The United States-Canada softwood lumber trade: An actual versus optimal export tax

- We develop a two-country two-stage game model to examine the lumber trade between the USA and Canada.
- The capacity-constraint scenario of the U.S. domestic lumber industry is taken into account.
- Canadian production costs and the U.S. lumber production capacity are main determinants of the optimal export tax.

By developing a two-country two-stage game model, this study examines an optimal level of export tax under the framework of the 2006 United States (U.S.)-Canada Softwood Lumber Agreement (SLA 2006). The theoretical results suggest that marginal lumber production costs in Canada and U.S. lumber production capacity along with linear demand parameters determine an optimum rate of export tax on Canadian lumber exports to the U.S. The empirical estimation reveals that the monthly optimal export tax during the SLA 2006 period follows the actual export tax closely with a monthly rate ranging from  −4% to 19%.