A Discussion Around Tariffs on Canadian Lumber
As inauguration day draws near, Trump’s threat of a 25% tariff on goods from Canada is a concern for many business owners on both sides of the border.
To date, the response from financial markets appears to be that the tariff discussions are a ploy to achieve policy objectives around border security. To that end, Canada’s prime minister did travel to Mar-a-Lago to outline changes he planned to implement to tighten the Canada-US border security. The prime minister did not, however, leave Florida with any assurance that the tariff pledge would be withdrawn.
Given the conservative views of many prospective new Cabinet members, what happens to softwood lumber imports from Canada if a 25% tariff is layered on top of existing and future countervailing (CV) and anti-dumping (AD) duties?
Since the expiration of the 2006 Canada-US softwood lumber settlement agreement expired in 2016, countervailing duties have been applied to Canadian lumber imports. The current combined rate is 14.4%. A 25% tariff could increase the layered rate to 39.4%.
To assess the impact of layered duties, monthly lumber prices were plotted against softwood duties (as a percent of price) and Canadian exports (as a percent of overall US consumption) (see chart).
Since 2017, softwood lumber prices have varied between $330/MBF and $1500/MBF, and Canadian lumber import duties between 6.6% and 26.5%. Irrespective of these variances, Canadian imports have declined from about 35% of US consumption at the end of 2016, to about 24% this past year. On a monthly basis, imports moved in the direction of a change in price only about half the time. As seen in the chart, there is no correlation.
This decline in Canadian lumber imports would have persisted even in the absence of tariffs, due to evolving forest management policies in Canada and a scarcity of economically viable log supplies.
Ignoring Trump’s tariff warning for a moment, the forest industry generally expects that the Department of Commerce will increase the combined duties on Canadian lumber imports above 30% in August 2025. If the 25% tariff is extended to August, the layered import fee could increase to over 55%.
So, what happens when January 20th comes and Trump fulfills his 25% tariff promise? Due to the integration of the North American economy, there would be losses for both countries, but the losses for Canada would be much larger. Regarding lumber, the US still needs Canadian supplies to meet its domestic consumption demand. A combined 39% levy will result in a lumber supply shock, and since Canadian lumber producers would not be able to absorb this, the price of lumber will adjust upwards to offset some (not all) of the cost of the tariff. Since the tariff would apply to many Canadian goods (energy being the most significant), the Bank of Canada would reduce interest rates, which would, in turn, further devalue the Canadian dollar relative to the US greenback. This would favor Canadian exporters and offset some more of the cost of the tariff. As these changes play out, there will be a tremendous amount of lumber price volatility. Lumber prices of $500+/MBF would be required for some Canadian sawmills to break even and allow sufficient imports to accommodate a reduced level of US domestic demand. If tariffs remain till August and combined import levies exceed 55%, the price of lumber would need to exceed US$600/MBF to accommodate some Canadian supply. At this level, assuming a 1.4 Canadian to US exchange rate, many Canadian lumber mills should still be able to break even. However, once prices surpass $600/MFB, the import of lumber from European countries will begin, thereby perpetuating price volatility.
In Canada, the majority of us hope the tariff threat’s real goal is to improve border security and that Canada’s federal government will respond by doing just that and thereby eliminate the trade threat.
Disclaimer: The opinions expressed in this article are those of the author and do not necessarily reflect the views or opinions of the Forest Resources Association (FRA).
