To say “I told you so” brings no satisfaction.
Back in April, President Trump slapped tariffs of around 20 percent on the Canadian softwood lumber industry. At the time, I wrote that it would cause lumber prices to rise, citing estimates that prices could increase by around 6.4 percent. Well, it turns out I was wrong, and lumber prices have not risen by around 6 or 7 percent. Instead, they’ve risen by much more since the spring—as much as 25 percent.
One contributing factor for this spike is not hard to see. Tariffs are taxes on the consumer, restricting the consumer’s options when purchasing a product. The levies make imported lumber more expensive, thus making American lumber a more attractive prospect for reasons not necessarily related to its quality or ease of procurement. It is not surprising that politically well-connected American companies, such as the U.S. Lumber Coalition, were strongly supportive of the import taxes. American lumber companies benefit, but at the expense of American lumber consumers that use the product as an input.
This price spike is occurring as the housing market is suffering. Materials needed to build new homes are becoming more expensive, and as a result, the production costs for homebuilders are increasing. This is resulting in a mismatch between sellers and buyers of homes: there is plenty of demand for new, inexpensive homes, but homebuilders cannot make a profit off homes at the prices that buyers can afford. Buyers want cheap homes, and, thanks in part to high lumber tariffs, homebuilders are less able to provide them.
The result of this has been plummeting confidence among homebuilders. The National Association of Home Builders’ confidence index has fallen to an eight-month low as home builders face higher supply costs. While builder confidence jumped following the election as President Trump promised lower taxes on corporations and reductions in regulations surrounding homebuilding, compliance with which makes up as much as a quarter of the cost of building a home. While builder confidence still remains high when compared to, for example, the rock-bottom lows of 2008, this recent drop highlights the administration’s habit of balancing policies that help businesses and consumers with trade policies that shoot American consumers in the foot.
As my colleague Brandon Arnold rightly pointed out at the time the tariffs were introduced, there are reasons for taxpayers to be concerned even if they do not plan to buy a home in the near future. President Trump has been teasing a plan to use $200 billion of taxpayer dollars to leverage $1 trillion in infrastructure investment. Yet with rising lumber prices causing construction costs to increase significantly, any infrastructure plan will get less bang for its buck. So will we see less “bang” or more “buck”? In other words, will Congress fund fewer projects for the same amount of money, or will it fund the same number of projects and spend more money? Either way, taxpayers lose.
The lesson here is not limited to lumber. Tariffs are, by their very nature, financial costs added to the myriad burdens faced by American businesses and consumers at large. As economists continue to overwhelmingly agree, international trade provides a net benefit to both countries that engage in it. Meanwhile, tariffs benefit small, politically favored industries at the expense of American businesses and consumers writ large. The country should seek to repair its damaged trade relationship with Canada and focus on lowering trade barriers, not erecting them.
Jerry Huddleston/Creative Commons