This document outlines a proposal to model the demand for Canadian softwood exports to China. It will analyze factors like price, income, exchange rates, and construction activity to estimate demand. The methodology draws on previous models of Canada-US trade and will use regression analysis of time series data from Canada, China, and the US. The goal is to help inform Canadian policy to increase softwood exports to China as an alternative to the disputed US market.

1. “Modeling the Demand for
Canadian Softwood
Exports to China”
By: Joey Zuo
Principal Advisor:
Dr. S. Dev Gupta
Canadian Softwood Exports 1

2. Outline of the Proposal
 Introduction
 Objectives
 Theoretical Analysis
 Literature Review (Trade Restrictions
 and Observed Impacts)
 Methodology (Demand Model
Specification)
 Data Availability
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3. Introduction—The News
 Prime Minister Paul Martin
announced an intention to increase
Canadian softwood exports to China.
 Background information: the forestry
industry has long been concerned
that the U.S. has ignored the WTO
ruling.
 Canadian softwood industry is not
unfairly subsidized.
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4. Introduction—Softwood Industry
 Softwood lumber is by far the largest
component of the Canadian forestry
products sector.
 Softwood: wood from coniferous tress with
needle leaves
 Used mainly for pulp and paper, structural
applications, millwork, etc.
 Main producing regions: BC-Alberta,
Quebec-Ontario, the Maritime Provinces.
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5. Introduction—Softwood Dispute
 Softwood lumber is by far the largest exports to
the U.S.
 Canada provides one third of the softwood
consumption for the U.S.
 Export Duty by Canada (MOU, 1986 – 1991)
 Countervailing Duty by U.S. (1991 – 1995)
(Revoked during 1994)
 Tariff Rate Quota by Canada (SLA, 1996 – 2001)
 Countervailing Duty and Antidumping Duty by
U.S. (2001 – Current)
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6. Introduction—Impacts of Trade
Restrictions
 Increase in prices of
softwood in Canada
and the U.S.
 Fluctuation in the
export & import
volume.
 Penalties collected: $3
billion.
 Mill closures and
workers being laid off.
Canadian Softwood Exports 6

7. Introduction—The Growing
Chinese Market
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8. Objectives
 Stop exporting softwood to the U.S. vs.
Grow a larger finished-wood market in
Canada.
 The solution? –Increase exports to China.
 An economic analysis—to estimate the
demand of Canadian softwood exports to
China, following the empirical studies done
on the Canada-U.S. trade.
 Investigation—trade barriers in China.
 Policy applications—strategic partnership.
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9. Theoretical Analysis—A Demand
Model
 Based on contemporary neoclassical
microeconomic theory
+ - + + + +
 Qd=f(Pt,P0t,HSt,MRt,EX,I).
 Pt (Price of softwood) increases, the
quantity demanded will decrease—the law
of demand.
 Pot (Price of other building materials)
increases, the demand for softwood will
increase—the substitution effect.
 HSt, MRt (New houses building and maintenance
activity).
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10. Theoretical Analysis
 Ex (real exchange rate) decreases, the
demand for Canadian softwood lumber will
increase.
 I (Income) increases, the demand curve
will shift in a proportion of the change—
income effect.
 Other factors: transportation costs, export
taxes, subsidies—production costs.
 Export taxes will reduce the demand and
subsidies stimulate the demand.
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11. A Demand Model Cont….
International Trade Theory
 Canada is forestry resource abundant
—comparative advantage.
 Effects of Tariffs
 Effects of Subsidies
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12. Literature Review
 Numerous studies on the impact of U.S.
trade barriers on the U.S. market—apply
to the Chinese market.
 Countervailing Duties (CVD)—more
harmful than its target: subsidies.
 Export Duties (ex. MOU)—affecting prices.
 Excise Taxes—will raise the revenue of the
government, and no benefits go to the
foreign.
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13. Methodology
 To estimate the factor effects on the
demand of Canadian softwood in China,
we need to use the regression analysis,
following the Uri and Boyd’s model (1990).
 Desired demand Qt*=f(Pt,Xt) in the SR.
 In the LR, (Qt*/Qt-1)=(Qt*/Qt-1)a, where a
is the adjustment parameter.
 The actual demand
Qt=(Qt*)^a (Qt-1)^(1-a).
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14. Methodology
 Qt*=
Pt,Pot,HSt,MRt,Ex are explained in the
theoretical analysis.
C0,C1,C2,…,C6 and the error term u are
the parameters to be estimated.
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15. Methodology
 Combining equations 1,2,and 3, we
get:
 Taking the natural logarithms on the
both sides, we get:
 ln(Qt)=alnC0+(1-a)ln(Qt1)+aC1ln(Pt)+
aC2ln(Pot)+aC3ln(HSt)+aC4ln(MRt)+
aC5ln(Ex)+aC6ln(I)+ln(u)
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16. Methodology
 The coefficient of price of softwood
C1 should be negative.
 The coefficient on price of other
building materials, C2 should be
positive.
 Coefficients on maintenance, new
housing activities, and exchange
reate--C3,C4,C5 and C6 should be
positive.
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17. Expected Results
 Allare statistically significant—F
tests.
 Achieving expected signs.
 Null hypothesis: the price elasticity
of demand of softwood exports
equals -1.
 In the U.S. it ranges between -0.008
and -3.20. in the 1970s.(Uri, Boyd,
1990)
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18. Data Availability
 Canada—Canadian Natural
Resources, Forestry Canada, Statistic
Canada, and Commerce Canada.
 China—National Bureau of Statistics
of China, Ministry of Commerce of
PRC.
 U.S.
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