.O.F.I., 1975). Since 1970, lumber exports to Japan have declined, r e g i s t e r i n g 407.5 m i l l i o n board feet i n 1975. The value of B.C. lumber exports to Japan increased from $38 m i l l i o n i n 1969 to $110 m i l l i o n i n 1974. In 1975, the value of B.C.'s lumber sales i n Japan declined to $89 m i l l i o n (Dept. of Economic Development, 1969, 1974, 1975). An important feature of the B.C.-Japan lumber trade to date has been the concentration of Japanese purchases i n rough squares and cants. These materials require the minimum l e v e l of processing at source; they are cut into dimensions of 4 inches square ('baby squares') or 12 inches square ('Jap squares') and are remanufactured i n Japan to meet Japanese s p e c i f i c a t i o n s . The willingness of B.C. lumber producers to provide these materials, combined with the reluctance of U.S. m i l l s to supply them, has been i d e n t i f i e d as the primary reason underlying the r e l a t i v e growth of the B.C.-Japan lumber trade (Shand, 1968). Considered impor-tant i n t h i s regard i s the Japanese Construction Ministry's 1974 adoption of the Canadian platform frame construction system (Jung, 1976). A l -though there i s some debate over the volume of trade to be gained (Q.C. Timber, 1975), a u t h o r i t i e s i n B.C. believe that the acceptance of B.C. lumber standards w i l l increase the demand for B.C. produced dimension lumber i n Japan r e l a t i v e to the demand for the semi-finished product (C.O.F.I., 1975b). Even i n l i g h t of t h i s information, probably the most important feature of the B.C.-Japan log/lumber trade i s the willingness of the Japanese to pay extremely high prices for imported softwood logs. The a v a i l a b l e s t a t i s t i c s show that the Japanese are w i l l i n g to pay more for c e r t a i n high q u a l i t y logs than for s i m i l a r q u a l i t y manufactured material. For example, for the l a s t four years at l e a s t , the resale value of No. 1 hemlock logs on the Japanese market has been con s i s t e n t l y above the s e l -12 l i n g p r i c e of hemlock 'baby squares' (Japan Lumber Journal, 1976).-12 Sutton (1975) also i d e n t i f i e d t h i s and suggested that i t raised important questions with regard to the v a l i d i t y of the value-added concept of investment planning. Another important fa c t i s that these log prices are often more than 13 double those paid by B r i t i s h Columbia log buyers. Projections of Japanese demand for softwood logs suggest that t h e i r import requirements w i l l continue to be strong over the next three or four decades at l e a s t . The Stanford Research I n s t i t u t e (1974b) has estimated that Japan would need to import approximately 10 m i l l i o n cunits of softwood logs by 2000 and Sutton (1975) has con-cluded that the Japanese w i l l be forced to continue to import large sawlogs and peeler logs regardless of t h e i r t o t a l demand requirements because of the i n a b i l i t y of t h e i r f o r e s t s to produce enough of those trees. 3.3. Log Exports from the U.S. P a c i f i c Northwest 3.3.1. Volumes Over the years the volumes of softwood log exports from the U.S. West Coast have been considerably greater than those from B r i t i s h Columbia. An estimated 3.8 m i l l i o n cunits were exported from Wash-14 ington and Oregon i n 1975 (Ruderman, 1976: p. 18) compared to 150 thousand cunits from B.C. i n the same year. The U.S. export market has developed over the l a s t two decades i n response to the growth of demand for softwood logs i n Japan (where over 90 percent i s s o l d ) . Export sales accelerated r a p i d l y i n 1961 and were further boosted by the increase i n a v a i l a b l e supply following the 1962 Columbus Day storm. Some l e v e l l i n g o ff i n U.S. export sales has been evident i n the mid-1970' s. Since 1962, exports have increased from less than 3 percent 13 See section 3.4. 14 Recorded i n 'thousands of board f e e t ' ; converted to cunits using a r a t i o of 1.7 : 1 (see Appendix B). 28 of the t o t a l Washington-Oregon timber harvest to over 15 percent (Darr, 1975a: p. 2). 3.3.2. R e s t r i c t i o n s on Exports The development of the U.S. export market added pressure to the timber market i n the P a c i f i c Northwest and led to a widespread contro-versy over the question of log exports. In response to the strong lobby that was mounted i n opposition to log exports a number of l e g i s -l a t i v e measures were introduced to r e s t r i c t the export of unmanufactured materials. The Morse Amendment, i n e f f e c t from 1968 to 1973, l i m i t e d softwood log exports from fe d e r a l land west of the 100th meridian to 350 m i l l i o n board feet"*""* per year. Before i t s expiration i n 1973, the Morse Amendment was superseded by an appropriations r i d e r which had the e f f e c t of i n i t i a t i n g a complete ban on log exports from the same area ( L i n d e l l , 1977). Log exports from Oregon State lands were prohibited i n 1961 (Austin, 1969). As a r e s u l t of these measures, only logs from pr i v a t e land—where over 75 percent of the volume originates (Darr, 1975b: p. 24)—and from Washington State land remain e l i g i b l e f o r export. 3.3.3. Species and Grades As the majority of P a c i f i c Northwest exports o r i g i n a t e from u n r e s t r i c t e d land, the composition of the exports ( i . e . , volumes, species and grades) i s , i n f a c t , determined by free market forces; i t r e f l e c t s the demands of the Japanese and the willingness of U.S. log producers to s e l l at i n t e r n a t i o n a l market p r i c e s . "^Approximately 595,000 cunits. 29 Table 3-8 examines the log consumption by species i n the P a c i f i c Northwest export and domestic markets. It shows a strong concentra-t i o n of export sales i n hemlock and Douglas-fir but also indicates the r e l a t i v e importance of the export market f o r spruce and cedar. TABLE 3-8 PACIFIC NORTHWEST DOMESTIC AND EXPORT LOG SALES— BY SPECIES, 1972 Market  Species Domestic Export - - - percent — — — Douglas-fir 60.0 27..'4 Hemlock 13.3 56.3 True f i r s 5.0 4.7 Spruce 1.1 3.6 Western redcedar 3.1 4.9 Other species 17.5 3.1 100.0 100.0 Source: Compiled from Darr, D. R., Softwood  Log Exports and the Value and Employment Issues. P.N.W.-200, 1975. Table 3-9 examines the grade d i s t r i b u t i o n of P a c i f i c Northwest export and domestic sales and shows export sales to be concentrated i n the higher grade materials. 30 TABLE 3-9 PACIFIC NORTHWEST DOMESTIC AND EXPORT LOG SALES—BY GRADE, 1973 Market  Grade Domestic Export - - - percent - -Peeler 5. 9 9. 7 Special m i l l 6. 6 22. 4 No. 1 sawmill 0. 8 4. 3 No. 2 sawmill 37. 2 45. 9 No. 3 sawmill 24. 8 17. 1 C u l l , u t i l i t y & No. 4 sawmill 17. 7 0. 5 Ungraded 7. 0 0. 1 100. 0 100. 0 Source: Darr, D. R. , i b i d . 3.4. Export/Domestic P r i c e D i f f e r e n t i a l s Of primary concern i n examining the question of log export r e s t r i c -t i o n i s the diff e r e n c e i n log prices between the export and domestic markets. As explained i n the next chapter, t h i s difference (the 'export/domestic p r i c e d i f f e r e n t i a l ' ) indicates the amount that export r e s t r i c t i o n s hold domestic log prices below i n t e r n a t i o n a l p r i c e l e v e l s . The export/domestic p r i c e d i f f e r e n t i a l provides ins i g h t into a number of important economic consequences of export r e s t r i c t i o n and establishes the basis for examining the e f f i c i e n c y of the export control system. Unfortunately, analysis of the p r i c e d i f f e r e n t i a l i s complicated by the lack of r e l i a b l e information regarding the prices received for B.C. log exports. I t i s reasonable to assume, however, that export prices a v a i l a b l e to B.C. operators are s i m i l a r to those a v a i l a b l e to U.S. exporters. On t h i s basis, U.S. export prices can be used as a proxy f o r the value of B.C. export sales. Using published U.S. i n f o r -mation, along with s t a t i s t i c s purchased from the I n d u s t r i a l Forestry Association and data pertaining to domestic log sales, t h i s section of Chapter 3 provides a d e s c r i p t i v e analysis of the export/domestic p r i c e d i f f e r e n t i a l . Table 3-10 examines average yearly prices on the export and domestic log markets for the important species of Douglas-fir, hemlock, spruce and cedar for the f i v e year period from 1970 to 1975. The information presented i n t h i s table shoi^s a substantial d i f -ference i n the s e l l i n g p r i c e s obtainable on the export and domestic log m a r k e t s — e s p e c i a l l y a f t e r 1972. The sudden jump i n export prices i n 1973 can be a t t r i b u t e d to the upward revaluation of the Japanese yen i n December 1972; to the increased competition f o r a v a i l a b l e logs which resulted from the high demand for lumber i n both the Japanese and North American markets i n 1973; and to the a d d i t i o n a l r e s t r i c t i o n s on log exports introduced i n the P a c i f i c Northwest i n 1973. The decline i n export prices i n 1974 and 1975 can be a t t r i b u t e d to the world-wide economic recession i n general and to depressed lumber markets and the oversupply of log stocks i n p a r t i c u l a r . Indications are that 1976 export p r i c e l e v e l s were approximately 8 percent above 1975 l e v e l s (Ruderman, 1976: p. 22). 16 As explained i n section 3.1.6, the information pertaining to B.C. log exports contained i n B.C. government publications i s not considered r e l i a b l e . TABLE 3-10 EXPORT/DOMESTIC PRICE COMPARISON1—BY SPECIES, 1970-1975 Douglas-fir Hemlock Spruce Cedar u.s. 2 u.s. u.s. uTs. Year V.L.M. Export V.L.M. Export V.L.M. Export V.L.M. Export Canadian d o l l a r s per cunit 1970 $55.67 $ 71.79 $38.83 $ 74.19 $ 50.43 $ 99.80 $38.32 $ 84.07 1971 46.96 66.23 36.98 66.35 56.34 89.46 36.13 81.55 1972 58.27 73.06 46.60 75.22 65.08 91.89 46.50 82,92 1973 68.13 167.08 58.10 168.26 124.23 311.50 73.73 196.55 19743 69.60 136.43 57.87 137.19 112.17 194.07 61.83 121.06 1975 3 71.08 132.32 58.36 127.01 90.75 149.86 61.39 117.35 Sources: Compiled from C.O.F.I., Average Log P r i c e s , 1970-75; Adams, T. C , Log Prices i n Western Washington and Northwestern Oregon 1963-73, PNW-235, 1974; In d u s t r i a l Forestry Association, Composite Log Sales A n a l y s i s — P u g e t Sound D i s t r i c t , 1974-75. "'"The U.S. figures have been converted from Mbm Scribner to cunits using a r a t i o of 1.7 : 1 and from U.S. d o l l a r s to Canadian d o l l a r s using the appropriate exchange rates. See Appendix B for a discussion of both conversion factors and exchange rates. 2 Sawlog grades only. 3 The U.S. figures pertain to the 3rd quarter only and to Puget Sound D i s t r i c t sales only. 33 Caution must be used i n comparing these p r i c e s . Exports from the United States are composed of much higher q u a l i t y logs than B r i t i s h Columbia exports and average U.S. export prices w i l l tend to be somewhat higher than actual B.C. export p r i c e s f or t h i s reason. Nevertheless, examination of export and domestic prices by grade eliminates much of t h i s problem. Table 3-11 presents a comparison of export and domestic s e l l i n g p r i c e s f o r i n d i v i d u a l grades of Douglas-fir, hemlock, spruce and cedar for 1975. These s t a t i s t i c s v e r i f y the existence of the export/domestic p r i c e d i f f e r e n t i a l . Importantly, for each species, the export premium a v a i l a b l e f or high grade material i s s u b s t a n t i a l l y greater than that a v a i l a b l e f or the low grade l o g s — a r e s u l t consistent with the Japanese preference for high q u a l i t y material. TABLE 3-11 EXPORT/DOMESTIC PRICE COMPARISON1—BY GRADE, 1975 Market  Species Grade 3 V.L.M. Export^ Canadian d o l l a r s per cunit Douglas f i r No. 1 Peeler $146.03 $322.29 No. 2 Peeler 138.88 252.81 No. 3/No. 4 P e e l e r 5 121.75 200.26 No. 1 Sawmill 97.36 199.83 No. 2 Sawmill 83.16 132.85 No. 3 Sawmill 64.04 79.76 Hemlock No. 16 78.10 202.52 No. 2 73.93 126.90 No. 3 56.15 76.38 Spruce No. l6 263.12 373.93 No. 2 100.06 140.74 No. 3 64.18 75.97 Cedar No. 1 80.10 205.50 No. 2 66.12 120.61 No. 3 58.15 56.97 Sources: Compiled from: I n d u s t r i a l Forestry A s s o c i -ation, Composite Log Sales A n a l y s i s — P u g e t Sound D i s t r i c t , 1975; C.O.F.I., Average Log Pr i c e s , 1975. ''"The U.S. figures have been converted from Mbm Scribner to cunits using the schedule of conversion factors l i s t e d i n Appendix B and from U.S. d o l l a r s to Canadian d o l l a r s using an exchange rate of 1.0173 : 1. 2 Similar tables f o r 1973 and 1974 are presented i n Appendix A. 3 Grading rules d i f f e r between B.C. and the P a c i f i c Northwest. A comparison of grades i s included i n Appendix B. 4 3rd quarter only; Puget Sound D i s t r i c t sales only. ^Includes No. 3 Peeler and Special M i l l i n U.S. grades. Includes Peeler, Special M i l l and No. 1 sawmill i n U.S. grades. CHAPTER 4 THE QUESTION OF LOG EXPORT RESTRICTION The p o l i c y of r e s t r i c t i n g the export of unmanufactured f o r e s t products has been the subject of debate i n B r i t i s h Columbia and elsewhere for decades. Many view raw material exports as being short-sighted i n terms of achieving the maximum long-term benefit from indigenous resources while others simply consider the export of raw material to be tantamount to the.export of employment. In l i g h t of these views, r e s t r i c t i o n s on the export of these materials have p r o v e n — i n B.C. at l e a s t — t o be popular instruments of forest p o l i c y . The issue, however, i s not as simple as that usually implied by the proponents of the r e s t r i c t i o n s . Most of the standard arguments neither view the r e s t r i c t i o n s i n the proper context nor do they c o r r e c t l y i d e n t i f y the trade-offs associated with the two p o l i c y extremes. This chapter i s concerned with the question of log export r e s t r i c t i o n : i t presents a b r i e f l i s t i n g of the arguments that have been expressed both i n favour of and i n opposition to the r e s t r i c t i o n s . Most importantly, the chapter attempts to c l a r i f y the issue underlying the debate by placing the arguments i n the proper economic context. And f i n a l l y , while no attempt i s made to aggregate the costs and benefits associated with the p o l i c y a l t e r n a t i v e s , the chapter does add to the debate by i d e n t i f y i n g and providing i n s i g h t into the existence, the mag-nitude and the d i s t r i b u t i o n a l considerations of the most important—but 35 36 yet often unrecognized—economic consequences of export r e s t r i c t i o n . 4.1. Arguments i n Favour/in Opposition When the export r e s t r i c t i o n s were f i r s t introduced i n B r i t i s h Columbia, the objective of the p o l i c y was to encourage the development of the domestic processing industry. The growth of the timber manu-factu r i n g sector, i t was argued, would i n turn produce a number of benefits including the creation of employment and income (Ross, 1912; Sloan, 1945; Darr, 1975a); the generation of taxation revenue (Sloan, 1945; Burch, 1976); the p r o v i s i o n of greater and more lo n g - l a s t i n g stimulation to economic development (Ross, 1912); and the encourage-ment of balanced growth and i n d u s t r i a l s t a b i l i t y (Deutsch et a l . , 1959; C.O.F.I., 1971). I t i s widely believed that the p o l i c y has been successful i n achieving i t s early objectives (Williston, 1968; B r i t i s h Columbia Forest Products, 1975). The objective of the p o l i c y i n the 1970's i s somewhat more com-plex; export r e s t r i c t i o n s are looked upon now as a means of protecting established industry from foreign competition for raw materials. In t h i s regard, the r e s t r i c t i o n s shelter domestic industry from high world market prices for raw materials. This, i t i s argued, helps to s t a b i l -i z e t o t a l production costs i n B.C. thereby enabling p r o v i n c i a l manufac-turers to continue to compete i n world markets i n the face of increasing energy, c a p i t a l and labour costs. Of a l l the benefits to be achieved through the domestic processing industry, employment i s the most i d e n t i f i a b l e and considered the most important. In t h i s regard, the greater labour input i n manufacturing r e l a t i v e to that i n log exporting i s often considered to be a p r i o r i proof of the employment benefits to be achieved from log export r e s t r i c t i o n . 37 The U.S. Forest Service has devoted a number of research projects to examining the employment issue (Adams and Hamilton, 1965; Darr, 1975a). In t h e i r most recent p u b l i c a t i o n , the d i r e c t labour input i n lumber manufacturing was found to be 2.67 times as great as that i n log exporting: d i r e c t employment per thousand board feet of logs i n Washington and Oregon i n 1973 averaged 12.58 man-hours for the lumber industry but only 4.72 man-hours for the log export industry (Darr, 1975a: p. 9). The same study estimated the average employment i n processing logs f o r veneer and plywood products to be over four times the d i r e c t labour input i n log exporting. Figures such as these have been interpreted to imply that for each one thousand board feet of logs exported, the equivalent of one man-day i n the lumber industry or two man-days i n the plywood industry are foregone (Sloan, 1945). Ad d i t i o n a l arguments supporting the p o l i c y of log export r e s t r i c -t i o n have been mentioned. They include the questioning of the theor-e t i c a l free trade argument and the possible c o n f l i c t s between log exports and such nation a l objectives as low-cost wood products, timber conserva-t i o n and community s t a b i l i t y (Hamilton, 1971; Stanford Research I n s t i t u t e , 1974a; Haynes, 1976). On the other side of the debate, the arguments opposed to log export r e s t r i c t i o n s have focused t r a d i t i o n a l l y on the incentives to timber u t i l i z a t i o n and forest management that r e s u l t from the higher log revenues generated by export sales (Usmar and Yska, 1971; Fenton and Dick, 1972a & b; Darr, 1975a; Sutton, 1975). Additional argu-ments have included the benefits to be achieved from free trade (Alston, 1975); the discriminatory nature of i n t e r n a t i o n a l t a r i f f s (Sutton, 1975); the con t r i b u t i o n of log exports to the trade balance (Darr, 38 1 9 7 5 b ) a n d the view that r e s t r i c t i o n s do not necessa r i l y r e s u l t i n manufactured product exports (Shand, 1968; McKillop, 1973). Another very important argument—and one often i g n o r e d — p e r t a i n s to the cost of c a p i t a l . Consideration of the marginal cost and pr o d u c t i v i t y of cap-i t a l r a i s e s questions concerning the v a l i d i t y of using 'simple' value-added as the basis of investment planning (Eklund, 1972; Sutton, 1975). 4.2. C l a r i f i c a t i o n of the Issue Most of the arguments l i s t e d i n section 4.1. (both i n favour of and i n opposition to the r e s t r i c t i o n s ) tend to view the basic issue surrounding the p o l i c y as whether or not the domestic processing industry should be a s s i s t e d . To t h i s end, consideration of the trade-offs between the two p o l i c y a l t e r n a t i v e s has evolved into an examination of the r e l a t i v e merits of the two i n d u s t r i e s : ( b a s i c a l l y ) the a d d i t i o n a l employment to be gained i n manufacturing compared to the forest manage-ment incentives to be gained i n exporting. This view r e f l e c t s a misunderstanding of both the issue and the ef f e c t s of the r e s t r i c t i o n s . More c o r r e c t l y , the issue should be. i d e n t i f i e d as whether or not export r e s t r i c t i o n s are an e f f i c i e n t means of encouraging (or protecting) the domestic timber processing industry. If p ublic p r i o r i t i e s d i c t a t e that the processing industry should be assi s t e d , then export r e s t r i c t i o n s should be viewed as only one of a number of a l t e r n a t i v e p o l i c y measures that could be used. Other measures such as discriminatory financing or taxation p o l i c i e s and "*"^A more recent a r t i c l e by Darr (1977) suggests that the s h i f t u t o f l o a t i n g exchange rates has relegated the balance of payments issue to one of secondary importance i n the log export debate. i n f r a s t r u c t u r a l development have been described (Sanvictores, 1975; Pearse, 1976). In the same respect, the i d e n t i f i c a t i o n of the trade-o f f s requires a more e x p l i c i t recognition of the economic r e l a t i o n s h i p between the r e s t r i c t i o n s , log prices and the log producing and proces-sing i n d u s t r i e s . Examined i n t h i s l i g h t , i t becomes r e a d i l y apparent that attempts to a s s i s t the domestic processing industry through a p o l i c y of log export r e s t r i c t i o n involves s i g n i f i c a n t economic conse-quences that have not been given consideration i n previous p o l i c y decisions. This approach to examining the p o l i c y of export r e s t r i c t i o n has been developed i n papers by Deutsch et a l . (1959), Lewis (1976), Baumann (1975), Scott and Shearer (1975) and by the Pearse Commission. The following d e s c r i p t i o n of the workings and the implications of the p o l i c y draws heavily from these studies. 4.3. Economic Consequences of Export R e s t r i c t i o n Three important and distinguishable economic consequences are associated with log export r e s t r i c t i o n s . They are: the r e d i s t r i b u t i o n of income between sectors of the p r o v i n c i a l economy; the loss of economic e f f i c i e n c y ; and the inequitable d i s t r i b u t i o n of the losses and gains that r e s u l t from the r e s t r i c t i o n s . 4.3.1. R e d i s t r i b u t i o n of Income The basic e f f e c t of the export r e s t r i c t i o n s i s to eliminate foreign competition f o r raw materials produced i n B.C. This has the intended e f f e c t of providing domestic manufacturers with s e c u r i t y of raw material supplies but, insofar as i t reduces the t o t a l demand for logs, i t also acts to hold domestic log p r i c e s below free market 40 l e v e l s . In t h i s regard, domestic processors benefit from both a greater a v a i l a b i l i t y of log supplies and from low log p r i c e s . Given that B.C. processors s e l l i n markets where they have l i t t l e e f f e c t on product p r i c e s , the depressed raw material p r i c e s w i l l be r e f l e c t e d i n the long-run growth of the sector. While many look upon the r e s t r i c t i o n s as protecting the domestic processing industry from 'unfair' p r i c e competition, i t i s important to recognize that other sectors within the p r o v i n c i a l economy are corres-pondingly disadvantaged by the r e s t r i c t i o n ' s e f f e c t on log p r i c e s . In the f i r s t place, depressed raw material prices hold the revenue of the log producing sector below achievable l e v e l s and, i n the long run, constrain the sector's growth. As such, the relevant consideration i n determining employment trade-offs i s not simply the r e l a t i v e labour input i n manufacturing and log exporting but rather the extent to which the a d d i t i o n a l jobs generated i n the processing sector by r e s t r i c t i n g log exports exceed those foregone i n the logging sector, and at what cost of c a p i t a l . In the second place, the Crown, through i t s i n t e r e s t i n resource revenues, i s also affected. On the B.C. coast, only the prices of timber sold on the open market are affected d i r e c t l y by the r e s t r i c t i o n s . However, because stumpage charges on a l l Crown timber i n the region are based on the average s e l l i n g p r ices of Vancouver Log Market transactions, the e f f e c t s of the r e s t r i c t i o n s are transmitted i n d i r e c t l y to Crown revenues. Insofar as log prices are depressed, stumpage revenue w i l l be held below free market l e v e l s as w e l l . To the Crown and the log producing sector, the loss of timber values a t t r i b u t a b l e to the r e s t r i c t i o n s should be viewed as an 41 opportunity cost; to the processing sector the p r i c e support achieved through the depressed log prices should be looked upon as a gain. In e f f e c t , the r e s t r i c t i o n s r e s u l t — a t l e a s t t h e o r e t i c a l l y — i n a r e d i s t r i -bution of income between the Crown and the log producing sector on one hand and the log processing sector on the other. The actual d i s t r i b u t i o n of the opportunity cost between the Crown and the log producing sector i s of p a r t i c u l a r importance and i s depend-ent upon the ' p r o f i t allowance' provisions of the stumpage appraisal system: f o r each $1.00 per cunit that domestic log p r i c e s are held below i n t e r n a t i o n a l free market l e v e l s , the revenue df the log producing sector i s reduced between 10.7c and 21.3c per cunit; Crown revenue i s 18 reduced between 78.7<; and 89.30 per cunit.. Taking account of the average p r o f i t r a t i o (20 percent) and maximum stumpage charges, i t can be estimated that the Crown absorbs something i n the order of 65 to 70 percent of the opportunity cost, a t t r i b u t a b l e to the export The system of timber valuation used i n B.C. apportions the d i f -ference between log s e l l i n g value and allowable operating costs ( i . e . , the conversion return) into stumpage f or the Crown and p r o f i t allowance for the log producing sector on the basis of a p r o f i t r a t i o applied to the sum of operating costs plus appraised upset p r i c e . As the ca l c u -l a t i o n cannot be made d i r e c t l y , the p r o f i t allowance i s determined by applying the p r o f i t r a t i o to the s e l l i n g p r i c e according to the formula p •j^p x SP, where P equals the p r o f i t r a t i o expressed i n decimal form (Pearse et a l . , 1974b). Based on the coastal p r o f i t r a t i o range of 12% to 27%, the p r o f i t allowance w i l l range from between 10.7% to 21.3% of the s e l l i n g p r i c e . The d i s t r i b u t i o n of the opportunity cost indicated i n the text above does not take account of maximum stumpage rates (60% of the con-version return) or minimum stumpage rates (the l e s s e r of: the lowest applicable royalty; 40% of the conversion return; or 10% of the average market p r i c e i n the Vancouver Forest D i s t r i c t ) . If either maximum or minimum rates are i n e f f e c t , an increasing percentage of the burden of the cost would be s h i f t e d to the log producing sector. 42 . . 19 r e s t r i c t i o n s . The extent by which domestic log prices are depressed i s represented at the margin by the export/domestic p r i c e d i f f e r e n -t i a l . When reversed, t h i s measure i d e n t i f i e s the increase i n value to be achieved (on average) by releasing any log from the co n t r o l l e d domestic market. The d i f f e r e n c e i n pr i c e s at the margin may not be i n d i c a t i v e of the t o t a l opportunity cost, however; an accurate measurement would have to take account of the responsive-ness of i n t e r n a t i o n a l log prices to a major change i n log market supplies. Empirical evidence on t h i s matter was provided by McKillop (1973). Using quarterly data f o r the period from 1950 to 1970, McKillop concluded that Japanese demand for U.S. softwood logs was t o t a l l y i n e l a s t i c . This suggests that the l e v e l of log prices i s not an important determinant i n e s t a b l i s h i n g the absolute l e v e l of i n t e r n a t i o n a l demand. It also implies that the t o t a l reaction to an increase i n log supply would be taken up by a decrease i n log p r i c e s . This view was supported by Adams (1977). An econometric analysis to up-date McKillop's study and to iden-t i f y , within reasonable l i m i t s , the p r i c e reaction to an increase i n 19 This f i g u r e pertains to Douglas-fir, hemlock, spruce and cedar only and i s based on c a l c u l a t i o n s presented i n Appendix C. The e f f e c t of minimum stumpage rates on the ca l c u l a t i o n s i s impos-s i b l e to quantify because of the lack of precise operating cost information. Nevertheless, i t can be presumed that the e f f e c t i s r e l a t i v e l y minor. B.C. log exports i s beyond the scope of t h i s t h e s i s . Nonetheless, a general i n d i c a t i o n of the magnitude of the opportunity cost can be gained by viewing the responsiveness of log prices within s p e c i f i e d l i m i t s . Using Vancouver Log Market average s e l l i n g p r i c e s , average export prices and timber harvest volumes, the t o t a l loss of log values which can be a t t r i b u t e d to the r e s t r i c t i o n s f o r Douglas-fir, hemlock, spruce and cedar i n 1975 (for the extreme case, i . e . , no p r i c e decrease) 20 can be estimated at $192 m i l l i o n . Even a 90 percent reduction i n the d i f f e r e n c e between world and domestic prices as the r e s u l t of an increase i n B.C. log exports would leave the estimate of the log values foregone at $19.2 m i l l i o n . It seems reasonable to presume that the actual value l o s s i n 1975 would have f a l l e n somewhere between these two f i g u r e s . Whatever the precise f i g u r e , i t i s clear that the d o l l a r value of the opportunity cost i s s u b s t a n t i a l ; that it." leads to losses i n employment, income and taxation revenue that otherwise would have been generated by the log producing sector; and that i t leads to the loss of Crown stumpage revenue. Based on t h i s examination i t i s clear that the r e d i s t r i b u t i o n of income represented by the opportunity cost warrants e x p l i c i t i n c l u s i o n i n any discussion of the trade-offs a s s o c i -ated with the r e s t r i c t i o n / n o n - r e s t r i c t i o n argument. 4.3.2. Economic E f f i c i e n c y Once the way the r e s t r i c t i o n s work to a s s i s t the domestic process-ing industry has been c l a r i f i e d i t becomes possible to consider some of the t r a d i t i o n a l n o n - r e s t r i c t i o n arguments i n a more r e a l i s t i c context. 20 The c a l c u l a t i o n s underlying these estimates, along with an i n d i c a t i o n of the d i s t r i b u t i o n of the cost between the Crown and the log producing sector, are presented i n Appendix C. While the r e d i s t r i b u t i o n of income i n favour of the domestic processing sector does not i n i t s e l f constitute a cost to the p r o v i n c i a l economy, the depressed nature of domestic log pr i c e s does a f f e c t the a b i l i t y of those p r i c e s to optimize resource a l l o c a t i o n s . In t h i s way a r e a l cost i s incurred: a reduction i n economic efficiency,- or stated otherwise, a loss of p r o v i n c i a l economic welfare. This occurs i n two basic areas: i n terms of the growth of domestic industry i n l i n e with i n t e r n a t i o n a l comparative advantages and with respect to the harvesting and u t i l i z a t i o n of timber. The growing comparative disadvantage of B.C. processors r e l a t i v e to competing producers i n other countries i s becoming increasingly prevalent (Farrow, 1977; Shields, 1977). In recognition of t h i s , the Pearse Commission emphasized the need to encourage those a c t i v i t i e s i n which domestic firms enjoy a comparative trade advantage and, beyond that, the importance of public p o l i c i e s which encourage productive e f f i c i e n c y (pp. 319, 375-6). In t h i s regard, the Commission stressed the valuable r o l e to be played by intermediate product ( i . e . , raw material) prices (pp. 321-2). The 'comparative advantage/log p r i c e ' argument can be summarized as follows: Export r e s t r i c t i o n s encourage the growth of the processing sector by holding raw material prices below free market l e v e l s and increasing the v i a b i l i t y of a d d i t i o n a l domestic production. These production increases can occur through the expansion of e x i s t i n g firms, through the introduction of new firms or through a combination of both. The growth of the manufacturing sector i n t h i s way reduces the indus-try ' s o v e r a l l l e v e l of e f f i c i e n c y but, more importantly, the growth occurs i n production that i s more co s t l y and that i s only marginally p r o f i t a b l e under the given circumstances. In face of competitive market prices and r e l a t i v e l y increasing costs for the other inputs, the sustainment of t h i s production w i l l require increasingly large amounts of p r i c e support. This argument- i s supported by the evidence. For example, the p r i c e support which accrued to domestic m i l l s processing Douglas-fir i n 1970 was .$,16.12 per cunit (Table 3-10). Following the i n t e r n a t i o n a l monetary revaluations of 1972, the p r i c e support accruing to the same processors increased to $98.95 per cunit. And, while the l e v e l of p r i c e support f e l l somewhat i n 1974 and 1975, the stimulation of the world economy and r e v i s i o n s to currency values ( F a i r b a i r n , 1977) can be expected to increase the d o l l a r value of p r i c e support required i n the future to maintain domestic production at e x i s t i n g l e v e l s . Even more important i s the f a c t that the p r i c e support occurs at the p a r t i a l expense of the log producing sector—where free market prices suggest that p r o v i n c i a l trade advantages l i e . In t h i s regard, a change i n p o l i c y which led to an increase i n log prices would, i n the long-run, force a marginal re-adjustment i n industrials structure between the log producing and processing sectors. While the processing sector would be forced to contract, the trade-off would involve the elimination of i n t e r n a t i o n a l l y i n e f f i c i e n t lumber production to be replaced to some 21 extent by i n t e r n a t i o n a l l y e f f i c i e n t log production. The average 21 The information regarding the a l l o c a t i o n of the income r e d i s -t r i b u t i o n costs between :the Crown and the log producing sector (section 4.3.1.) ra i s e s important questions with respect to the Pearse Commis-sion's argument that elimination of the r e s t r i c t i o n s would not r e s u l t i n a reduction i n t o t a l p r o v i n c i a l employment (p. 310). Insofar as the log producing sector bears l e s s than the f u l l burden of the cost, elim-i n a t i o n of the p r i c e support accruing to the processing sector ( c e t e r i s  paribus) would not r e s u l t i n an equivalent boost to the log producing sector. 46 e f f i c i e n c y of the processing sector would increase and the a b i l i t y of the industry to compete p r o f i t a b l y , without p r i c e support, i n world markets i n the long-run would improve. The second area i n which the a l l o c a t i v e a b i l i t i e s of log pr i c e s are affected pertains to the physical u t i l i z a t i o n of the resource—both i n terms of wood as a productive input and i n terms of timber as an output. In the f i r s t place, depressed raw material prices encourage domestic m i l l s to. choose manufacturing processes that involve more intensive use of the under-priced input and les s exacting production techniques than would be the case i f prices were higher. Speaking on the subject of timber u t i l i z a t i o n i n a recent address to the Council of Forest Industries the Minister of Forests, T. M. Waterland (1977), c r i t i c i z e d the coastal forest industry for i t s uneconomic timber a l l o -cations and use of out-dated production f a c i l i t i e s . Increases i n log prices r e l a t i v e to the prices of other productive inputs would, i n the long run, induce a marginal r e a l l o c a t i o n i n factor combinations, more exacting u t i l i z a t i o n and the production of higher valued products. In the second place, the depression of log p r i c e s — i n s o f a r as i t a f f e c t s the value of timber at the margin—constrains the a b i l i t y of the logging industry to increase the i n t e n s i t y of timber harvests and to harvest high cost timber stands on a p r o f i t a b l e basis. In t h i s regard, Pearse (p. 312) outlined the contradictory natures of the export r e s t r i c t i o n s and the p r o v i n c i a l government's r i g i d standards of timber u t i l i z a t i o n . Associated with t h i s i s the r e l a t i o n s h i p between the r e s t r i c -tions and general forest management. The New Zealand Forest Service, i n p a r t i c u l a r , has examined t h i s subject i n some d e t a i l and has found \ s i g n i f i c a n t benefits i n terms of increased returns on a f f o r e s t a t i o n investment to be achieved through log exporting (Fenton et a l . , 1968; Usmar and Yska, 1971; Fenton and Dick, 1972a & b). 4.3.3. D i s t r i b u t i o n of Losses and Gains from R e s t r i c t i o n In a d d i t i o n to the income r e d i s t r i b u t i o n and economic e f f i c i e n c y consequences of the r e s t r i c t i o n s , there ex i s t s a t h i r d area of concern: the inequitable d i s t r i b u t i o n of the losses and gains which r e s u l t from export r e s t r i c t i o n . In t h i s regard, the a l l o c a t i o n of the opportunity costs of the r e s t r i c t i o n s between the Crown and the log producing sector along with the consequences of reduced logging sector growth have already been i d e n t i f i e d . As with the costs, a number of questions r e l a t i n g to the d i s t r i b u t i o n of the gains ( i . e . , the p r i c e support accruing to the processing industry) are evident. A number of v a l i d arguments can be made for using Crown revenue as an incentive for i n d u s t r i a l investment (Haley and Smith, 1976) and, i n t h i s regard, a transfer of income from the Crown to the log process-ing sector might be j u s t i f i a b l e . The indiscriminate a l l o c a t i o n of the subsidy through export r e s t r i c t i o n s and reduced log prices and stumpage charges i s questionable, however. Under the present system the Crown has no c o n t r o l over the a l l o -cation of the p r i c e support. In the f i r s t place, a l l of the benefits accrue to the forest industry (when public p r i o r i t i e s or investment a l t e r n a t i v e s might suggest a d i f f e r e n t a l l o c a t i o n ) . And secondly, within the forest industry the benefits are d i s t r i b u t e d i n accordance with the volume and q u a l i t y of raw material consumption (rather than i n response to s p e c i f i c c r i t e r i a to meet s p e c i f i e d needs or o b j e c t i v e s ) . A more e x p l i c i t and d i f f e r e n t i a t i n g form of p r i c e support could be used 48 to eliminate these equity problems while, at the same time, being more e f f i c i e n t i n terms of the cost to the pu b l i c treasury. 4.4. Summary and Implications f o r P o l i c y In summary, the objectives of t h i s chapter have been twofold: f i r s t , to c l a r i f y the issue surrounding the question of log export r e s t r i c t i o n ; and second, to i d e n t i f y the existence, the magnitude (within l i m i t s ) and the d i s t r i b u t i o n a l considerations of c e r t a i n economic consequences of the p o l i c y . The analysis suggests that the opportunity costs of r e s t r i c t i n g the export of unmanufactured logs are sub s t a n t i a l and that these costs should be considered e x p l i c i t l y i n any examination of the e f f i c i e n c y of log export r e s t r i c t i o n s . In t h i s regard, t h i s chapter has not attempted a d e t a i l e d accounting of a l l of the costs and benefits associated with the r e s t r i c -t i v e export p o l i c y . To do so would be a complicated undertaking i n v o l v -ing the consideration of s o c i a l as well as f i n a n c i a l matters. Nor has th i s chapter attempted to examine the r e l a t i v e e f f i c i e n c y of a l t e r n a t i v e support programs. Both of these matters are areas f o r further research. It i s important to note at t h i s point that a decision to eli m i n -ate the export r e s t r i c t i o n s (whether to be replaced by some other form of assistance or not), could not be effectuated i n one step. The coastal forest industry has evolved within the protection and the security of the r e s t r i c t i o n s ; the s i z e and structure of the industry and the d i s t r i b u t i o n of raw materials amongst the firms i s dependent, to what appears to be a large extent, upon them. In t h i s regard, the large d i f f e r e n t i a l between domestic and export log pr i c e s suggests that immediate elimination of the r e s t r i c t i o n s would r e s u l t i n s u b s t a n t i a l disruptions to the domestic industry's raw material supply. This, i n turn, would lead to short-term s o c i a l d i s l o c a t i o n s and the waste of in-place c a p i t a l . If the r e s t r i c t i o n s were to be replaced by an a l t e r n a t i v e form of support, a period of t r a n s i t i o n would s t i l l be required to minimize the costs of the p o l i c y r e v i s i o n . Even i f the decision was made—on either economic or p o l i t i c a l 22 grounds — t o maintain the r e s t r i c t i o n s , the method of c o n t r o l l i n g the flow of exports should be examined. In t h i s matter the r o l e of the economist extends beyond the i d e n t i f i c a t i o n and q u a n t i f i c a t i o n of the costs and benefits associated with a l t e r n a t i v e p o l i c y choices to the examination of the r e l a t i v e e f f i c i e n c i e s of a l t e r n a t i v e regulatory mechanisms. S i g n i f i c a n t l y , the method of export r e s t r i c t i o n employed i n B r i t i s h Columbia has been subjected to even more c r i t i c i s m than the question of r e s t r i c t i o n i t s e l f . Many firms and associations have c a l l e d f or changes to the e x i s t i n g system of c o n t r o l . The Pearse Com-mission devoted su b s t a n t i a l resources to examining the method of con-t r o l and concluded that i t was i n need of r e v i s i o n . And, most impor-t a n t l y , the B.C. Forest Service has been concerned about the e f f i c i e n c y consequences of the administrative control system. In l i n e with these concerns, the focus of t h i s thesis now turns to an economic examination of the method of export regulation. 22 An i n t e r e s t i n g discussion of the c o n f l i c t between p o l i t i c a l decision-making and economic e f f i c i e n c y i n B.C. i s presented i n Black (1968). CHAPTER 5 THE METHOD OF EXPORT REGULATION To control the flow of exports, both the p r o v i n c i a l and fed e r a l governments have turned to systems of administrative regulation; the a d v i s a b i l i t y of exporting i n d i v i d u a l log packages i s bu r e a u c r a t i c a l l y determined and export authorization i s designated by means of permits. For those logs subject to the p r o v i n c i a l l e g i s l a t i o n , permits are issued by the B.C. Forest Service on the authority of the Lieutenant-Governor i n Council. Those logs being exported to foreign countries require permits issued by the Federal Minister of Industry, Trade and Commerce. To provide the basis f o r the examination of the method of export regulation that i s undertaken i n Chapter 6, t h i s chapter outlines the structure of the control system; describes the methodology i t uses to determine export e l i g i b i l i t y ; and discusses the way i n which the con-t r o l system i s based on the i n t e r p r e t a t i o n of the l e g i s l a t i o n . 5.1. Method of Control 5.1.1. Review Procedure With the same objectives underlying t h e i r respective p o l i c i e s the two l e v e l s of government have harmonized t h e i r control systems. The fed e r a l government simply endorses export permits granted by p r o v i n c i a l a u t h o r i t i e s and applies p r o v i n c i a l c r i t e r i a i n regulating the export of 50 51 timber that i s not subject to the p r o v i n c i a l controls. To obtain advice on the a d v i s a b i l i t y of exporting logs subject to p r o v i n c i a l l e g i s l a t i o n , the B.C. government, i n 1918, established the Log Export Advisory Committee. The membership of the Committee con-s i s t s of representatives from the i n d i v i d u a l sectors of the wood proces-sing industry, logging contractors, log exporters, labour and o t h e r — including relevant government o f f i c i a l s . I t i s the task of t h i s informal committee to review i n d i v i d u a l export applications and, based on i t s members' s p e c i a l i z e d knowledge of industry conditions, to make recommen-dations to the respective governments with regard to the a d v i s a b i l i t y of 23 export. The Committee meets monthly and, on each occasion, i s formally convened twice: once under the chairmanship of a representative of the B.C. Forest Service to consider p r o v i n c i a l applications and again, under the chairmanship of an o f f i c i a l of the Department of Industry, Trade and Commerce, to deal with those applications subject to the fe d e r a l controls only. The i n t e r p r e t a t i o n of the statute over the years has made i t c l e a r that raw material exports are only to be allowed i f the logs i n question are 'surplus' to the input requirements of domestic m i l l s . While the Committee has received no statutory guidance with respect to the method or the c r i t e r i a to be used to determine export a d v i s a b i l i t y , i t has introduced a methodical system for judging the 'surplus' nature of the 24 material proposed for export. 23 In 1969, the f e d e r a l export regulations were tightened and the terms of reference of the Committee expanded to include those exports subject only to the f e d e r a l l e g i s l a t i o n . 24 See section 5.2. 52 The procedures used by the Committee for t h i s purpose have been revised numerous times. Those currently employed require that once the logs have been scaled, the applicant n o t i f y the appropriate D i s t r i c t Forester of h i s i n t e n t i o n to apply for export permission and then advertise the logs for sale i n the Vancouver and/or l o c a l newspapers according to s p e c i f i e d procedures. A f t e r two weeks, the prospective exporter submits a formal a p p l i c a t i o n , including copies of any o f f e r s received, to the D i s t r i c t Forester. A l l applications are forwarded to the Vancouver o f f i c e of the Forest Service and subsequently to the Log Export Advisory Committee. When the Committee recommends that a p r o v i n c i a l export a p p l i c a -t i o n be approved, that recommendation i s passed to the government which, i f i t agrees with the recommendation, passes an Order-in-Council author-i z i n g the D i s t r i c t Forester to issue an export permit once a l l relevant terms and conditions (such as the payment of Crown charges) have been met by the applicant. Once n o t i f i e d of the Order-in-Council, the pros-pective exporter must formally apply for the permit. This l a s t step i s a bookkeeping formality which ensures the payment of a l l charges and allows the Forest Service to record the volume of timber a c t u a l l y exported. The exporter must also obtain a permit from the regional o f f i c e of the f e d e r a l Department of Industry, Trade and Commerce. For those exports subject to the federal l e g i s l a t i o n only, a sim-i l a r procedure i s undertaken—although the D i s t r i c t Forester i s not i n -volved. The logs must be advertised and the advertisement and o f f e r s 25 ( i f any) submitted to the Vancouver o f f i c e of the Forest Service. 25 In t h i s s i t u a t i o n , the p r o v i n c i a l Forest Service acts as an 'agent' of the federal government. 53 The Forest Service compiles the applications and presents them to the feder a l meeting of the Committee. I f export approval i s granted, permits are issued by both the Department of Industry, Trade and Com-merce and the B.C. Forest S e r v i c e — t h e f e d e r a l permit i n d i c a t i n g export authority; the p r o v i n c i a l permit to record the volume of exports. The export permits p e r t a i n to s p e c i f i c logs and usually remain i n e f f e c t f o r 120 days. If the permit expires before the logs are exported, the a p p l i c a t i o n procedure must be undertaken a second time. If an o f f e r to purchase the logs has been received from the domestic market, the Committee i n v a r i a b l y recommends that the ap p l i c a -t i o n be rejected; the 'reasonableness' of the domestic p r i c e s i s not considered. While he i s not required to s e l l the material to the m i l l , the only recourse a v a i l a b l e to the applicant when he considers the domestic o f f e r to be inadequate i s d i r e c t appeal to the p r o v i n c i a l 26 Min i s t e r of Forests. I t should be emphasized at t h i s point that i t i s the Committee's function to provide the Lieutenant-Governor i n Council ( i . e . , the p r o v i n c i a l Cabinet) with advice and, while the Cabinet main-tains f i n a l decision-making authority with respect to export, the Com-mittee's recommendation has been overturned i n very few cases. The Committee i s aware of the time involved i n the a p p l i c a t i o n procedure and has attempted to develop an e f f i c i e n t and equitable system of review. The system i n e f f e c t u n t i l l a t e 1975 was based on the applicant obtaining written r e f u s a l to purchase the material from three appropriate m i l l s . These l e t t e r s stood as evidence that the logs had 26 This procedure applies for those logs subject to the p r o v i n c i a l c o n t r o l s ; there does not appear to be a set procedure for review when the logs are subject to the fede r a l controls only. Presumably, appeal could be-made to the Minister of Industry, Trade and Commerce. 54 been offered for sale on the market and were 'surplus' to domestic m i l l -ing requirements. This procedure often required three to four months 27 before f i n a l adjudication and was subject to a number of abuses. The present system—with advertising as the main f e a t u r e — i s more consistent and much f a s t e r . From the time of n o t i f i c a t i o n of the intent to apply for export permission to the issuance of the permit, the new procedure usually requires between f i v e weeks and two months. 5.1.2. Timber Tax In addition to the review procedures, authorized exports that f a l l under p r o v i n c i a l j u r i s d i c t i o n are subject also to a surcharge, known informally as the 'timber tax'. The statutory basis for the 'tax' i s contained i n section 97 of the Forest Act and, while some question e x i s t s with respect to the c o n s t i t u t i o n a l v a l i d i t y of the Province levying such 28 a charge, i t s h i s t o r y ( i n i t s d i f f e r e n t forms) dates back to the 1888 royalty rebate on manufactured timber exports. There i s no formal schedule of tax rates or charges; the levy applied to each export package i s established by the Order-in-Council authorizing the export of the material. Nevertheless, the 'tax' has been charged on a r e l a t i v e l y consistent basis i n the past. When i t was introduced i n i t s present form as a d i r e c t charge on the export of unmanufactured logs (apparently during the mid-1950's), the 'timber tax' 29 was set at 50c per cunit. It was raised i n i t i a l l y to 90c per cunit 27 A discussion of these abuses i s contained i n Appendix E (p. E3) of the Pearse Commission Report. 28 See section 7.2. for a discussion of the c o n s t i t u t i o n a l ques-tions associated with the 'timber tax'. 29 Forest Service records are unclear with respect to both the date that the 'timber tax' was introduced as a d i r e c t charge and the date that the levy was increased to 90c per cunit. and, i n October 1973, to $2.00 per cunit. In February 1974, several d i f f e r e n t rates were introduced to r e f l e c t the wide discrepancies between the export p r i c e s of d i f f e r e n t species: $2.00 per cunit for I n t e r i o r pulpwood; $5.00 per cunit for cottonwood; and $10.00 per cunit f o r a l l other species except cypress which, bringing exception-a l l y high prices i n Japan, was subject to a levy of $40.00 per cunit. These rates are the same today except f o r Coastal pulpwood which was reduced to $2.00 per cunit i n mid-1976. The objective underlying the charging of the 'timber tax' i s not well documented. Informal discussions suggest that i t i s a charge 'in l i e u of l o s t manufacturing b e n e f i t s ' but, insofar as i t a f f e c t s the return a v a i l a b l e from the sale of logs on the export market, the 'tax' must be considered to be an a d d i t i o n a l deterrent to the exporting of raw materials. 5.2. Interpretation of the Export Provisions Although the l e g i s l a t i o n makes provisions for log exports, i t does not i n d i c a t e what exports to allow or when to allow them. State-ments by government o f f i c i a l s , however, have made i t c l e a r that permit-t i n g log exports i s to be viewed s t r i c t l y as a secondary objective of the p o l i c y ; the primary objective i s to ensure that whenever possible the timber covered by the statute i s used or manufactured i n the province. Under t h i s i n t e r p r e t a t i o n , only those logs considered 'surplus' to the requirements of the domestic processing industry are e l i g i b l e f o r export. More s p e c i f i c a l l y , a number of these statements have been i n s t r u c -tions to or comments by the Log Export Advisory Committee pertaining to 56 the i n t e r p r e t a t i o n of 'surplus'. Examination of these statements makes i t c l e a r that the choice of an administrative review system as the means of export regulation, as well as the methodology and c r i t e r i a used by the system, were l o g i c a l consequences of the i n t e r p r e t a t i o n of the export provisions and, beyond that, the i n t e r p r e t a t i o n of 'surplus'. The export provisions have never been interpreted as intending to allow logging for the deliberate purpose of export. The Hon. T. D. P a t t u l l o , as Minister of Lands i n 1927, s a i d : There i s no i n t e n t i o n of permitting even a semblance of logging for export. It would be well for the operators to take note now i n order that they may not f i n d themselves i n an awkward p o s i t i o n . (Author unknown, 1941: p. 5) This p o s i t i o n has been r e i t e r a t e d numerous times over the years ( W i l l i s t o n , 1968) and c l e a r l y places log exports i n the category of a l a s t r e s o r t — t o be allowed only i n emergency si t u a t i o n s i r r e s p e c t i v e of economic conditions or the benefits that might otherwise r e s u l t from d i r e c t exports. The 'no harvest f o r export' r u l e i s probably the most important consideration i n terms of the methodology used to determine export e l i g i b i l i t y . Under t h i s d e f i n i t i o n , the 'surplus' must a c t u a l l y e x i s t at the time of a p p l i c a t i o n f or export approval. The review procedures have been designed to demonstrate the existence of the 'surplus' insofar as the logs must be on the market ( i . e . , they must be scaled) before the a p p l i c a t i o n i s made. The second important i n t e r p r e t a t i o n i s that 'surplus' has been defined on a ph y s i c a l basis. To provide domestic m i l l s with security of l og supply, the government has intended since the inception of the p o l i c y that the d i f f e r e n c e between export and domestic log prices should 57 not be considered i n the determination of export a d v i s a b i l i t y . Instruc-tions from the Minist e r of Lands to the Log Export Advisory Committee i n 1932 r e f l e c t t h i s f a c t : . . . the requirements of the l o c a l m i l l s are of paramount consideration and the spread i n p r i c e of logs between here and the other side i s a matter that should not be considered by your Committee as a governing factor i n dealing with log export. (Author unknown, 1941: p. 6) The Committee, however, has extended the government's i n s t r u c t i o n into a t o t a l disregard f o r prices by refusing to consider the 'reason-ableness' of the o f f e r s made by domestic firms on material f o r which export approval i s being sought. As a r e s u l t , only when the input requirements of a l l domestic m i l l s are s a t i s f i e d and a phys i c a l over-supply of material a r i s e s on the domestic market do logs become e l i g i b l e f or export. Together, the int e r p r e t a t i o n s of the p o l i c y which define 'surplus' i n the above manner and require that the 'surplus' be demonstrable pro-vide the basis f o r the system of con t r o l : demonstration requires that the logs be on the market at the time of export a p p l i c a t i o n while the d e f i n i t i o n of 'surplus' necessitates a search f o r possible domestic buyers. Insofar as neither of these c r i t e r i a are true economic v a r i -ables (see Chapter 6), a system of administrative regulation provides the l o g i c a l choice as the means of c o n t r o l l i n g the flow of e x p o r t s — o n l y through bureaucratic examination of export applications could the meeting of the two c r i t e r i a and the intended s e c u r i t y of log supply be ensured i n every case. In summary, t h i s chapter has described the system of export regu-l a t i o n , outlined the objectives of the system and provided a discussion of the t r a n s i t i o n between the two. In doing so, i t has established the the basis for examining the system from an economic standpoint. CHAPTER 6 THE ECONOMIC RATIONALITY OF THE METHOD OF EXPORT REGULATION While the primary c r i t i c i s m of B r i t i s h Columbia's log export r e s t r i c t i o n s pertains to the implications of holding domestic log prices below i n t e r n a t i o n a l p r i c e l e v e l s , the method of regulating the flow of exports through the administrative review/permit/timber tax system has, i n i t s e l f , a number of important economic consequences. The c r i t i c i s m s of the export control system can be related to four areas: the p h y s i c a l d e f i n i t i o n of 'surplus'; the requirement that the 'surplus' be demonstrable; the abuses which the system encourages; and the d i s t r i b u t i o n of the gains r e s u l t i n g from export log sales. Each of these concerns i s r e l a t e d to the fact that the system of export regula-t i o n i s based on a r b i t r a r y , administrative controls which i n t e r f e r e with the workings of the log market rather than acting as a l o g i c a l adjunct to i t . The f i r s t two a r i s e because the system ignores the c r i t e r i a of economic e f f i c i e n c y . The t h i r d i s an equity consideration. The fourth combines both a lack of e f f i c i e n c y recognition and equity problems which a r i s e from the r i g i d i t y of the system. Taken together, these c r i t i c i s m s r a i s e important questions with respect to the economic r a t i o n a l i t y of the method of export regulation. It i s important to emphasize that a complete d i s t i n c t i o n between the objectives of the l e g i s l a t i o n , the l e v e l of protection provided by the r e s t r i c t i o n s and the method of c o n t r o l l i n g the flow of exports can-58 59 not be drawn. Indeed, as explained i n Chapter 5, the c r i t e r i a and methodology used by the control system to regulate the flow of exports are based d i r e c t l y on the extreme manner i n which the l e g i s l a t i o n has been interpreted. As a r e s u l t , any c r i t i c i s m of the method of export control must be viewed as a c r i t i c i s m of the i n t e r p r e t a t i o n of the p o l i c y as well. 6.1. Physical Interpretation of 'Surplus' History has shown that the Log Export Advisory Committee has tended to base i t s recommendations of export a d v i s a b i l i t y on the simple c r i t e r i a of whether or not an o f f e r to purchase the material has been received from a domestic m i l l . The 'reasonableness' of the prices offered, e i t h e r r e l a t i v e to the export o f f e r or r e l a t i v e to some standard on the domestic , 30 market is not considered. While i t has been the government's inten t i o n that the diffe r e n c e between export and domestic prices not be considered i n the Committee's de l i b e r a t i o n s , the 'reasonableness' of the domestic o f f e r r e l a t i v e to other domestic prices i s another matter. Interpreting 'surplus' without due consideration to domestic p r i c e l e v e l s ignores the objective of i n d u s t r i a l and a l l o c a t i v e e f f i c i e n c y that i s inherent i n other Crown timber p r i c i n g procedures. Stumpage appraisal c a l c u l a t i o n s , f o r example, provide e x p l i c i t incentives f o r e f f i c i e n c y through the use of the 'operator of average e f f i c i e n c y 1 concept. The government has recog-nized t h i s and has urged the Committee to consider domestic p r i c e 'reasonableness' i n t h e i r d e l i b e r a t i o n s . The Committee members from 30 In the past the Committee has disallowed domestic o f f e r s which were considered ' f r i v o l o u s ' . Apparently, however, t h i s has not occurred for the l a s t three or four years. 60 industry continue to refuse to do so, however, ostensibly out of concern that discussions of domestic log p r i c e s would constitute a contravention 31 of f e d e r a l anti-combines laws. Economic theory suggests that a firm's a b i l i t y to pay for a pro-ductive input w i l l be dependent upon that firm's r e l a t i v e l e v e l of e f f i c -iency (Scitovsky, 1971). That i s , within constraints, the more e f f i c i e n t a f i r m the higher the p r i c e s i t w i l l be able to pay for i t s raw materials; and conversely, the l e s s e f f i c i e n t a f i r m the lower the prices i t w i l l be able to pay. In t h i s respect, the Committee's decision to r e j e c t export applications on the basis of any o f f e r can lead to firms at the lower end of the e f f i c i e n c y scale being able to obtain raw material supplies and being able to obtain them at l e s s than market p r i c e s . In such a s i t u a -t i o n , the i n e f f i c i e n t domestic processor benefits at the d i r e c t expense of the domestic log producer. This i s referred to i n t h i s thesis as 32 'dire c t p r i c e support'. Indications during the l a s t year were that 'dire c t p r i c e support' was evident i n only a r e l a t i v e l y small number of instances. From June 1976 to February 1977 the Log Export Advisory Committee rejected seven export applications out of a t o t a l of 243; the rejected applications accounted for 1.7 percent of the t o t a l volume of logs for which export approval had been sought during the period (Forest Service, 1977). 31 Insofar as the Committee i s acting as a government appointed advisory body, i t i s u n l i k e l y that the law would apply i n t h i s s i t u a t i o n . The issue could be s e t t l e d simply by requesting the Bureau of Competi-t i o n P o l i c y to review the matter and advise on any possible contraven-tions of the Combines Investigation Act. 32 The transfer of income involved i n t h i s s i t u a t i o n occurs between two s p e c i f i c p a r t i e s . I t i s d i f f e r e n t , therefore, than the r e d i s t r i b u t i o n of income described i n Chapter 4 which i s a general tran s f e r of income between sectors. 61 Each of the seven applications was rejected on the grounds that an o f f e r had been received from a domestic m i l l . Importantly, i n each case, the domestic o f f e r was below the Vancouver Log Market average s e l l i n g p r i c e . In two of the cases, the log s e l l e r argued that the offered prices were below delivered costs. Both times the log s e l l e r offered to s e l l the material to the domestic m i l l i f the m i l l would be w i l l i n g to meet delivered costs. In each case the m i l l refused; the log s e l l e r s followed through with t h e i r export applications and the applications were rejected by the Committee. Examination of the seven rejected applications suggests that the 'direct p r i c e support' occurring i n i n d i v i d u a l instances can be substan-t i a l . For example, i n oneccase involving approximately 600 cunits of spruce, the following prices (shown i n comparison to the applicable V.L.M. average monthly prices) were offered by a domestic m i l l (Forest Service, 1977): domestic o f f e r V.L.M. average blue spot $ 265.63/cunit $ 396.08/cunit white spot 234.38 295.86 No. 2 100.00 127.51 No. 3 87.50 89.62 In t h i s case, the 'direct p r i c e support' was calculated to be i n the range of $25,000. In another case, inv o l v i n g 1,000 cunits of Douglas-f i r , the 'direc t p r i c e support' t o t a l l e d over $36,000. These figures notwithstanding, when the i n d i v i d u a l cases are aggregated and considered within the context- of t o t a l market transactions, i t becomes clear that the t o t a l amount of 'direc t p r i c e support' that occurred during the period i n question was r e l a t i v e l y i n s i g n i f i c a n t . Insofar as the figures for t h i s period r e f l e c t general market conditions i n coastal B.C.—export permits were r e l a t i v e l y easy to 62 obtain i n l a t e 1976 and early 1977—the number of rejected applications (and, most l i k e l y , the aggregate l e v e l of p r i c e support) could be expected to increase as the balance i n the log market improves. Nevertheless, t h i s i s not the issue. The f a c t s remain that 'direct p r i c e support' may occur at any time; that i t involves an inequitable transfer of income between a log producer and a log processor; and that i t i s based on an i n t e r p r e t a t i o n of 'surplus' which ignores the c r i t e r i a of e f f i c i e n c y and which i s , therefore, inconsistent with other Crown timber p r i c i n g p o l i c i e s . 6.2. Demonstration of 'Surplus' The actual demonstration of the ' s u r p l u s ' — t h e basis of the export c o n t r o l system—may involve even greater economic costs than the d e f i n i t i o n of 'surplus'. The requirement that the 'surplus' be demon-strated i s intended to ensure that a l l domestic m i l l s receive the oppor-tunity to b i d on the material i n question and to eliminate the p o s s i b i l -i t y of harvest for the purpose of export. In doing so, however, the requirement adds substantial time to the review process, creates confu-sion i n the planning of log harvests, a f f e c t s the a b i l i t y of exports to meet t h e i r intended objective and ignores the economic, s o c i a l and f o r e s t management benefits to be gained from allowing some d i r e c t exports. Under the present export control system i t i s impossible for the prospective exporter to enter into a f i r m contract with a foreign buyer u n t i l the necessary permits have been granted. While waiting for export approval the applicant must incur a d v e r t i s i n g , inventory and administrative costs. If the permit i s granted, the knowledge that the 63 material i s domestically 'surplus' may, i n some cases, erode the exporter's bargaining power with foreign buyers thereby a f f e c t i n g his a b i l i t y to obtain maximum value for h i s material on the export market. During t h i s period the exporter cannot bring together the desired s i z e of export package or f i n a l i z e shipping arrangements. Both of these factors tend to prolong the length of storage and increase the r i s k of 33 the permit expiring before the logs are shipped. In addition, extended inventory periods increase the p o s s i b i l i t y of insect and marine borer damage and the subsequent reduction i n log values. Taken together these factors increase the c a p i t a l requirements for prospec-t i v e exporters, making i t almost impossible for small operators to pursue export opportunities. It has been stated that the objective of allowing .'surplus' logs to be exported i s to r e l i e v e congestion and thereby improve the a l l o c a t -ive e f f i c i e n c y of the domestic log market (Author unknown, 1941; C.O.F.I., 1971). Given t h i s objective, the requirement that the 'surplus' be demonstrated may be s e l f - d e f e a t i n g . The approval proce-dure comes into play only once the 'surplus' has arisen. The system does not attempt to forecast 'surpluses' nor does i t take steps to ensure that 'surpluses' do not a r i s e . Secondly, once the permit has been granted, the exporter may f i n d himself attempting to s e l l logs into a market which i s also over-supplied. This was the case i n mid-1976 when a 'surplus' commonly believed to be i n the range of one m i l l i o n cunits of low grade hemlock/balsam was a v a i l a b l e on the domestic 33 If the permit expires p r i o r to shipment the a p p l i c a t i o n proce-dure must be undertaken again. To avoid t h i s , exporters often tow t h e i r booms to Puget Sound, inc u r r i n g a d d i t i o n a l costs i n the process. 64 market. Export permits were easily obtainable but there was virtually no demand for the logs in foreign markets. Very l i t t l e material was exported and the costly over-supply situation was extended. More important is the fact that the exporter cannot apply for export permission until after the logs have been scaled. This dictate, which follows from the 'no harvest for export' interpretation of the policy, implicitly assumes that the long-term benefits to the province from domestic manufacture w i l l be greater than from log export in a l l cases except when a 'surplus' of logs exists. The blanket nature of this requirement ignores the differences in economic conditions in various regions of the province, the forest management benefits to be gained from increasing the harvest of decadent timber and the increase in present value that would result from an increase in the rate of harvest in general. In addition, the requirement that the timber be harvested before export application can add substantial confusion to log harvest planning. The lack of knowledge of which market(s) w i l l be available to him often leaves the log producer in a vague position with respect to the financial v i a b i l i t y of his operation. This is particularly true in high cost/low quality timber areas such as those evident in the Prince Rupert Forest 34 District (Prince Rupert Forest Products, 1975). If the logs can be sold to export buyers, the high prices w i l l ensure the p r o f i t a b i l i t y of the operation but, i f the logs must be sold on the domestic market, the prices may not be sufficient to cover the costs of harvest. The result In addition to high harvesting costs and low timber values, log producers in the Prince Rupert Forest District often must absorb transportation costs to mills in the Vancouver Forest District. 65 i s that many independent logging operators are not w i l l i n g to take the r i s k that they w i l l be forced to s e l l d o m e s t i c a l l y — t h e y are c l o s i n g down t h e i r operations (Manning, 1977) and fo r c i n g further reductions i n employment. This i s a p a r t i c u l a r l y serious matter i n the Prince Rupert area where unemployment rates are the highest i n the province ( S t a t i s t i c s Canada, 1977), the percentage of overmature timber the highest i n the province (Forest Service, 1975b) and the r a t i o of actual cut to allow-able annual cut the lowest i n the province (Forest Service, 1975a). 6.3. Abuses of the System The method and c r i t e r i a used to determine export e l i g i b i l i t y i n v i t e abuse by both domestic m i l l s and exporters. Two good examples of how t h i s abuse could a r i s e are 'application blocking 1 and 'the use of market power'—both of which are due to the p r o f i t opportunities created by the r i g i d i t y of the administrative system. Domestic m i l l s r e a l i z e that any o f f e r i s s u f f i c i e n t to block export approval and i n t e n t i o n a l l y could enter uncompetitively low prices on proposed export material. I f the m i l l was able to purchase the material at the bid p r i c e i t would benefit i n terms of lower than average raw material p r i c e s . Even i f the m i l l did not require the logs immediately and had to hold them i n inventory, a f i n a n c i a l incen-t i v e f o r blocking the export a p p l i c a t i o n would e x i s t whenever the inventory costs were les s than the savings i n raw material costs. If the log owner refused to s e l l the material at the bid p r i c e , the i n j e c -t i o n of the logs onto the domestic market would expand the s i z e of the 'surplus'. This would tend to release other logs f o r sale, increasing the domestic m i l l ' s purchase opportunities and reducing average log pr i c e s . A v a r i a t i o n of t h i s could occur i f a m i l l entered a b i d to block an a p p l i c a t i o n then withdrew the o f f e r once the a p p l i c a t i o n had been rejected with the s p e c i f i c i n t e n t i o n of using the expanding surplus to obtain other materials. The second form of possible abuse pertains to the use of market power by large firms. To obtain export approval for a s p e c i f i c group of logs, firms which constitute major sources of market log supplies could intimate that future log supplies would not be made av a i l a b l e to m i l l s that blocked t h e i r export a p p l i c a t i o n s . Firms could also trade considerations by not blocking one anothers' a p p l i c a t i o n s . Important i n t h i s respect i s not that the use of market power might e x i s t — i t occurs to some extent i n a l l forms of market s t r u c t u r e — b u t rather that the method of export control provides the opportunity f o r i t to occur. 6.4. D i s t r i b u t i o n of Gains from Export D i s t r i b u t i o n of the gains r e s u l t i n g from export i s the most apparent economic e f f i c i e n c y problem that pertains to the method of con t r o l , with concern r e l a t i n g to the success of the timber tax i n appropriating the w i n d f a l l gains that accrue to export sales. Insofar as the r e s t r i c t i v e export p o l i c y holds domestic l o g prices below i n t e r n a t i o n a l p r i c e l e v e l s , the returns from export sales (for most species and grades) tend to be much greater than from domestic sales. This does not occur because of any s p e c i a l expertise on the part of the log exporter. Rather, i t occurs because government regula-t i o n has created two d i s t i n c t markets and because only those fortunate enough to secure export permits are able to obtain the high i n t e r n a t i o n a l prices for t h e i r logs. As a r e s u l t , export p r i v i l e g e s often bestow a w i n d f a l l gain on the exporter. While t h i s claim i s disputed by 67 exporters (MacMillan Bloedel, 1975), the evidence as expressed by the estimated difference between export and domestic prices suggests that these w i n d f a l l gains can be s u b s t a n t i a l . From an economic e f f i c i e n c y standpoint, the w i n d f a l l gain i s a form of economic rent which, by d e f i n -35 i t i o n , should accrue to the owner of the resource. In t h i s regard, the i n t e n t i o n of the 'timber tax' should be to appropriate the d i f f e r -ence for the Crown. 'Timber tax' revenues have varied widely over the years, r e f l e c t -ing both the f l u c t u a t i o n s i n export volumes and the changes i n the tax rate. Table 6-1 summarizes the 'timber tax' revenues from l o g export sales during the period from 1966 to 1975. The success of the 'timber tax' i n appropriating the f u l l value of the economic rent accruing to export sales can be judged by comparing the export/domestic p r i c e d i f f e r e n t i a l on i n d i v i d u a l species and grades of logs with the applicable 'timber tax* charge. This i s done i n Table 6-2. The information contained i n t h i s table indicates that the 'timber tax' i s unsuccessful i n appropriating the rent accruing to export sales. The r e s u l t i s that opportunities for r e l a t i v e l y higher p r o f i t s i n exporting (as opposed to s e l l i n g domestically) are c r e a t e d — e s p e c i a l l y f or high grade material—which, i n turn, forms the basis of 35 Not a l l of the d i f f e r e n c e between export and domestic prices i s economic r e n t — a percentage should be returned to the exporter i n l i e u of marketing costs and return on a d d i t i o n a l investment. Exporters claim that any attempt by the Crown to appropriate the export d i f f e r e n -t i a l i s double taxation insofar as stumpage charges have already been paid ( P a c i f i c Coast Log Exporters Association, 1975). This argument, however, ignores the f a c t that stumpage charges are based on the lower Vancouver Log Market average p r i c e s . TABLE 6-1 'TIMBER TAX1REVENUES, 1966-1975 Year Revenue Collected thousands of d o l l a r s 1966 81.6 1967 112.4 1968 73.2 1969 76.4 1970 183.0 1971 117.4 1972 34.0 1973 13.8 1974 3,313.8 1975 929.0 1 Sources: Pearse, P. H. , Timber Rights and Forest P o l i c y  i n B r i t i s h Columbia, Volume 2, 1976; B.C. Forest Service, unpublished records and f i l e s . 1The 1975 figu r e f o r 'timber tax' revenue published by the Pearse Commission d i f f e r s from that contained i n B.C. Forest Service records. Although i t applies to the f i r s t three quarters of 1975 only, the B.C.F.S. fi g u r e i s considered to be more accurate and i s used i n the table. 69 TABLE 6-2 THE EFFECTIVENESS OF THE 'TIMBER TAX', 1975 Pri c e Timber Species Grade D i f f e r e n t i a l Tax Canadian d o l l a r s per cunit Douglas-fir No. 1 Sawmill $ 102.47 $ 10 No. 2 Sawmill 46.69 10 No. 3 Sawmill 15.72 10 Hemlock No. 1 124.42 10 No. 2 52.97 10 No. 3 20.23 10 Spruce No. 1 110.81 10 No. 2 40.68 10 No. 3 11.79 10 Cedar No. 1 125.40 10 No. 2 54.49 10 No. 3 -1.18 10 Sources: Compiled from: I n d u s t r i a l Forestry Association, Composite Log Sales A n a l y s i s — P u g e t Sound D i s t r i c t , 1975; C.O.F.I., Average Log P r i c e , 1975. some of the primary equity problems r e l a t i n g to the export control system. For example, above normal p r o f i t opportunities create a f i n a n c i a l incen-t i v e f o r exporters to attempt to circumvent the administrative review procedure (e.g., the use of market power by large f i r m s ) . And secondly, even though export prices are not included i n V.L.M. average s e l l i n g p r i c e compilations, the i n a b i l i t y of the control system to separate the two markets completely makes i t impossible to eliminate the influence of the higher export prices from the domestic market. Speculative buying of possible export materials has the e f f e c t of increasing domestic log prices contrary to the objectives of the p o l i c y and also r e s u l t s i n inequitable stumpage payments on timber that i s subject to these p r i c e 70 d i s t o r t i o n s . In addition, i t i s c l e a r from Table 6-2 that the use of a s i n g l e 'timber tax'rate (for most species), fixed i n d o l l a r terms, r e s u l t s i n inequitable treatment of d i f f e r e n t species and grades of exports. For example, both No. 1 hemlock and No. 3 cedar were charged $10 per cunit when exported. The average export/domestic p r i c e d i f f e r e n t i a l for No. 1 hemlock during the period i n question was $124.42 per cunit, while the average p r i c e d i f f e r e n t i a l f o r No. 3 cedar was l e s s than zero. Similar r e s u l t s pertained to i n d i v i d u a l species and the burden of the 'tax' became even more prevalent when less than average q u a l i t y No. 3 logs and No. 4 and r e j e c t material were considered. Furthermore, Table 6-2 provides evidence that the 'tax' i s working i n a manner that i s contrary to the objectives of the p o l i c y . The u t i l i z a t i o n of low grade logs i s one of the most pervasive problems facing the coastal forest i n d u s t r y — i n d e e d , the majority of the logs exported from B r i t i s h Columbia are low grade. In t h i s regard, i t would seem reasonable to expect the government to encourage the export of t h i s 36 type of material once i t had been judged as 'surplus'. Just the opposite i s the case. The province imposes the highest e f f e c t i v e rate of tax on low grade/low value logs reducing the f i n a n c i a l incentive to export these materials to often l e s s than zero. In t h i s regard, adherence to the r i g i d schedule of tax rates often relegates log export-ing to a p o s i t i o n of loss minimization. 36 In a r e l a t e d s i t u a t i o n the p r o v i n c i a l government removed the 'timber tax' on wood chip exports i n 1977 i n an attempt to encourage the export of surplus chips (Lewis, 1977). 71 6.5. Summary and Implications for P o l i c y In summary, t h i s chapter has been concerned with examining the economic r a t i o n a l i t y of the method of export regulation. I t i s apparent that the sole objective of the control system i s to ensure that no exports occur unless they have been judged as 'surplus' to the require-ments of the domestic processing industry. In t h i s regard, the system has proven to be highly e f f e c t i v e — e x p o r t s are confined to a very small percentage of p r o v i n c i a l production. At the same time, however, i t i s equally apparent that the system's f a i l u r e to recognize the need to encourage economic e f f i c i e n c y — e v e n within the constraints of general export r e s t r i c t i o n — r e s u l t s i n the loss of possibly s u b s t a n t i a l economic bene f i t s . This problem can be rel a t e d d i r e c t l y to the i n t e r p r e t a t i o n o f the l e g i s l a t i o n . The i n t e r p r e t a t i o n of the p o l i c y over the years has been very r i g i d : domestic processing i s considered to be the best economic use of the province's timber resource i n a l l cases and the c r i t e r i a and methodology employed by the control system r e f l e c t t h i s b e l i e f . In terms of the c r i t e r i a , t h i s chapter has shown that the r i g i d i t y of the i n t e r p r e t a t i o n ignores the benefits to be gained by maintaining f l e x i b -i l i t y i n the view of constantly changing and varied economic conditions. In terms of the methodology, t h i s chapter has shown that d e f i n i t e i n e f f i c i e n c i e s r e s u l t from the use of administrative regulations to cont r o l the flow of expo r t s — w h i l e the system was designed for bureau-c r a t i c s i m p l i c i t y , i t imposes unwarranted costs and confusion on the logging sector i n the name of export r e s t r i c t i o n . The implications of these conclusions are c l e a r : even within the constraints of general export r e s t r i c t i o n , the objectives of the p o l i c y 72 should be broadened to include economic e f f i c i e n c y and the method of control should be restructured to provide the incentives f o r i t . CHAPTER 7 THE PEARSE COMMISSION'S PROPOSAL TO REVISE THE METHOD OF EXPORT REGULATION The Pearse Commission Report c a l l s f o r fundamental changes to both the p o l i c y of r e s t r i c t i n g the export of unmanufactured forest products and to the method of regulating the flow of exports. The f i r s t recommendation i s based on the view that export r e s t r i c t i o n s are an i n e f f i c i e n t means of a s s i s t i n g the p r o v i n c i a l manufacturing sector. The second recommendation i s based on the need to provide a v e h i c l e f o r systematically eliminating the r e s t r i c t i o n s and i n recognition of the 'non-economic' nature of the e x i s t i n g controls. The two recommendations can be, viewed independently. If the need to provide opportunities f o r f l e x i b i l i t y and e f f i c i e n c y i n regula-t i o n i s accepted, then the merits of the second recommendation can be considered regardless of whether the f i r s t recommendation i s accepted or rejected. In the f i r s t case, the a l t e r n a t i v e controls proposed by Pearse would provide the basis f o r the t r a n s i t i o n to the 'no-controls' p o l i c y ; i n the second case, the proposed controls would simply replace the e x i s t i n g controls. The f i r s t section of t h i s chapter outlines the Pearse Commission's proposal to rev i s e the export control system while the second section reviews the c o n s t i t u t i o n a l and i n t e r n a t i o n a l questions that introduction of the proposal would r a i s e . The t h i r d section i s the most important— 74 i t examines the e f f e c t s of the proposed change i n the regulatory system on log supplies, Crown revenues and timber harvests and o f f e r s conclu-sions with respect to the adequacy of the proposed system. 7.1. The Price-Related System of Control The Pearse Commission's proposal to revise the export control system c a l l s f o r the administrative r e s t r i c t i o n s to be eliminated and replaced by a system of p r i c e - r e l a t e d controls. S p e c i f i c a l l y , the recommendation c a l l s for the 'timber tax' to be used as the sole method of export regulation; f o r the tax to be changed from a f i x e d d o l l a r levy to an ad valorem tax; and for the e f f e c t i v e rate of the tax to be set at "something i n the order of 40 percent" of the export s e l l i n g p r i c e (p. 314). Pearse was of the view that export controls based d i r e c t l y on the market system could provide domestic manufacturers with whatever degree of protection from foreign competition was considered des i r a b l e and, at the same time, not give r i s e to the more a r b i t r a r y and inequitable features of the present r e s t r i c t i o n s . Under the proposed c o n t r o l system the tax would be designed to reduce the f i n a n c i a l incentive to export by appropriating some (or a l l ) of the premium that would be gained by s e l l i n g logs i n the higher-priced export market. Although export sales would be unconstrained by admin-i s t r a t i v e r e s t r i c t i o n s , normal market a l l o c a t i o n s would ensure that exports would not occur unless domestic m i l l s could not p r o f i t a b l y use the materials, even with the p r i c e advantage provided by the tax. In a p r i c e - r e l a t e d c o n t r o l system the choice of the tax rate would be c r u c i a l . A very high tax rate would appropriate a l l of the p r o f i t from log exports and would eliminate exports. A very low tax r a t e — 75 although considered by Pearse to be desirable i n the long-run—would create opportunities f o r s u b s t a n t i a l p r o f i t s i n exporting. This i n turn would stimulate exports and cause, i n the short and medium terms, major disruptions i n the raw material supplies of B.C. m i l l s . Obviously neither extreme i s de s i r a b l e . While a 40 percent timber tax would involve an increase i n the e f f e c t i v e rate of the tax (to account for the elimination of the adminis-t r a t i v e c o n t r o l s ) , the proposed rate was not intended to appropriate the export premium completely. The tax r a t e — w h i c h was based on the export/ domestic p r i c e d i f f e r e n t i a l s presented i n Table 3-10—was chosen to relax the e x i s t i n g l e v e l of protection only s l i g h t l y . In t h i s manner, i t was designed to set the basis for (and to begin) the t r a n s i t i o n to the p o l i c y of 'no r e s t r i c t i o n ' . From an e f f i c i e n c y standpoint, the p r i c e - r e l a t e d system of control would o f f e r a number of d e f i n i t e improvements over the administrative c o n t r o l system. Most importantly, the l e v e l of protection would be t i e d d i r e c t l y to the export market. This would have the e f f e c t of replacing the i s o l a t i o n between the domestic and i n t e r n a t i o n a l markets with a d i r e c t ( a l b e i t constrained) association; i f i n t e r n a t i o n a l markets were to change, the B.C. market would be forced to react. For example, i f export prices increased, the export premium would r i s e to exceed the d o l l a r value of the tax and export pressure would force domestic log p r i c e s to r i s e . This, i n turn, would induce a l l o c a t i v e responses on the domestic market i n l i n e with the changes i n the i n t e r n a t i o n a l s i t u -a t i o n . The c o n t r o l system would s t i l l provide the domestic processing industry with s e c u r i t y of raw material s u p p l i e s — t h e new system would simply broaden the i n t e r p r e t a t i o n of 'security' to recognize the i n t e r -76 n a t i o n a l dependency of the B.C. forest industry and to include incen-t i v e s for e f f i c i e n t performance. The second improvement i s that the l e v e l of protection provided the domestic processing industry would be e x p l i c i t . Insofar as the same tax rate would apply to a l l log exports, a l l domestic processors would be treated equally; the opportunities for 'direct p r i c e support' would be eliminated which, i n turn, would provide further incentives for domestic e f f i c i e n c y . Even more importantly, the e x p l i c i t n e s s of the protection would provide f u l l and open knowledge of the p r i c e support accruing to the domestic processing industry. Both the government and the p u b l i c would be better able to examine the objectives and the suc-cesses of the p o l i c y r e l a t i v e to i t s costs. In addition, the e x p l i c i t -ness of the tax would allow the l e v e l of protection to be adjusted i n l i n e with public p r i o r i t i e s . For example, the tax rate could be reduced i n c e r t a i n areas of the province to stimulate exports and further regional employment or development objectives. Or the tax could be reduced or increased over time. In t h i s regard, Pearse argued that a 40 percent tax rate was "undoubtedly more protection than warranted i n the long run" (p. 315), and recommended that i t be gradually reduced. At the same time, however, the a l t e r n a t i v e of increasing the l e v e l of protection would be a v a i l a b l e . In the t h i r d place, the use of an ad valorem timber tax would provide equitable treatment of d i f f e r e n t valued species and grades of logs. In addition, the ad valorem tax would allow the d o l l a r value of protection to respond to market cycles. Fourthly, by making payment of the timber tax the sole condition for entry into the export market, the proposed control system would eliminate much of the a r b i t r a r i n e s s and confusion associated with the administrative controls. Most importantly, improved knowledge of market a v a i l a b i l i t y , p r ices and costs would reduce r i s k s and allow operators to plan harvests and make transportation arrangements more e f f i c i e n t l y . The time delay and the cost of obtaining export approval, along with the incentives and the opportunities for abusing the control system, would be eliminated. F i n a l l y , the administration of the export controls would be much simpler under the p r i c e - r e l a t e d system. The function of the Forest Service would become that of c o l l e c t i n g the t a x — i n t r o d u c i n g a s i g n i f -icant cost savings i n t h i s regard alone. The introduction of a p r i c e - r e l a t e d control system would not eliminate a l l of the ' i n e f f i c i e n c i e s ' associated with export r e s t r i c t i o n . In the f i r s t place there i s presently no mechanism f o r c o l l e c t i n g export sales p r i c e s . Unless l e g i s l a t i v e measures were introduced to require the reporting of these p r i c e s , the onus would f a l l on exporters to i n d i c a t e the prices received for the logs. This, i n turn, would create a f i n a n c i a l incentive f o r misreporting. It was f o r t h i s reason that Pearse suggested that the Minister of Forests r e t a i n f i n a l respons-i b i l i t y f o r s e t t i n g the timber tax charge i n each case (p. 314). And, secondly, the proposed control system would not eliminate the r e d i s t r i -bution of income nor the problems pertaining to the a l l o c a t i o n of both the losses and the gains of export r e s t r i c t i o n . Improvement i n t h i s area would require the elimination of the r e s t r i c t i v e export p o l i c y and the replacement of i t with some other form of processing assistance (Powrie, 1976). Although Pearse presented hi s arguments c l e a r l y i n favour of 78 introducing the system of p r i c e - r e l a t e d controls, there remains substan-t i a l confusion surrounding the recommendation. While most groups agree with the use of an ad valorem timber, tax, exporters, on one hand, argue that the suggested e f f e c t i v e rate of the tax i s too high. Industry and labour, on the other hand, appear to misunderstand both the intentions of the proposal and the way i n which the tax would work to protect domestic processors (Smith, 1977). These groups argue for the retention of the administrative controls. 7.2. C o n s t i t u t i o n a l arid International Implications The prominent r o l e proposed for the timber tax i n the export con-t r o l system r a i s e s important questions with respect to the c o n s t i t u t i o n a l v a l i d i t y of the Province levying such a tax. In addition, concern has been expressed over the possible implications of B r i t i s h Columbia impos-ing an e x p l i c i t trade b a r r i e r i n the face of on-going i n t e r n a t i o n a l trade negotiations (Smith, 1977). In 1929, the Supreme Court of B r i t i s h Columbia declared the imposition of the 'timber tax' to be u l t r a v i r e s of the P r o v i n c i a l Legis-l a t u r e . The tax which existed at the time applied only to timber harvested on non-Crown land and consisted of a royalty rebate on the 37 timber used or manufactured i n the province. The judgement was based on two grounds: f i r s t , that the imposition of a tax which, by i t s nature, was i n d i r e c t was outside the competence of the P r o v i n c i a l L e g i s l a t u r e ; and second, and more important, that the tax was designed to discourage exports and was, therefore, a matter of customs and 37 This 'timber tax' i s described i n more d e t a i l i n section 2.2. 79 e x c i s e — a n area assigned to the exclusive j u r i s d i c t i o n of the Dominion Parliament (Dominion Law Reports, 1930). In the mid-1950's the province introduced a revised form of 'timber tax'. This tax, which i s s t i l l i n e f f e c t , consists of a d i r e c t charge against exports and applies only to timber harvested on Crown . land. While the c o n s t i t u t i o n a l v a l i d i t y of t h i s tax has not been challenged, i t s standing i s unclear. On one hand, the current tax i s structured d i f f e r e n t l y than the previous tax and i s applied to timber over which the province retains authority (while the previous tax was applied to timber over which the province had relinquished c o n t r o l ) . On the other hand, as with the previous tax, the current tax has the e f f e c t of discouraging exports. Possible reasons why the l e g a l i t y of the current tax has not been contested include the low e f f e c t i v e rate of the tax and the fear that the p r o v i n c i a l government would p r o h i b i t exports e n t i r e l y i f the previous r u l i n g was applied. Nevertheless, i t i s important that the government be aware that an increase i n the e f f e c t i v e rate of the tax could lead to a challenge of the tax's v a l i d i t y . Importantly, i t i s believed i n some c i r c l e s that the stature of the tax could be s o l i d i f i e d by making i t an e x p l i c i t condition . of the timber sale contract. This would have the e f f e c t of placing the timber tax on exactly the same footing as that which allows the province to p a r t i c i p a t e i n log export r e s t r i c t i o n . A r e l a t e d concern pertains to the p o s i t i o n of the federal govern-ment. In recent years the a l l o c a t i o n of natural resource revenues between the provinces and the fed e r a l government has become a much debated issue. While the controversy pertains p r i m a r i l y to o i l and natural gas revenues (Scott, 1976), the p r i n c i p l e could be extended i n 80 a consistent manner to include timber. As a r e s u l t , the p r o v i n c i a l government must be aware that the introduction of the proposed control system—which could lead to s u b s t a n t i a l increases i n timber tax reven-ues—might r e s u l t i n a c o n s t i t u t i o n a l challenge by the f e d e r a l govern-ment . Pearse based the proposal to revise the export control system on the assumption that the f e d e r a l government would not i n t e r f e r e with the timber tax. More s i g n i f i c a n t l y , the proposal i s based on the assump-t i o n that the f e d e r a l government would continue to harmonize i t s controls with those of the province (pp. 315-6). If t h i s cooperation was not forthcoming, the superseding nature of the f e d e r a l authority combined with the more r e s t r i c t i v e nature of the administrative controls would render the proposed p r o v i n c i a l control system unworkable. In t h i s regard, the province would be well advised to undertake discussions with the f e d e r a l a u t h o r i t i e s with respect to the introduction of a mutually acceptable control system rather than attempting to introduce the pro-posed controls u n i l a t e r a l l y . The second general consideration pertains to the i n t e r n a t i o n a l implications of B r i t i s h Columbia introducing an e x p l i c i t b a r r i e r to trade. Insofar as the timber tax would constitute a highly v i s i b l e attempt to constrain exports, i t could be subject to c r i t i c i s m s of 'protectionism' and therefore considered contrary to agreements reached under the 'General Agreement on T a r i f f s and Trade' (G.A.T.T.)—a program supported by both the f e d e r a l and B.C. governments (Economic Council, 1975; Dept. of Economic Development, 1977). In response to these c r i t i c i s m s , however, the argument could be made that the tax i s simply the s u b s t i t u -t i o n of a reverse t a r i f f for a n o n - t a r i f f b a r r i e r (the control of which 81 i s a s p e c i a l concern of current G.A.T.T. negotiations; Economic Council, 1975) thereby making the protection more systematic and providing the basis for the gradual elimination (or relaxation) of the b a r r i e r . 7.3. E f f e c t s of a Forty Percent Tax The effectiveness of the p r i c e - r e l a t e d system of control i n regulating the flow of exports would be dependent almost e n t i r e l y upon the e f f e c t s of the chosen tax rate. The Pearse Commission did not attempt to quantify the e f f e c t s of the proposed 40 percent tax. As a r e s u l t , there has been no i n d i c a t i o n of how c l o s e l y the proposed tax rate would emulate the l e v e l of protection provided by the administrative r e s t r i c t i o n s . Nor has there been any i n d i c a t i o n of whether the 40 per-cent tax would induce the benefits that Pearse f e l t i t would, or whether i t would provide a more equitable system of control.than the administrat-ive r e s t r i c t i o n s . The possible consequences of an inappropriate choice necessitate the consideration of these matters p r i o r to the adoption of the system. Unfortunately, the a v a i l a b l e information pertaining to log exports, i n t e r n a t i o n a l and domestic markets, economic prospects and other matters i s not s u f f i c i e n t l y precise to allow an accurate q u a n t i f i c a t i o n of the long-run e f f e c t s of a 40 percent tax rate. Nevertheless, the information presented i n t h i s thesis allows some important conclusions to be drawn with regard to the i n i t i a l e f f e c t s of the change i n the control system and with respect to how these e f f e c t s would be trans-mitted throughout the coastal forest industry. The c a l c u l a t i o n s i n t h i s section are based on estimates of what could have happened i n 1975 i f the p r i c e - r e l a t e d control system had been 82 i n e f f e c t . Some comparisons are made to 1973 and 1974 as a means of tes t i n g the system's f l e x i b i l i t y . 7.3.1. Volumes, Species and Grades The i n i t i a l e f f e c t s of the proposed r e v i s i o n to the export control system would have been evidenced i n changes i n the volumes, species and grades of exports. From.the information presented i n Chapter 3 i t i s apparent that there i s a strong export demand f o r B.C. logs; that foreign buyers prefer high q u a l i t y material (but are w i l l i n g to purchase some lower grade l o g s ) ; and that foreign buyers are w i l l i n g to pay very high prices f o r the materials they purchase. In addition, i t i s reason-able to assume that domestic log s e l l e r s would s e l l any material on the 38 export market for which the export premium exceeded 40 percent. This information combined with the estimates of the export/domestic p r i c e d i f f e r e n t i a l s presented i n Table 3-11 suggests that s u b s t a n t i a l pressure to increase the export volumes of c e r t a i n species and grades of logs would occur i f the system of control was based on the 40 percent tax rate. More s p e c i f i c a l l y , the analysis suggests that No. 1 and No. 2 Douglas-fir peelers. No. 1 Douglas-fir sawlogs, No. 1 hemlock and No. 39 1 cedar would have faced heavy export demand i n 1975. The pressure to increase the export of these materials would have been f e l t i n i t i a l l y by those firms dependent on the open market f o r log supplies. In t h i s regard, a t o t a l of 86.2 thousand units of these materials were sold on the Vancouver Log Market i n 1975 (C.O.F.I., 1975a). In perspective, 38 To account f o r the a d d i t i o n a l costs of s e l l i n g logs on the export market, i t i s assumed here that an export premium of 40% plus $5/cunit would be required to induce export sales. 39 In addition, No. 2 hemlock and No. 2 cedar would have been subject to minor export pressures. 83 these materials accounted for les s than 8 percent of the t o t a l volume of these four species transacted on the market i n 1975 and only 1.2 percent of the Coast region harvest of these species i n the same year (Forest Service, 1975a). The increased export demand for these p a r t i c u l a r species and grades would have been met by an increase i n V.L.M. prices as domestic firms attempted to bid the logs away from foreign buyers. Based on 1975 p r i c e d i f f e r e n t i a l s , i t i s reasonable to assume that the domestic prices f o r No. 2 Douglas-fir peelers and for No. 1 Douglas-fir sawlogs would have r i s e n to the 40 percent protection l e v e l — a p r i c e response that would have eliminated much of the export pressure on these logs. It i s u n l i k e l y , however, that B.C. log purchasers would have been able to absorb the f u l l p r i c e increase on the other species and grades. As a r e s u l t , export pressure on these materials would have been expected to remain strong. The analysis suggests that the same general r e s u l t s would have pertained to the use of the proposed controls and tax rate i n 1974. In 1973, however, strong export pressures would have been extended to No. 3/No. 4 Douglas-fir peelers, No. 2 Douglas-fir sawlogs, No. 2 hemlock and No. 2 cedar, increasing the volume of V.L.M. sales subject to export demand to 25 percent. More importantly, the magnitude of the i n d i v i d u a l p r i c e d i f f e r e n t i a l s suggests that:.increases i n V.L.M. prices would not have been s u f f i c i e n t to counteract export pressures. In addition to these volume observations, the two most s i g n i f i c a n t differences between the e f f e c t s of the 40 percent tax system and those of the administrative controls would have been the rever s a l i n the q u a l i t y of exports (with high grade logs substituted f o r low grade ones) and the 84 complete elimination of spruce as an export species (when i t has been the most important export species throughout the 1970's). 7.3.2. Crown Revenues Any export sales that occurred under the proposed control system would have been accompanied by the increased timber tax charge. Based on the tax rate and indicated export p r i c e s , t o t a l tax revenues i n 1975 could have been expected to increase s u b s t a n t i a l l y . More important, however, would have been the influence of the proposed control system on stumpage p r i c e s . Stumpage prices would have r i s e n f o r the species and grades of logs that were subject to export p r e s s u r e — t h e r e s u l t of two separate processes that would have acted to increase V.L.M. average s e l l i n g p r i c e s : (1) increases i n the prices offered by domestic log buyers would have increased average p r i c e s , and (2) any exports that did occur would have displaced the purchases of les s e f f i c i e n t domestic processors ( i . e . , those paying l e s s than average prices f o r t h e i r l o g s ) . Insofar as export sales are not included i n average s e l l i n g p r i c e c a l c u l a t i o n s , the elimination of these domestic sales from the sample would, i n i t s e l f , have increased average p r i c e s . While estimates of the t o t a l increase i n stumpage revenues that would have occurred i n 1975 are not f e a s i b l e , some conclusions can be reached with respect to the e f f e c t of the proposed 40 percent tax on per cunit stumpage charges. F i r s t , the average s e l l i n g prices of No. 1 and No. 3 Douglas-fir peeler, No. 1 Douglas-fir sawlogs, No. 1 hemlock and No. 1 cedar would have r i s e n to the 40 percent protection l e v e l . Second, i f neither minimum nor maximum stumpage rates were i n e f f e c t , f o r each $1.00 per cunit increase i n average s e l l i n g p r i c e s , the marginal 85 stumpage charge increase would have been between 78.7c and 89.3c per cunit. And t h i r d , i f minimum or maximum stumpage rates were i n e f f e c t , the actual increase i n stumpage charges would have been les s than the 40 indicated marginal rate. Using No. 2 Douglas-fir peelers as an example, i t can be estim-ated that the average s e l l i n g p r i c e would have increased by $12.81 per 41 cunit (to $151.69/cunit). This f i g u r e suggests that the indicated stumpage assessment for a l l of the timber i n t h i s species/grade category on the B.C. coast would have increased by between $10.08 and $11.44 per cunit i f minimum or maximum stumpage rates were not i n e f f e c t . For the 1,575.7 cunits of t h i s material sold on the V.L.M., the t o t a l assessment i n 1975 would have increased by between $15,883.06 and $18,019.32. No. 1 hemlock can be used as a second example. Average s e l l i n g p r i c e would have increased i n the range of $43.41 per cunit (to $121.51/cunit) r e s u l t i n g i n an increase i n the indicated per cunit stumpage charge of between $34.16 and $38.77. Based on a V.L.M. volume of 13,595.94 cunits, the t o t a l indicated assessment on t h i s material would have increased by 42 between $464,437.31 and $527,114.59. 40 The differ e n c e between the indicated marginal stumpage rate and the actual marginal rate that r e s u l t s from the introduction of minimum or maximum stumpage charges cannot be determined with any p r e c i s i o n when dealing with s p e c i f i c grades of logs because of the lack of i n f o r -mation pertaining to operating costs of per grade stumpage charges. 41 The amount that domestic prices would have increased i s e s t i -mated by f i n d i n g the p r i c e l e v e l 40% l e s s than the export p r i c e ( i . e . , $252.81 - (.4) $252.81 = $151.69) and subtracting from that p r i c e , the domestic p r i c e ( i . e . , $151.69 - $138.88 = $12.81). See Table 3-11 for p r i c e s . 42 It seems most l i k e l y that maximum stumpage charges would have come into e f f e c t i n t h i s s i t u a t i o n . A general estimate, based on a l l -grade c a l c u l a t i o n s (see Appendix C) suggests that the actual increase i n stumpage assessments for No. 1 V.L.M. hemlock would have been i n the range of 25% to 30% les s than indicated. 86 Extension of the increased per cunit stumpage charges to the non-market log supplies of integrated firms would have further increased stumpage revenues. Unfortunately, estimation of the t o t a l increase i n stumpage assessments i s rendered unfeasible by the lack of t o t a l harvest and stumpage charge s t a t i s t i c s f o r i n d i v i d u a l log grades. It would, however, have been the a p p l i c a t i o n of the increased per cunit Crown charges to these non-market supplies that would have produced the major long-term benefits of the p r i c e - r e l a t e d control system. Increases i n stumpage assessments would have forced l e s s e f f i c i e n t integrated processors to make more logs a v a i l a b l e to the market where the a l l o c a t i v e mechanism would have d i s t r i b u t e d the logs to t h e i r most va l u -able uses: either to more e f f i c i e n t domestic processors o r — i f the export premium was greater than the d o l l a r value of the t a x — t o the export market. 7.3.3. Timber U t i l i z a t i o n and Timber Harvests In addition to the u t i l i z a t i o n ( a l l o c a t i o n ) incentives that would have resulted from the increases i n log p r i c e s and stumpage charges i n 1975, the p r i c e - r e l a t e d control system would have been expected to produce incentives f o r the i n t e n s i f i c a t i o n of timber harvests. Examination of the e f f e c t s of the 40 percent tax shows that the proposed system and tax rate would have led to an increase i n the revenue of the log producing sector. Based on a $1.00 per cunit increase i n average s e l l i n g p r i c e , the marginal revenue increase would 43 have been i n the range of 10.7c to 21.3c per cunit. Importantly, 43 As with the marginal stumpage increases, the marginal revenue increase that would have accrued to the log producing sector would have been affected by minimum and maximum stumpage rates. The di f f e r e n c e , i n both cases, i s that the logging sector would capture the amount of the adjustment. however, the transfer of t h i s increase i n revenue into the i n t e n s i f i c a -t i o n of timber harvests would have depended upon the e f f e c t of the system on log p r i c e s at the m a r g i n — f o r only i f the value of submarg-i n a l timber was increased would the economic i n t e n s i t y of the harvest have been increased. In t h i s regard, the benefits that would have been achieved i n 1975 from the 40 percent timber tax system appear to be minimal. The i n i t i a l e f f e c t of the proposed tax rate i n 1975 would have been to lead to an increase i n the value of s p e c i f i c high grade logs. Low q u a l i t y materials would have been unaffected by export demand and no p r i c e increase on these logs would have been expected. As a r e s u l t , the 40 percent tax rate would not, i n i t s e l f , have led to the i n t e n s i -f i c a t i o n of timber harvests. There are, however, two other p o s s i b i l -i t i e s that might have led to increased harvests. F i r s t , increased competition amongst domestic firms for low grade wood (to compensate for the export of high q u a l i t y logs) might have led to an increase i n the value of what had been submarginal timber previously. And second, the increased value of high grade logs could have been averaged over the stand as a whole to improve the h a r v e s t a b i l i t y of otherwise submarginal trees and/or submarginal stands. While t h i s would have been an i r r a t i o n a l a ction i n a true economic sense, there have been some i n d i c a -tions that p r i v a t e landowners i n the P a c i f i c Northwest have undertaken these practices (Lewis, 1977). 7.3.4. Conclusions and Possible Revisions The analysis of t h i s chapter leads to a number of conclusions with regard to the e f f e c t s of the 40 percent tax rate and i t s success i n meeting c e r t a i n export control objectives. In the f i r s t place, the 88 aggregate l e v e l of protection that would have resulted from the use of the tax i n 1974 and 1975 would not have been s i g n i f i c a n t l y d i f f e r e n t than that provided by the administrative controls. This leads to the conclusion that the introduction and use of the proposed tax rate would not lead to a large increase i n log export volumes i f economic condi-tions were s i m i l a r to those of 1974 and 1975. In 1973, however, the 40 percent l e v e l of protection would not have been s u f f i c i e n t to stop large volumes of log exports. This obser-vatio n r a i s e s important questions with respect to both the f l e x i b i l i t y and the adequacy of the general l e v e l of protection that would be pro-vided by the proposed control system and tax rate. In the second place, i n terms of simply adjusting the d o l l a r value of the tax to meet minor changes i n the i n t e r n a t i o n a l market, the p r i c e - r e l a t e d controls would constitute a d e f i n i t e improvement over the e x i s t i n g c o ntrols. However, the l i m i t e d range of both domestic log p r i c e reactions and the tax adjustment i t s e l f would render the proposed controls incapable of responding adequately to large changes i n i n t e r -n a t i o n a l market p r i c e s . Related to t h i s i s the conclusion that the return of the export/domestic p r i c e d i f f e r e n t i a l to 1973 l e v e l s would render the proposed tax rate i n e f f e c t i v e . Importantly, there are strong i n d i c a t i o n s (e.g., recent revaluations i n Japanese (upward) and Canadian (downward) currencies r e l a t i v e to the U.S. d o l l a r ; and i n -creases i n Japanese housing construction) which suggest that major increases i n the export premium i n the near future are a very r e a l p o s s i b i l i t y . T h i r d l y , i t i s apparent that the use of the 40 percent tax would have led to a complete r e v e r s a l i n the q u a l i t y of log e x p o r t s — t h e r e s u l t 89 of the r e l a t i v e l y greater export premium on high q u a l i t y logs. Importantly, t h i s would have r e s t r i c t e d any incentives for improved timber u t i l i z a t i o n or forest management to high grade materials, sug^ gesting that some of the benefits of r e v i s i n g the export control system would not be achieved i f the tax controls were introduced as proposed. A number of a l t e r n a t i v e s e x i s t f o r r e v i s i n g the tax to eliminate these problems. On one hand, the tax rate could be increased. This would eliminate the concerns pertaining to the adequacy of the protection but i t would also relegate the benefits of the p r i c e - r e l a t e d controls to even higher q u a l i t y logs. On the other hand, the tax rate could be reduced to create export pressures on low grade material. While t h i s would extend the benefits of the proposed system to a l l grades of timber, i t would also i n t e n s i f y the export demand for high and medium grade logs. The only means f o r handling these c o n f l i c t i n g problems simultane-ously would be to introduce a tax schedule based on progressively increasing rates. General observation suggests that a s i n g l e tax rate would be incapable of providing the same r e l a t i v e l e v e l of protection to a l l l o g s — a n d , from a true e f f i c i e n c y standpoint, i t would not be intended to. However, the introduction of a tax schedule that would impose a low tax rate on low-valued timber and a high rate on high-valued timber would spread the benefits ( i . e . , u t i l i z a t i o n and management) to a l l grades of logs. A progressive tax system would continue to pro-vide a d i r e c t a s s o c i a t i o n with the i n t e r n a t i o n a l market but yet allow the proposed co n t r o l system to be introduced i n a way that would be more consistent with the protection achieved under the e x i s t i n g controls. The higher l e v e l of p r i c e protection offered to higher q u a l i t y logs would be based on e x p l i c i t knowledge of the costs involved and, i f desired, could be reduced over time and brought into l i n e with the protection afforded lower q u a l i t y logs. Determination of the structure of the system and estimation of the i n d i v i d u a l tax rates are beyond the scope of t h i s t h e s i s . Never-theless, the analysis presented herein suggests that a p r i c e - r e l a t e d export control s y s t e m — i n p a r t i c u l a r , a progressive tax system—would provide a number of benefits over the administrative system of controls and s t i l l allow the volume of exports to be controlled e f f e c t i v e l y . CHAPTER 8 SUMMARY, CONCLUSIONS AND FURTHER RESEARCH This thesis has been concerned with f i v e separate aspects of B r i t i s h Columbia's log export r e s t r i c t i o n s . This chapter b r i e f l y summarizes the findings and conclusions of the previous chapters and i d e n t i f i e s areas where further research i s needed to substantiate or extend the a n a l y s i s . Chapter 2 documented the evolution of the r e s t r i c t i v e export p o l i c y by examining current and h i s t o r i c a l l e g i s l a t i o n at both the p r o v i n c i a l and fe d e r a l l e v e l s . I n t e r e s t i n g l y , the p o l i c y of d i r e c t export r e s t r i c t i o n was found to date back to 1891 rather than to 1906 as i s commonly thought to be the case. In Chapter 4 the issue underlying the r e s t r i c t i o n s was discussed and c l a r i f i e d . The issue i s not whether the growth (or protection) of the domestic processing industry should be encouraged but r a t h e r — g i v e n that a l t e r n a t i v e s are available—whether or not export r e s t r i c t i o n s are an e f f i c i e n t means of a s s i s t i n g the processing sector. Viewed i n t h i s l i g h t i t i s possible to examine the e f f e c t s of the r e s t r i c t i o n s i n a more l o g i c a l , l e s s emotional manner. The broader issue of a s s i s t i n g the domestic processing industry i s s t i l l of i n t e r e s t . It i s , however, a matter of s o c i a l concern which l i e s beyond the scope of simple f i n a n -c i a l a n a l y sis. 91 92 The economic consequences of r e s t r i c t i n g the export of unmanu-factured materials was also discussed i n Chapter 4. In t h i s regard, four important findings were made which r a i s e serious questions with respect to the ' e f f i c i e n c y ' of export r e s t r i c t i o n s . (1) The r e s t r i c -tions were i d e n t i f i e d as holding the prices paid for raw materials by the domestic processing industry below free market l e v e l s . (2) The depressing e f f e c t of the r e s t r i c t i o n s on domestic log prices was iden-t i f i e d as imposing s i g n i f i c a n t opportunity costs (estimated to be i n the range of $19; 2 to$192 m i l l i o n i n 1975) on other sectors of the p r o v i n c i a l economy. Insofar as part of the cost i s borne by the p r o v i n c i a l log producing sector, some of the benefits achieved through the growth of the processing sector are negated. (3) The e f f e c t of the r e s t r i c t i o n s on domestic log prices was i d e n t i f i e d also as leading to losses i n economic e f f i c i e n c y i n both i n d u s t r i a l structure and resource use. (4) The p r i c e support accruing to the domestic process-ing industry was i d e n t i f i e d as being i n d i s c r i m i n a t e l y a l l o c a t e d . The chapter concluded that these consequences should be given appropriate consideration i n any discussion pertaining to the r e s t r i c t i o n s . In Chapter 6 the method of export regulation was considered. C r i t i c a l examination of the export controls found them to be based on non-economic c r i t e r i a which a r b i t r a r i l y and u n i l a t e r a l l y view domestic processing to be the best use of the province's timber resources. The administrative review procedure for determining export e l i g i b i l i t y was i d e n t i f i e d as being cumbersome, time-consuming, risk-inducing and c o s t l y . In addition, the r i g i d i t y of the 'timber tax' was found to lead to the inequitable treatment of logs of d i f f e r e n t values and to the existence of w i n d f a l l gains on some log exports. Importantly, the 'timber tax' was also found to be working i n a manner inconsistent with the objectives of the p o l i c y . The chapter concluded that the e x i s t i n g export control system was void of economic consideration and suggested that an a l t e r n a t i v e should be sought—even i f the general export r e s t r i c -tions were to be maintained—to r a t i o n a l i z e the controls and provide e x p l i c i t incentives f o r economic e f f i c i e n c y . In Chapter 7 an examination, was made of the Pearse Commission's proposal f o r r e v i s i n g the export control system. The objectives and methodology of a p r i c e - r e l a t e d export control system were i d e n t i f i e d and the t h e o r e t i c a l advantages of providing incentives f o r e f f i c i e n c y (both domestically and i n t e r n a t i o n a l l y ) , f l e x i b i l i t y , consistency and equity were discussed. Possible questions pertaining to the c o n s t i t u -t i o n a l v a l i d i t y of the province using a tax scheme to regulate exports . and regarding the implications of the province introducing an e x p l i c i t b a r r i e r to trade were i d e n t i f i e d . In the l a s t section of the chapter, the e f f e c t s of introducing the proposed control system and tax rate were examined. In addition to the e f f e c t s on Crown revenue and economic e f f i c i -ency, three general observations were made. F i r s t , under economic conditions s i m i l a r to those of 1974 and 1975, the introduction and use of the p r i c e - r e l a t e d exports, controls and the 40 percent tax rate would be u n l i k e l y to lead to a large increase i n the volume of log exports. Second, i f economic conditions were to change to the point where the diff e r e n c e between export and domestic prices returned to the 1973 l e v e l , the proposed tax rate would be i n e f f e c t i v e i n c o n t r o l l i n g the flow of exports. And t h i r d , regardless of economic conditions, the use of the si n g l e tax rate would r e s u l t i n a re v e r s a l i n the q u a l i t y 94 of log exports. These observations led to the conclusion that the use of the 40 percent tax rate would be inappropriate, p a r t i c u l a r l y during the introductory stages of the program. A progressive tax system was suggested as a possible a l t e r n a t i v e . The above concerns notwithstand-ing, the chapter concluded that the p r i c e - r e l a t e d export control system o f f e r s a v i a b l e a l t e r n a t i v e to the administrative regulations. When the analyses and observations of the i n d i v i d u a l chapters are aggregated, they provide a serious indictment of both the e x i s t i n g p o l i c y and the e x i s t i n g method of export r e s t r i c t i o n . This thesis has not attempted to provide answers to many of the issues surrounding the r e s t r i c t i o n s . Rather, by i d e n t i f y i n g the economic consequences of both the l e v e l and the method of c o n t r o l , i t has endeavored to eliminate some of the confusion involved i n the r e s t r i c t i o n / n o n - r e s t r i c t i o n debate. To the extent that i t has been successful,- t h i s thesis has set the stage for an improved l e v e l of discussion of export r e s t r i c t i o n i n general and of the Pearse Commission's export recommendations i n p a r t i c u l a r . Hope-f u l l y , the p r o v i n c i a l government w i l l be able to use the information and the analysis presented herein to a s s i s t i n determining whether a change i n p o l i c y and/or methodology i s i n the best i n t e r e s t s of the province. Throughout the t h e s i s , areas where more de t a i l e d information or a d d i t i o n a l research would be u s e f u l were i d e n t i f i e d . The following l i s t summarizes some of these areas. (1) More detai l e d information regarding export and domestic log prices i s needed to increase the s o p h i s t i c a t i o n of the analysis and to reduce the r e l i a n c e on averages. (2) The con-version factors and log grades used to compare U.S. and Canadian s t a t i s -t i c s should be c l o s e l y s c r u t i n i z e d . While the assumptions appear reasonable, the conversion factors l i e at the basis of the p r i c e analysis 95 and accuracy i s of utmost importance.. (3) Records of the prices obtained for B.C. log exports would be useful to reduce the dependence upon or to confirm the a p p l i c a b i l i t y of the U.S. p r i c e s . (4) More current and improved estimates of the responsiveness of world market pr i c e s to increases i n log supplies i s needed to determine the existence of the market f o r B.C. log exports. This information i s also needed to improve the estimate of the t o t a l opportunity cost of export r e s t r i c t i o n . (5) More s p e c i f i c stumpage and log harvest s t a t i s t i c s would provide the basis for more d e t a i l e d estimates of the e f f e c t s of the proposed export control system and tax rate. (6) Consideration should be given to the responsiveness of non-market log supplies to changes i n stumpage charges and to the a b i l i t y of the domestic processing sector to re-arrange input combinations to achieve cost reductions and improved e f f i c i e n c y . (7) The e f f e c t of increased log prices on the economic v i a b i l i t y of timber harvesting should be examined. In areas such as the Prince Rupert Forest D i s t r i c t , the proposed change i n p o l i c y provides an opportunity for increasing both the l e v e l of forest management and the l e v e l of forest-based employment and income. (8) Forecasts of changes i n the i n t e r n a t i o n a l economic s i t u a t i o n are important f o r determining the adequacy of the proposed tax rate. (9) The structure and i n d i v i d u a l rates of a progressive tax system should be considered. (10) The e f f i c i e n c y and effectiveness of a l t e r n a t i v e processing assistance pro-grams should be considered for comparison with log export r e s t r i c t i o n s . (11) The broader s o c i a l question of whether the domestic processing industry should be a s s i s t e d should be investigated. 96 BIBLIOGRAPHY Adams, D. M., 1977. 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P r i c e Impacts of Log Export R e s t r i c t i o n s Under A l t e r n a t i v e Assumptions. USDA Forest Service Research Paper PNW-212, P a c i f i c Northwest Forest and Range Exp. Sta., Portland, Oregon. 25 p. + I l l u s . Hosie, R. C , 1969. Native Trees of Canada. Seventh e d i t i o n . Canadian Forestry Service, Department of F i s h e r i e s and Forestry, Queen's P r i n t e r , Ottawa. 319 p. + App. In d u s t r i a l Forestry Association, 1974. Composite Log Sales A n a l y s i s — Puget Sound D i s t r i c t : July, August, September 1974. Mimeo, Portland, Oregon. 15 p. , 1975. Composite Log Sales A n a l y s i s — P u g e t Sound D i s t r i c t : July, August, September 1975. Mimeo, Portland, Oregon. 12 p. Japan Lumber Journal Inc., 1976. "Wholesalers' S e l l i n g Prices of American Timber, Keihin Area", Japan Lumber Journal 17 (20): 10. Jung, W., 1976. An Analysis of B r i t i s h Columbia's Log Export P o l i c y . Unpublished B.S.F. Thesis, Faculty of Forestry, U n i v e r s i t y of B r i t i s h Columbia, Vancouver. 73 p. Kerfoot, D. E., 1966. Port of B r i t i s h Columbia: Development and Trading Patterns. B.C. Geographical Series, number 2. Tantalous Research Limited, Vancouver. 113 p. + App. Langdon, F. C., 1973. Japan's Foreign P o l i c y . U n i v e r s i t y of B r i t i s h Columbia Press, Vancouver. 224 p. Leftwich, R. H., 1973. The Price System and Resource A l l o c a t i o n . F i f t h e d i t i o n . The Dryden Press, Hinsdale, I l l i n o i s . 433 p. Lewis, H. V., 1976. "Objectives of Public Forest P o l i c y i n B r i t i s h Columbia: Some Economic Observations" i n W. McKillop and W. J . Mead (eds.) op c i t . pp. 3-22. , 1977. Personal communication. L i n d e l l , G., 1977. Log Export R e s t r i c t i o n s of the Western States and B r i t i s h Columbia. P u b l i c a t i o n forthcoming, USDA Forest Service, P a c i f i c Northwest Forest and Range Exp. Sta., Portland, Oregon. 40 p. 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Crown Charges for Early Timber Rights. F i r s t Report of the Task Force on Crown Timber Disposal. Queen's P r i n t e r , V i c t o r i a . 47 p. + App. , 1974b. Timber Appraisal. Second Report of the Task Force on Crown Timber Disposal. Queen's P r i n t e r , V i c t o r i a . 156 p. + App. Powrie, T. L., 1976. " S t a t i c R e d i s t r i b u t i v e and Welfare E f f e c t s of an Export Tax" i n A. D. Scott (ed.) Natural Resource Revenues: A Test of Federalism. University of B r i t i s h Columbia Press, Vancouver, pp. 137-152. Prince Rupert Ci t y Council, 1975. B r i e f Submitted to the Royal Commission on Forest Resources. Prince Rupert. 3 p. Prince Rupert Forest Products Limited, 1975. B r i e f to the Royal Commis-sion on Forest Resources. Vancouver. 20 p. + App. Province of B r i t i s h Columbia, 1960. Forest Act. R.S.B.C. 1960, Chapter 153, Queen's P r i n t e r , V i c t o r i a . Q.C. Timber Ltd., 1975. Submission to the Royal Commission on Forest Resources. Vancouver. 27 p. + App. Raynauld, A., 1967. The Canadian Economic System. The MacMillan Company of Canada Limited, Toronto. 440 p. Robinson, J. L., and W. G. Hardwick, 1973. B r i t i s h Columbia: One Hundred Years of Geographical Change. Gordon F i d l e r , Vancouver. 63 p. Ross, W. R., 1912. B r i t i s h Columbia's Forest P o l i c y — S p e e c h by the Minist e r of Lands on the Second Reading of the Forest B i l l . Mimeo, V i c t o r i a . 24 p. 102 Rostow, W. W., 1960. The Process of Economic Growth. Second e d i t i o n . Clarendon Press, Oxford, England. 372 p. Ruderman, F. K., 1976. Production, Pr i c e s , Employment, and Trade i n Northwest Forest Industries, 3rd Quarter 1976. USDA Forest Service, P a c i f i c Northwest Forest and Range Experiment Station, Portland, Oregon. 53 p. Sanvictores, B. F., 1975. "Moving Away From Log Exports", Unasylva, 1975 (II):10-19. Scitovsky, T., 1971. Welfare and Competition. Richard D. Irwin, Inc., Homewood, I l l i n o i s . 472 p. Scott, A. D., (ed.), 1976. Natural Resource Revenues: A Test of Federalism. Un i v e r s i t y of B r i t i s h Columbia Press, Vancouver. 261 p. Scott, A. D., and R. A. Shearer, 1975. Some Sources of I n e f f i c i e n c y i n Forest P o l i c y — T h e C o n f l i c t of D i s t r i b u t i o n and E f f i c i e n c y as C r i t e r i a f o r P o l i c y . B r i e f Submitted to the Royal Commission on Forest Resources. Vancouver. 16 p. Shand, E. A., 1968. The Development of the Japanese Market for P a c i f i c Northwest Lumber: A H i s t o r i c a l Survey. Unpublished MBA Thesis, Faculty of Commerce and Business Administration, University of B r i t i s h Columbia, Vancouver. 168 p. + App. Shearer, R., (ed.), 1968. E x p l o i t i n g Our Economic P o t e n t i a l — P u b l i c  P o l i c y and the B r i t i s h Columbia Economy. Holt, Rhinehart and Winston of Canada, Limited, Toronto. 151 p. Shields, K., 1977. The Challenge of Rapid Change i n the B r i t i s h Columbia Forest Products Industry. Paper presented to the 34th Annual Truck Loggers' Association Convention, January 19, 1977, Vancouver. Pemberton S e c u r i t i e s Limited, Mimeo. 4 p. Sloan, G. McG., 1945. Report of the Commissioner Relating to the Forest Resources of B r i t i s h Columbia. King's P r i n t e r , V i c t o r i a . 188 p. , 1957. Report of the Commiss ioner Relating to the Forest* Re-sources of B r i t i s h Columbia, Volume 1. Queen's P r i n t e r , V i c t o r i a . 416 p. Smith, A. J . R., 1971. "Canada's P o l i c y Problem" i n I-D. Pal (ed.) op c i t . pp. 477-496. Smith, J. H. G., 1976. "Investment Implications of Sustained Y i e l d Theories and C r i t e r i a f o r Improving Forest Land Management" i n W. McKillop and W. J . Mead (eds.) op. c i t . pp. 142-170. 103 Smith, J . H. G., 1977. "Reports on the Discussion Forums" i n The Pearse Report and Future Forest P o l i c y . Centre f o r Continuing Education and the Faculty of Forestry, The University of B r i t i s h Columbia, Mimeo, Vancouver, pp. 17-25. Stanford Research I n s t i t u t e , 1974a. Benefits and Costs of A l t e r n a t i v e Log Export P o l i c i e s — P h a s e I Report. Prepared for the P a c i f i c Northwest Regional Commission, Vancouver, Washington. 126 p. + App. , 1974b. Benefits and Costs of A l t e r n a t i v e Log Export P o l i c i e s — Phase II Report. Prepared for the P a c i f i c Northwest Regional Commission, Vancouver, Washington. 99 p. + App. S t a t i s t i c s Canada, 1977. Labour Force Survey. Catalogue 71-001. Sutton, W. R. J . , 1975. An Evaluation of New Zealand's Forestry Export P o t e n t i a l . Unpublished Ph.D. Thesis. Oxford Un i v e r s i t y . 211 p. + App. The Bank of Nova Scotia, 1971. "Canada's Trade Across the P a c i f i c " i n I-D. Pal (ed.) op. c i t . pp. 461-471. Usmar, R., and G. J . Yska, 1971. New Zealand's Wood Supply; Trends In I t s Management and Use. Mimeo. 24 p. Waterland, T. M., 1977. Where We Are and Where We Are Going. Address by the Minister of Forests to the Annual General Meeting of the Council of Forest Industries of B r i t i s h Columbia, A p r i l 14, 1977, Vancouver. Mimeo. 22 p. W i l l i s t o n , R., 1968. Statement on Log Export. Mimeo, V i c t o r i a . 3 p. Wilson, A., 1975. "Union man asks gov't log c o n t r o l " , Vancouver Sun, December 13, 1975. p. 32. Wright, D. M. , 1969. A Comparison of the B.C. Cubic Scale With Three Log-Scale Rules Used i n Western North America. Environment Canada P u b l i c a t i o n VP-X-52, Vancouver. 9 p. 104 APPENDIX A: EXPORT/DOMESTIC PRICE DIFFERENTIALS, 1973-1974. TABLE A - l EXPORT/DOMESTIC PRICE COMPARISON1—BY GRADE, 1973 „ Market  Species Grade V.L.M. U.S. Export —Canadian d o l l a r s per cunit Douglas-fir No. 1 Peeler $136.74 $465.40 No. 2 Peeler 132.85 367.75 No. 3/No. 4 P e e l e r 3 110.46 261.33 No. 1 Sawmill 85.22 233.45 No. 2 Sawmill 73.80 167.30 No. 3 Sawmill 57.10 87.37 Hemlock No. 1* 81.15 254.85 No. 2 77.35 159.69 No. 3 55.20 101.37 Spruce No. 1* 431.12 640.58 No. 2 188.68 224.24 No. 3 67.71 104.73 Cedar No. 1 103.65 336.82 No. 2 78.94 221.91 No. 3 62.75 102.97 Sources: Compiled from: Adams, T. C. Log Prices  i n Western Washington and Northwestern Oregon 1963-73, PNW-235, 1974; C.O.F.I., Average Log Pr i c e s , 1973. "'"See Appendix B for conversion factors and exchange rates. 2 See Appendix B for grading r u l e s . 3 Includes No. 3 Peeler and Special M i l l i n U.S. grades. 4 Includes Peeler, Special M i l l and No. 1 sawmill i n U.S. grades. TABLE A-2 EXPORT/DOMESTIC PRICE COMPARISON —BY GRADE, 1974 Species Grade 2 V.L.M. Market ~ U.S. Export —Canadian d o l l a r s per cunit Douglas-fir No. 1 Peeler $153.43 $396.09 No. 2 Peeler 144.77 283.26 No. 3/No. 4 Peeler 129.05 206.99 No. 1 Sawmill 99.05 212.13 No. 2 Sawmill 86.29 132.28 No. 3 Sawmill 64.90 80.65 Hemlock No. 15 82.33 202.96 No. 2 79.35 120.68 No. 3 56.97 78.16 Spruce No. I 5 401.53 418.22 No. 2 139.32 161.15 No. 3 69.19 99.97 Cedar No. 1 89 .'47 192.58 No. 2 66.93 125.01 No. 3 57.30 73.29 Sources: Compiled from: I n d u s t r i a l Forestry Association, Composite Log Sales Analysis—Puget Sound D i s t r i c t , 1974; C.O.F.I., Average Log P r i c e s , 1974. See Appendix B for.conversion factors and exchange rates. 2 See Appendix B f o r grading r u l e s . 3 3rd quarter only; Puget Sound D i s t r i c t sales only. 4 Includes No. 3 Peeler and Special M i l l i n U.S. grades. ^Includes Peeler, Special M i l l and No. 1 sawmill i n U.S. grades. 106 APPENDIX B: CONVERSION FACTORS, EXCHANGE RATES AND LOG GRADES B . l . Conversion Factors The units of wood measurement used i n the P a c i f i c Northwest and those used i n B.C. are completely d i f f e r e n t . The Scribner Decimal C Board Foot Rule i s the most commonly used log scale i n the P.N.W.; i n B.C. the o f f i c i a l scale i s the B.C. Firmwood Cubic Rule. Comparisons of log prices i n the two regions require that the prices be expressed on the basis of a common u n i t . The t h e o r e t i c a l conversion from Scribner Decimal C to B.C. Firm-wood ( i . e . , from Mbm. Scribner to cunits) ranges from 3.5 : 1 for logs with 4" DIB (small end) to 1.3 : 1 for large logs with 40" DIB (C.O.F.I., 1973). An average conversion of between 1.9 : 1 and 2 : 1 i s normally used ( i b i d ) . This averaging can be very misleading when dealing with s p e c i f i c log grades, however. To f a c i l i t a t e the per grade examination of export and domestic log p r i c e s , i n d i v i d u a l grade conversion factors were estimated. The estimation procedure was as follows: f i r s t , the range of log diameters was divided into grades (No. 3 equalled logs between 4" and 13"; No. 2 — logs between 14" and 23", No. 1 — l o g s 24" p l u s ) . Second, the i n d i v i d u a l diameter classes (and applicable t h e o r e t i c a l conversion factors) within each grade were weighted with the appropriate volume of logs that f e l l within that class i n a sample of export logs (Adams and Hamilton, 1965). The conversion factors estimated were: No. 1 - 1.4 : 1 No. 2 - 1.8 : 1 No. 3 - 2.5 : 1 These conversion factors apply only to export sales. The i n d i -v i d u a l grade conversion factors r e f l e c t the s i z e d i s t r i b u t i o n within that grade, and for No. 3 logs e s p e c i a l l y , export sales are concentrated i n the larger diameters. When aggregated (again using weights) these per grade conversion factors r e s u l t i n an average all-grade conversion factor of 1.7 : 1. This factor r e f l e c t s the r e l a t i v e l y higher q u a l i t y grade d i s t r i b u t i o n of U.S. export sales and, as such, i s considered to be more appropriate for the purpose of t h i s study than the general conversion factor of 1.9 : 1. B.2. Exchange Rates Conversion of U.S. log prices into Canadian units requires also that the two currencies be examined on a comparable basis. A l l p r i c e figures i n the thesis are recorded i n Canadian d o l l a r s ; the U.S. prices have been converted using the following schedule of exchange rates (Bank of Canada, 1977): 107 1970 - 1.0440 1971 - 1.0098 1972 - .9905 1973 -r 1.0001 1974 - .9780 1975 - 1.0173 1 1 1 1 1 1 B.3. Log Grades The comparison of log prices i n B.C. and the P a c i f i c Northwest i s further complicated by the differences i n log grading rules i n the two regions. Examination of the diameter l i m i t s , log lengths and lumber content requirements of the two grading systems suggests that the No. 1 and No. 2 grade c l a s s i f i c a t i o n s are somewhat more stringent i n B.C. than i n the U.S. The No. 3 grade c l a s s i f i c a t i o n i n B.C. includes a much wider range of log q u a l i t i e s than does the U.S. No. 3. Based on t h i s i n f o r -mation, the comparison of s i m i l a r l y l i s t e d grades i n the two regions would suggest a q u a l i t y bias i n favour of the B.C. logs. In t h i s regard, the differences i n log prices indicated by the export-domestic p r i c e comparison would tend to be conservative. 108 APPENDIX C: ESTIMATES OF INCOME REDISTRIBUTED, 1975 In Chapter 4, the r e d i s t r i b u t i o n of income within the p r o v i n c i a l economy which occurs as the r e s u l t of export r e s t r i c t i o n was described. To review b r i e f l y : the r e s t r i c t i o n s hold domestic log prices below i n t e r n a t i o n a l l e v e l s thereby providing the domestic processing sector with an i m p l i c i t benefit (in terms of reduced raw material costs) while, at the same time, imposing an opportunity cost ( i n terms of foregone revenue) on both the log producing sector and the Crown. This appendix estimates the income r e d i s t r i b u t e d i n 1975 within the l i m i t s of two general assumptions regarding the p r i c e responsiveness of i n t e r n a t i o n a l demand for softwood logs. In addition, an estimate of the a l l o c a t i o n of the cost between the Crown and the log producing sector i s provided. For the upper l i m i t of the estimate i t i s assumed that i n t e r n a t i o n -a l p r ices would not respond to an increase i n log supply ( i . e . , that i n t e r n a t i o n a l demand i s completely p r i c e e l a s t i c ) , which, i n turn, implies that any (or a l l ) of the coastal B.C. log production could be sold on the i n t e r n a t i o n a l market at stated export p r i c e s . For the lower l i m i t , i t i s assumed that a supply increase would r e s u l t i n a decrease i n the interna-t i o n a l p r i c e l e v e l , and that, for the volume considered here, the decrease would be i n the range of 90% of the stated d i f f e r e n c e between export and domestic prices ( i . e . , that i n t e r n a t i o n a l demand i s almost completely i n e l a s t i c ) . As explained i n Chapter 4, up-to-date information that would provide an i n d i c a t i o n of the true p r i c e responsiveness of i n t e r n a t i o n a l demand i s not a v a i l a b l e . The procedure for each of the two e l a s t i c i t y assumptions involves twelve steps and includes an adjustment for maximum stumpage rates. Although important, adjustment for: minimum stumpage rates i s not f e a s i b l e without accurate information regarding operating cost allowances. Nevertheless, i t can be presumed that the burden of the cost assumed by the log producing sector would have been greater than indicated below i f minimum rates had been i n e f f e c t (which apparently was the case i n many instances i n 1975). Available information r e s t r i c t s the c a l c u l a t i o n s to Douglas-fir, hemlock, spruce and cedar. C l . P r i c e E l a s t i c For the assumption that export prices remain fi r m i n the face of an increase i n log supply, the twelve steps are as follows: step 1: using s t a t i s t i c s published by the B.C. Forest Service (1975a) f i n d the average per cunit stumpage p r i c e for each specie. step 2: using the p r o f i t allowance extremes of (i) 10.7% and ( i i ) 21.3% of average s e l l i n g price 1* 1* along with V.L.M. average s e l l i n g The determination of the range of the p r o f i t allowance i s described i n footnote 18, page 41. 109 p r i c e , estimate the d o l l a r value range of the p r o f i t allowance. step 3: subtracting the average stumpage p r i c e (step 1) and the two p r o f i t allowance figures (step 2) from the V.L.M. average p r i c e , estimate the average per cunit operating costs for the two p r o f i t allowance assumptions. step 4: s u b s t i t u t i n g the average export p r i c e (Table 3-11) f o r the V.L.M. p r i c e , apply the 10.7% and 21.3% p r o f i t allowance assumptions and estimate the indicated per cunit p r o f i t allowance for the two extremes. step 5: subtracting the indicated p r o f i t allowance figures (step 4) and the average operating cost figures (step 3) from the average export p r i c e , estimate the indicated per cunit stumpage charges fo r the two p r o f i t allowance assumptions. step 6: adding the appropriate indicated p r o f i t allowance and stumpage charge f i g u r e s , estimate the conversion returns f o r the two p r o f i t allowances. step 7: multip l y i n g the conversion return estimates by 0.6 f i n d the maximum per cunit stumpage charges f o r the two assumptions. step 8: fi n d i n g the lower of the indicated stumpage charge and the maxi-mum stumpage charge, determine the revised per cunit stumpage charge at the two extremes. step 9: subtracting the revised stumpage charge from the conversion return, f i n d the revised per cunit p r o f i t allowance for the two p r o f i t allowance assumptions. step 10: subtracting the i n i t i a l stumpage rate (step 1) from the revised stumpage rates, f i n d the estimate of the per cunit stumpage revenues foregone at the two extremes. Subtracting the revised p r o f i t allowance fi g u r e from the i n i t i a l allowance (step 2) f i n d the estimate of the per cunit p r o f i t allowance foregone at the two extremes. step 11: mul t i p l y i n g the per cunit stumpage and p r o f i t allowance figures (step 10) by the volume of the applicable material harvested i n 1975, estimate the t o t a l cost to the Crown and to the log pro-ducing sector. Adding the two fi g u r e s , estimate the t o t a l income foregone for each species. step 12: adding the t o t a l s f o r the i n d i v i d u a l species f i n d the t o t a l income foregone for the four species combined. Viewed oppositely, t h i s f i g u r e measures the t o t a l l e v e l of p r i c e support received by the processing sector. The r e s u l t s of the cal c u l a t i o n s are presented below. The c a l c u l a -tions f o r Douglas-fir are presented i n d e t a i l for i l l u s t r a t i v e purposes; only the f i n a l step i s presented for the other species. C . l . l . Douglas-fir average stumpage = $9.65 V.L.M. = $71.08 ( i ) at 10.7% = $ 7.61 ( i i ) at 21.3% = $15.14 (i) $71.08 - 7.61 - 9.65 ( i i ) $71.08 -15.14 -9.65 $53.82 $46.29 export p r i c e = $132.32 (1) ( i i ) $14.16 $28.18 (i) $132.32 - 53.82 - 14.16 ( i i ) $132.32 - 46.29 - 28.18 $64.34 $57.85 (i) $14.16 + $64.34 = $78.50 ( i i ) $28.18 + $57.85 = $86.03 (i) $78.50 x 0.6 = $47.10 ( i i ) $86.03 x 0.6 = $51.62 (i) $47.10 ( i i ) $51.62 (i) $78.50 - $47'..10 = $31.40 ( i i ) $86.03 - $51.62 = $34.41 (a) foregone stumpage (i) $47.10 - $9.65 = $37.45 ( i i ) $51.62 - $9.65 = $41.97 (b) foregone p r o f i t allowance (i) $31.40 - $7.61 = $23.79 ( i i ) $34.41 - $15.14 = $19.27 (a) t o t a l stumpage foregone (i) $37.45 x 347,818 cunits = $13,025,784.10 ( i i ) $41.97 x 347,818 cunits = $14,597,921.46 (b) t o t a l p r o f i t allowance foregone (i) $23.79 x 347,818 cunits = $8,274,590.22 ( i i ) $19.27 x 347,818 cunits = $6,702,452.86 (c) t o t a l income foregone = $21,300,374.32 I l l C.1.2. Hemlock S . l l : (a) t o t a l stumpage foregone (i) $43.21 x 1,740,507 cunits = $75,207,350.68 ( i i ) $46.92 x 1,740,508 cunits = $81,664,635.36 (b) t o t a l p r o f i t allowance foregone (i) $25.44 x 1,740,508 cunits = $44,278,523.52 ( i i ) $21.73 x 1,740,508 cunits = $37,821,238.94 (c) t o t a l income foregone = $119,485,874.20 C.1.3. Spruce S . l l : (a) t o t a l stumpage foregone (i) $36.72 x 232,320 cunits = $8,530,790.40 ( i i ) $42.49 x 232,320 cunits = $9,871,276.80 (b) t o t a l p r o f i t allowance foregone (i) $22.39 x 232,320 cunits = $5,201,644.80 ( i i ) $16.62 x 232,320 cunits = $3,861,158.40 (c) t o t a l income foregone = $13,732,435.20 C.1.4. Cedar S . l l : (a) t o t a l stumpage foregone (i) $35.57 x 670,510 cunits = $23,850,040.70 ( i i ) $38.47 x 670,510 cunits = $26,465,029.70 (b) t o t a l p r o f i t allowance foregone (i) $20.39 x 670,510 cunits = $13,671,698.90 ( i i ) $16.49 x 670,510 cunits = $11,056,709.90 (c) t o t a l income foregone = $37,521,739.60 Adding the i n d i v i d u a l species t o t a l (step 12) provides an estimate of the t o t a l d o l l a r value of the income foregone by the Crown and the log produc-ing sector (for the four species) i n 1975 under the assumption of complete p r i c e e l a s t i c i t y . S.12 Douglas-fir $ 21,300,374.32 Hemlock 119,485,874.20 Spruce 13,732,435.20 Cedar 37,521,739.60 $192,040,423.32 T o t a l l i n g the i n d i v i d u a l species stumpage figures as well as the i n d i v i d u a l species p r o f i t allowance figures gives the upper and lower estimates of the a l l o c a t i o n of the burden between the Crown and the log producing sector. 112 ( i ) i f the p r o f i t allowance was 10.7%, the cost to the Crown would have been $120,613,965.88; the cost to the log producing sector $71,426,457.44 ( i i ) i f the p r o f i t allowance was 21.3%, the cost to the Crown would have been $132,598,863.32; the cost to the log producing sector $59,441,560.00. C.2. P r i c e I n e l a s t i c For the assumption of p r i c e i n e l a s t i c i t y , some changes have to be made i n the estimating procedure to account for the responsiveness of i n t e r n a t i o n a l p r i c e s . S p e c i f i c a l l y , steps 4 and 5 become: step 4: subtracting 90% of the d i f f e r e n c e between export and domestic prices from the average export p r i c e , estimate the extent of the p r i c e decrease that would occur from a major change i n log supply. Then, s u b s t i t u t i n g the revised export p r i c e for the V.L.M. p r i c e , apply the 10.7% and 21.3% p r o f i t allowance assump-tions and estimate the indicated per cunit p r o f i t allowance for the two extremes. step 5: subtracting the indicated p r o f i t allowance figures (step 4) and the average operating cost figures (step 3) from the revised export p r i c e (step 4), estimate the indicated per cunit stumpage charges for the two p r o f i t allowance assumptions. Each of the other steps remains the same. The c a l c u l a t i o n s for t h i s assumption are presented below. Again, only the c a l c u l a t i o n s f o r Douglas-fir are presented i n d e t a i l (from step 4). C.2.1. Douglas-fir S.4: revised export p r i c e = $132.32 - .9 ($132.32 - $71.08) = $77.20 (i) at 10.7% = $8.26 ( i i ) at 21.3% = $16.44 S.5: (i ) $77.20 -53.82 - 8.26 ( i i ) $77.20 -46.29 -16.44 $15.12 $14.47 S.6: (i ) ( i i ) $8.26 + $15.12 = $23.38 $16.44 + $14.47 = $30.91 113 S.7: ( i ) $23.38 x 0.6 = $14.03 ( i i ) $30.91 x 0.6 = $18.55 S.8: (i) $14.03 ( i i ) $14.47 S.9: (i) $23.38 - $14.03 = $9.35 ( i i ) $30.91 - $14.47 = $16.44 S.10: (a) foregone stumpage (i) $14.03 - $9.65 = $4.38 ( i i ) $14.47 -.$9.65 = $4.82 (b) foregone p r o f i t allowance (i) $9.35 - $7.61 = $1.74 ( i i ) $16.44 - $15.14 = $1.30 S . l l : (a) t o t a l stumpage foregone (i) $4.38 x 347,818 cunits = $1,523,442.84 ( i i ) $4.82 x 347,818 cunits = $1,676,482.76 (b) t o t a l p r o f i t allowance foregone ( i ) $1.74 x 347,818 cunits = $605,203.32 ( i i ) $1.30 x 347,818 cunits = $452,163.40 (c) t o t a l income foregone = $2,128,646.16 C.2.2. Hemlock S . l l : (a) t o t a l stumpage foregone (i) $6.13 x 1,740,507 cunits = $10,669,307.91 ( i i ) $5.41 x 1,740,507 cunits = $9,416,142.87 (b) t o t a l p r o f i t allowance foregone (i) $0.74 x 1,740,507 cunits = $1,287,975.18 ( i i ) $1.46 x 1,740,507 cunits = $2,541,140.22 (c) t o t a l income foregone = $11,957,283.09 C.2.3. Spruce S . l l : (a) t o t a l stumpage foregone (i) $4.80 x 232,320 cunits = $1,115,136.00 ( i i ) $4.65 x 232,320 cunits = $1,080,288.00 (b) t o t a l p r o f i t allowance foregone (i) $1.11 x 232,320 cunits = $257,875.20 ( i i ) $1.26 x 232,320 cunits = $292,723.20 (c) t o t a l income foregone = $1,373,011.20 114 C.2.4. Cedar S . l l : (a) t o t a l stumpage foregone (i) $5.00 670,510 cunits = $3,352,550.00 ( i i ) $4.41 670,510 cunits = $2,956,949.10 (b) t o t a l p r o f i t allowance foregone (i) $0.60 670,510 cunits = $402,306.00 ( i i ) $1.19 670,510 cunits = $797,906.90 (c) t o t a l income foregone = $3,754,856.00 Adding the i n d i v i d u a l t o t a l s provides an.estimate of the t o t a l income foregone i n 1975 under the assumption that a major increase i n world market log supplies would r e s u l t i n a sub s t a n t i a l decrease i n interna-t i o n a l log p r i c e s . S.12: Douglas-fir $ 2,128,646.16 Hemlock 11,957,283.09 Spruce 1,373,011.20 Cedar 3,754,856.00 $19,213,796.45 The a l l o c a t i o n of the burden between the Crown and the log producing sector would be as follows: ( i ) i f the p r o f i t allowance was 10.7%, the cost to the Crown would have been $16,660,436.75; the cost to the log producing sector $2,553,359.70 ( i i ) i f the p r o f i t allowance was 21.3%, the cost to the Crown would have been $15,129,862.73; the cost to the log producing sector $4,083,933.72 C.3. Conclusions The figures presented here provide an i n d i c a t i o n of the magnitude of the income r e d i s t r i b u t e d between the Crown and the log producing sector on one hand and the processing sector on the other, given c e r t a i n assumptions regarding the p r o f i t allowance and i n t e r n a t i o n a l log demand. Although i t i s not f e a s i b l e (within the scope of t h i s thesis) to deter-mine where within t h i s range the actual income transf e r f a l l s , i t i s clear that, even at the lower extreme, the t o t a l l e v e l of income r e d i s t r i b u t e d i s s u b s t a n t i a l . 

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