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Do Protectionist Trade Policies Integrate Domestic Markets? Evidence from the Canada-U.S. Softwood Lumber Dispute

Author

Listed:
  • Jinggang Guo
  • Craig M.T. Johnston
Abstract
We consider the effects of protectionist trade policies on international and domestic market integration, using evidence from the long-standing softwood lumber trade dispute between Canada and the United States. The benefits of trade liberalization are widely acknowledged, including better home-to-foreign price transmission due to reduced tariffs and lower trade costs between countries. Yet in recent years we see efforts to protect specific domestic groups, including producers, through a revival of protectionist trade policies. Such policies could improve the home-to-home price transmission across domestic markets as consumers may seek lower-cost alternatives domestically. We investigate these ideas using a bi-variate threeregime threshold vector error-correction model (TVECM) to examine the spatial price transmission between Canadian and U.S. markets and within U.S. domestic markets. We do that by introducing a structural break at the start of an effective free trade period within our sample. The results suggest that duty-free treatment for imported Canadian softwood lumber substantially lowers the transaction costs between the two nations. Prices are more easily transmitted from the Canadian market to the U.S. at a higher speed, but the speed of price transmission in the reverse direction is not statistically significant. The U.S. domestic market experienced a higher speed of price adjustment across domestic regions prior to the free trade period, which provides evidence that protectionist policies lead to better domestic market integration.

Suggested Citation

  • Jinggang Guo & Craig M.T. Johnston, 2020. "Do Protectionist Trade Policies Integrate Domestic Markets? Evidence from the Canada-U.S. Softwood Lumber Dispute," Staff Working Papers 20-10, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-10
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    References listed on IDEAS

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    More about this item

    Keywords

    International topics; Market structure and pricing; Trade integration;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade

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