Illegal Imported Chinese Hardwood Plywood - Just Because It's Cheap Doesn't Make It Right

Kip Howlett
President
Hardwood Plywood and Veneer Association
September 27, 2012

A coalition of U.S. hardwood plywood manufacturers filed today a petition with the International Trade Commission and the U.S. Department of Commerce requesting antidumping margins of up to 300% and countervailing duties for subsidies on Chinese manufactured hardwood plywood. For more information on that case visit: www.hardwoodplywoodfairtrade.org

Chinese import share of the U.S. market has skyrocketed from 7% in 2000 to over a 66% market share in 2011. Why did this happen? In addition to addressing that question, the question of how U.S. customers will be impacted if the U.S. manufacturers are successful in their trade case will also be discussed.

First let’s understand some facts:
U.S. hardwood plywood manufacturing capacity over the last 5 years has been reduced by over 20% with plant closures caused by the housing depression and rising imports.

Capacity utilization dropped from 66% in 2002 to less than 45% of that diminished capacity.

Hundreds of good paying rural jobs, taxes paid, and associated businesses from loggers to truckers to suppliers were all permanently lost.

The U.S. industry’s before tax profits are estimated to be 2%.

Hardwood plywood imports from China grew from $389 million in 2009 to $576 million in 2011.

Over the last 3 years in a U.S. market decimated by the housing depression, Chinese hardwood plywood imports continued to grow from 56% share in 2009 to 63% in 2011.

China consumes more logs (400 million m3, $3.66 billion, 55% of world’s total log exports) than any nation to feed its forest products industry including $274 million of hardwood logs from the U.S. These logs are processed in China and return to the U.S. and other countries in finished goods such as furniture, cabinets and other wood products valued in the billions of dollars.

China consumes more illegal logs than any other nation and the World Resources Institute estimates that 17% is used in plywood production. These manufacturers gain a raw material cost advantage of about 20% in products where raw materials account for typically over 75% of the costs of production.

China is not a free market and the government’s industrial policy has supported at virtually at all cost the expansion of its manufacturing sector to provide jobs that maintain domestic tranquility and social order in its society. Funds to support these policies come from export revenues.

So what happened to the U.S. hardwood plywood industry?

China grew its industrial base in hardwood plywood under a 5 year plan by 255% from 2002-2006 to over 600 producers compared to two dozen in America. Government industrial policies and programs provided subsidies to support that explosive growth. To this day, Chinese producers enjoy a reduced raw material cost advantage by using illegal logs which their government is lax to enforce. Tax rebates and other subsidies support aggressive programs to increase exports to the mature industrial economies in the United States and Europe.

When the domestic market in China cannot absorb all that is produced, and then the excess production is “dumped” into the global market. It’s a classic case. The EU put into place countervailing duties on Chinese produced hardwood plywood imported into their market. The U.S. industry seeks the same remedy.

Ironically, when the U.S. housing bubble was developing, this new U.S. demand coincided with China’s explosive capacity growth. The U.S. industry could not compete with the cheaper Chinese imports that captured the “bubble” demand and then held onto and increased their market share after the bubble burst.

The U.S. does not have an “industrial policy” to promote and protect its industry. We rely on the free market and legal trade remedies which are the only tools available to the industry. Hence, the filing of the anti-dumping and countervailing duty case against Chinese hardwood plywood producers.

The bottom line is the playing field is not level with China.

What about customers?

Over 80% of U.S. produced hardwood plywood is sold to local distributors who then sell to the cabinet, furniture, millwork, homebuilders, and other businesses in their area. These distributors are damaged because their margins are less on cheaper Chinese products and claims costs increase due to quality differences.
Further downstream customers on a short term basis may see prices rise but two important factors should be considered that will shorten whatever the price pressure might be.

First, the 55% of dormant U.S. capacity can more than meet the demands of the U.S. market. Economies of scale and higher productivity as a result of increased domestic production should ameliorate pricing pressures.

U.S. policies on timber harvesting that restrict supply may put pressure on increasing prices but these policies also impact forest health. Economic demand makes a forest valuable as a resource and promotes good stewardship of it. Current policies restricting growth encourage unnatural wild fires, insect and disease devastation. Prices and good stewardship policies are two sides of the same coin.

Second, the motivation of the product “dumper” has been discussed above to get rid of excess production rather than shut down their production. There is another more sinister reason for subsidies and other countervailable practices. If a producer controls a market in either a monopoly or oligopoly then the producer can raise prices at their will. Short term gain becomes longer pain for customers and consumers.

Trade laws protect the rule of law to level the playing field and insure fair play. The U.S. industry produces a certified quality; sustainably produced product from America’s beautiful temperate hardwood forests, the world’s greatest. Favorable resolution will help create more American jobs and conserve a unique natural resource. America’s hardwood plywood industry can compete when everyone plays by the rules.