The document analyzes the effect of the 1996 US-Canada Softwood Lumber Agreement (SLA) on downstream lumber-using industries in the US. It uses an event study methodology to examine stock price reactions around key dates related to the SLA. The study finds statistically significant negative stock price reactions among lumber-using firms, suggesting the SLA negatively impacted these downstream industries. Specifically, single-family home builders saw stock price declines of over 6% on average. The results indicate trade restrictions can negatively impact downstream industries in the importing country.

1. The Effect of a Trade
Restriction on the Downstream
Industry: Evidence from the
US-Canada Softwood Lumber
Agreement
Nisha Malhotra & Sumeet Gulati

2. Objective
 Trade Restriction:
• Protection for the import competing industry
Increase in the Product price or arrest declining
product prices
• SLA: Export restrictions on Canadian
lumber exports to the US
 Downstream Industry: Lumber using
industries in the US
 Methodolgy: Event Study

3. The Softwood Lumber
Agreement
 US Claim
• Artificially low Provincial Stumpage fees -
Countervailable subsidies.
 April 1996-Softwood Lumber Agreement finalized.
• First 14.7 Billion Board Feet (BBF) of softwood lumber
exports from Alberta, British Columbia, Ontario, and
Quebec would enter the US market duty free.
• The first 650 million board feet over 14.7 BBF -tax of
$50 per thousand board feet.
• Any further exports were subject to a tax of $100 per
thousand board feet.
 Other provinces- Unrestricted access to the US market.

4. Literature
Ries (1993) examines the effect of voluntary
export restraint agreements (1981) on
profits in the Japanese automobile industry.
Lenway et al. (1996) examine the direct
returns to the steel industry from the
voluntary export restrictions of 1982 and
1984.
Begley et al. (1998) Impact of export taxes
during US-Canada’s Memorandum of
understanding

5. Timeline for the dispute
 Softwood Lumber I: 1982
• US authorities decided no subsidy
 Softwood Lumber II: 1986
• 15% provisional duty
• Replaced by 15% export tax in MOU
 Softwood Lumber III: 1991
• Canada unilaterally terminates MOU
• Countervailing case filed: Interim bonding requirement
• Canada wins appeal against countervailing duty in CUSTA (1993
and 1994)
• US revokes duties against Canadian lumber (Aug 1994)
• Bilateral consultation process for softwood established

6. Timeline
 Clinton visits Ottawa in post-NAFTA Euphoria (Feb
1995)
• Highlights worlds biggest trading relationships
• Bilateral trade irritants considered minor
• Bilateral Trade at record high
 February 2, 1996: The Coalition for Fair Lumber
Imports (CFLI) announces intentions to petition if
no pact by Feb 15th
 February 15th 1996: The basic Softwood Lumber
agreement announced
 April 3rd 1996: Details on Softwood Lumber
Agreement Finalized

7. Event Study
An event study is used to examine the reaction of
investors to positive or negative news (also called
events).
• Firm’s stock prices at the time of the event
A simple event study involves the following steps:
• Event of interest (event dates)
• Selection of firms
• Predicting "normal" return during the event window in the absence of
the event
• Abnormal Return=Actual Return-Predicted Return
• Estimating the Average Cumulative Abnormal Return within the event
window for all the firms.
• Testing whether the Average Cumulative Abnormal return is
statistically different from zero.

8. Event Study

t=0
Estimation Period
(365 days)
Event Window
(-5, 5)
t= -396 t= -31

9. Event Study
Standard Market Model to predict
Abnormal Returns
itR
itR firm i’s return at date t
-The return of the value weighted NYSE and AMEX index at
date t.
mtR
a, B and A - are the parameters to be estimated
EW - is a dummy variable that takes the value 1 for the nth day
of the event window and 0 otherwise.

10. Event Study- Events of Interest
 Feb 2nd 1996: Warning by the US Group
“The coalition for fair lumber imports warned that they
would petition the US Govt. to impose duties if no
pact is reached by Feb 15th” – Journal of Commerce inc.
 Feb 15th 1996: Agreement in Principle
“US Lumber Industry welcomes agreement in principle
over subsidized Canadian Softwood Lumber Imports”
– PR Newswire Association
 April 3rd 1996: Finalizing of the agreement
“Canada agrees to tax softwood exports to US….”
-Wall Street Journal
Source: LexisNexis Academic

11. Event Study - Selection of Firms
Downstream Industry/ Users of Softwood Lumber
 Firms belonging to the groups that are members of American
Consumers for Affordable homes (ACAH)
 Short listed firms that fell under lumber using 4-digit Standard
Industrial Classification
• SIC 1521: (Single-Family Housing Construction), SIC 1531 (Operative
Builders), 2451(MobileHomes), and 2452 (Prefabricated Wood
Buildings).
• Besides the direct users, we also include suppliers (the wholesale
lumber dealers) SIC 5211 (Lumber and other Building Materials).
 Checked the website to reconfirm
 Publicly Listed in NYSE and AMEX
• Stock Price data - Centre for Research on Security Prices (CRSP)
database (AMEX, NYSE)

12. Stock Price Response to SLA
Event Window (-1,+1)
EVENT News No. of
firms
ACA Z STAT Positive:
Negative
Z Stat
event 1 Warning by US Producers
37 -1.50% -2.61* 13:24 -1.42
event 2 Agreement Reached in Principle
37 -1.45% -2.63* 11:26 -2.08*
event 3 Canada Finalizes the Agreement
37 -2.47% -3.18** 9:28 -2.74**
* significant at 5 % confidence interval level;
** significant at 1 % confidence interval level
6th column-generalised significant test

13.  Lumber is the primary material used in
new homes.
• An estimated 40 % of US Consumption of
Softwood Lumber is accounted for by
Construction of new residential homes and
another 30% by remodeling and repair.
• The National Association of Home Builders
estimate that direct and indirect use of lumber
in an average new home is about 16,000 board
feet.
Use of Softwood Lumber

14. Stock Price Response, Cumulated over all eventsa ,
by 4-Digit SIC,
Event Window (-1, +1)
b Others 4-digit SICs: 2515-Mattresses and Bedsprings; 5031-Lumber,
Plywood, and Millwork; 5271-Mobile Home Dealers
SIC 4-digit Industries No. of firms TACA Z STAT
1521
Single-family Housing Construction &
Residential Construction, Nec 9 -6.19% -2.90**
1531 Operative Builders 11 -4.22% -0.88
2451 & 2452
Mobile Homes & Prefabricated Wood
Buildings 11 -1.88% 0.04
5211 Lumber and Other Building Materials 6 -12.99% -2.08*
ALL ALL 37 -5.42% -1.84*

15. Industry Coverage
 1521 - Top 5 builders have 15% of market
share. (Top 8 ~ 26%)
 Solely engage in building residential homes,
remodeling, and repairing houses.
 1531 – Top 8 have 23% of the market
share.
 Construction, land acquisitions, sales and a host of
other non-constructive activities
 5211- Top 6 leaders in the market
 2451 & 2452 - 10 manufactured home
producers accounted for 78 percent of
total industry shipments.

16. Robustness Check
Stock Price Response for all the events
Various Event Windows
Event Window No. of firms TACA Z STAT
(-1,+1) 37 -5.42% -1.84*
(-2,+2) 37 -5.11% -2.03*
(-3,+3) 37 -3.55% -2.27*
(-5,+5) 37 -5.10% -2.19*
* significant at 5 % confidence interval level;
** significant at 1 % confidence interval level

17. Conclusion
 We find that events leading to the Softwood
Lumber Agreement brought about large and
statistically significant reductions in the
stock values of the firms in our sample .
Final Consumers:
• The U.S. Census Bureau :
For every 1,000$ increase in housing price
300,000 potential homeowners are priced out
of the housing market. (lower income families)