Economic Ironies and The Crisis of the Forest Industry

The Communications Energy and Paperworkers Union (CEP) organized a lively and informative forum on the forest industry crisis today on Parliament Hill, bringing together leading union,  community, industry and environmental spokespersons.  Some 20,000 jobs have been lost over the past three years due to literally scores of  mill closures in both the pulp and paper and lumber sectors, devastating rural industrial communities across the entire country. 

The key factors at play in this ‘perfect storm’ have been the high Canadian dollar, reduced US demand for newsprint and (recently) lumber, the rise of forest production in developing countries due to technological changes which no longer put Canadian species at a premium for pulp and paper production, a legacy of industry under-investment in aging mills, and our long-standing failure to add value to the forest resource through more innovative competitive strategies.

For an economist, certain ironies abound. In theory, we are, as a country,  supposed to participate in the global economy by focusing in areas of comparative advantage, and by shifting resources from lower to higher productivity sectors.  Industries of the future are generally held to be those which are highly productive, carbon light, and environmentally sustainable. Theory should lead us to see the forest industry as a major part of our economic future, but it is disappearing in front of our eyes.  

We surely still have a comparative advantage in forest products – and are still a major exporter to world markets – but US protectionism and the lumber deal in combination with the high dollar have badly squeezed our market in the US. The export tax on softwood lumber is having perverse impacts, ramping up exports of (tax exempt) raw logs from BC to the US and China even as some mills close for lack of timber supply, and raising the price of value-added products (since the tax is added onto the lumber component of costs.)  And potential buyers of closed mills often can’t get export quotas, especially in Ontario which has imposed quantitiative restrictions to allocate the allowed level of exports.   

As for the needed shift of our economy to higher productivity jobs, the forest industry – with 120% of the US labour productivity level – is one of the few major sectors where we are highly productive by world standards. That is why most forest workers losing their jobs are forced to take much lower wage jobs,  often in low pay/low productivity private services jobs, not to mention having to leave the communities in which they live.

Perverse economics are at play in recent closures. Often, mills which close could survive with new investment, and potential new owners are often available. However, the companies closing the mills are often unwilling to sell, preferring to squeeze supply to their advantage, and sometimes to redirect timber resources to their remaining mills. And, in many cases, the mill owners have found that they can make more money by closing mills and re-directing their suddenly surplus hydro power to the provincial grid, selling at high prices.  In Ontario, in particular, companies which historically gained public water rights to power industrial facilities are turning themselves into power producers. (A shift from hewers of wood and drawers of water to water specialists, as it were.) That is why unions and communities are pushing for re-gaining control by again making preservation and creation of industrial jobs the condition for access to resources.

 Another of the ironies of the current crisis is that it is foreclosing potentially viable industries of the future. When sawmills close, we often also lose the smaller, more value-added anciallary operations which we could and should be expanding.  You can’t build flooring from lumber if the sawmill clsoes down. Sawmill closures also starve the pulp industry of raw material, not just for making pulp, but also the wood waste biomass which we have begun to use much more to co-generate heat and power – some of which can be sold to other community users and industries. The forest industry could and should be a minor user of carbon-based energy and a major part of the solution to climate change via the production of biomass and bio fuels,  expanded green power production, and carbon reducing reforestation. Instead, the industry which should be a major part of a sustainable future is shrinking fast.

 The crisis of the forest industry also underlines the failure of our traditional “leave it all to the market” industrial policies. Through most of the past two decades, mills made lots of money (especially when the dollar was low)  and were highly profitable, but generally failed to invest in higher value-added operations – eg fine papers in place of pulp and newsprint; finished building products instead of 2 by 4s.  Corporate income tax cuts  simply went to swell the bottom line.

As CEP has recognized, new investment is badly needed. But support for the industry should come in the form of specific, targeted incentives to invest in new energy technologies, research and development, training, and new machinery and equipment.  Even the industry now talks of the need for targeted measures, hardly surprising now that they are losing money and hence unable to take advantage of a rate cuts which would mainly benefit the energy and financial sectors.

 Keep an eye out for a policy statement coming out of this discussion to be released in the next few weeks …