Homebuilders could be losers in US trade policy

Bloomberg

A long-simmering trade dispute between the US and Canada over lumber is heating up, increasing the cost of building houses and causing American businesses to hunt for supplies in other countries.
A detente between the normally friendly neighbors expired in October, and a new agreement isn’t on the horizon. That’s contributed to a more than 20 percent surge in wood prices since the US election and has the US poised to impose tariffs that may send prices even higher.
Since the early 1980s, the US has argued with Canada over how much softwood lumber the country’s suppliers can sell in the US and at what price. The two nations have negotiated temporary agreements in previous years over softwood, which comes from trees that have cones, like pine or spruce, and is preferred by builders for constructing home frames.
But hammering out a new deal has been slow-going for the Trump administration, which still doesn’t have its chief trade negotiator in place. “There’s a tremendous amount of frustration because of this,” said Jerry Carter, a custom home builder and remodeler in Dallas. “It’s similar to the impact if you go to buy gas one day and decide not to buy it when it was three dollars, and then you go back first thing in the morning and it’s four dollars. Except you’re buying $10,000 worth of gas.”
After the latest deal lapsed, a group including US timber companies petitioned an independent government agency and the US Commerce Department for duties on lumber imports from Canada, saying the country unfairly subsidizes its own industry, costing profits and jobs. Those taxes, the first of which is expected to be announced by the end of April, could total more than 30 percent.
While beneficial for US lumber suppliers, tariffs could lead to even higher costs for companies that buy wood, such as builders and mattress makers, which use it in box springs. President Donald Trump has been highly critical of existing trade deals and has called for the renegotiation of the North American Free Trade Agreement, which could ultimately include the wood dispute. Trump picked Robert Lighthizer to be the next US Trade Representative in January, and his nomination is pending before the Senate.
Lighthizer said at his confirmation hearing last month that he views the lumber dispute as the top trade issue between the US and Canada. Oregon Democratic Senator Ron Wyden told Lighthizer the fight is the “longest-running battle since the Trojan War.”
The $4.7 billion in softwood lumber that Canada sent to the US in 2015 made up less than 2 percent of its exports to the US, but the wood trade has an outsize impact in timber producing regions of both countries. Most of the softwood in Canada is owned by provincial governments, which set prices to cut trees on their land, while it’s generally harvested from private property in the US The fees charged by Canadian governments are below market rates, creating an unfair advantage, US producers say. Canada disputes that.
US import penalties could increase the market price for wood even more, boosting profits for producers. Builders may suffer unless the can pass the higher prices along to consumers. Then there are the mattress companies.
Canadian softwood is their lumber of choice for box springs because they claim colder climates produce a finer grain, which reduces warping and squeaks. The manufacturers are concerned the dispute will result in less lumber flowing into the US and want the lower-grade Canadian wood they use exempted from any tariffs or restrictions.
“The last thing you want is a customer returning a product because the wife says every time her husband turns over the box spring squeaks,” said Ryan Trainer, president of the International Sleep Products Association, a trade group for the mattress industry that has lobbied for the exemption.
Some large builders can lock in lumber prices for months, but eventually both large and small builders will either pass the higher prices to buyers or earn less money.
Carter, the Dallas homebuilder, recently passed on the higher prices to a buyer. For a 3,300-square-foot home he’s constructing for a young couple, he’d estimated late last year the lumber would cost $27,000. Last week, when he went to lock in the price, the quote came in $4,500 higher.