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Gaston Abstract Page ii

Abstract

This thesis investigates the Japanese demand for wood by product type, by country

of origin, and by species, over the period 1965 to 1993. The product types include

softwood and hardwood logs, softwood and hardwood lumber, and wood-based panel

products (plywood, fibreboard and particle board). In addition to estimating the own-price

effects on quantity demanded for individual wood product imports, substitution effects

within these product categories are documented to the degree possible, including

Japanese substitution with domestic product and non-wood alternatives.

The research makes two important contributions. The first is to offer Japanese

demand descriptors at a level of wood product detail which is not found in the existing

literature. The second is to review and critique the existing methodologies available for

investigating substitution effects among disaggregated products (such as softwood lumber

by species). As it was discovered that the available approaches are inadequate for

properly dealing with product detail, strong recommendations for further research are made

for improving Our ability to document cross-price effects.

The primary conclusion of the study is that individual wood products, by product

type, by country of origin, or by species, behave as distinct economic units. This suggests

that studies which aggregate wood products into broad categories such as "softwood

lumbef risk obscuring important dimensions of both forest products' trade and forest

policy.

Gaston Table of Contents Page iii

TABLE OF CONTENTS

ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE OF CONTENTS iii

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIST OF TABLES v

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIST OF FIGURES vi

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACKNOWLEDGEMENTS vii

INTRODUCTION

1.1 Motivation for the Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Background 3

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 ScopeoftheResearch 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 The Research Problem - 8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Objectives 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 Hypotheses 10

1.4 Organization of Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

LITERATURE REVIEW ON LOG AND LUMBER SUBSTITUTIONS AND IMPLICATIONS FOR FURTHER RESEARCH

2.1 The Econometric Estimates of the Pnce Elasticity of Demand . . . . . . . . . . . . . . . 12 2.1.1 Estimates of Wood for Wood Substitutes . . . . . . . . . . . . . . . . . . . . . . . . 12 2.1.2 Estimates of Non-Wood for Wood Substitutes . . . . . . . . . . . . . . . . . . . . 16

2.2 Parametfic Demand Elasticity Estimation Techniques . . . . . . . . . . . . . . . . . . . . . 20 2.3 Implications for the Present Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

THE MARKET FOR WOOD PRODUCTS IN JAPAN

3.1 The Japanese Domestic Timber Resource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.2 The Use of Japanese Domestic Timber Production . . . . . . . . . . . . . . . . . . . . . . . 44 3.3 lrnports of Wood Products into Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.4 Japanese Processing of Domestic and lmported Logs . . . . . . . . . . . . . . . . . . . . . 57 3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

THEORET CAL FOUNDATIONS AND IMPLICATIONS FOR THE EMPIRICAL

Gaston Table of Contents Page iv

ANALYSIS OF THE JAPANESE DEMAND FOR WOOD PRODUCTS

4.1 Theoretical Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.2 The Empirical Model . . ............................................ -71

. . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Data Sources Used in the Empirical Analysis 73

5.0 EMPIRICAL RESULTS

5.1 Direct Estimation of Japanese Price Elasticities of Demand for Wood lmports . . 85 5.2 Estimation of the Amington Two-Stage Model of the Japanese Demand

for Total Wood lrnports ......................................... -93 5.3 Cornparison of the Two-Stage and Direct Estimates of the Own-Price

Elasticities of Oemand for Wood Product lmports in Japan .............. 100 5.4 Non-Wood Substitution in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Sumrnary 105

6.0 DISCUSSION OF RESULTS

6.1 Japanese Wood Product Imports . Aggregated by Product Type . . . . . . . . . . . . 108 6.2 Japanese Softwaod Lumber lmports. Aggregated by Source . . . . . . . . . . . . . . . 112 6.3 Japanese Softwood Lumber lmports from Canada. Aggtegated by Species . . . 116 6.4 Japanese Softwood Lumber lmports from Non-Canadian Sources .

Aggregated by Species . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 6.5 Japanese Softwood Log. Aggregated by Source . . . . . . . . . . . . . . . . . . . . . . . . 127 6.6 Japanese Softwood Log. Aggregated by Species . . . . . . . . . . . . . . . . . . . . . . . . 130 6.7 Japanese Hardwood Lumber and Log Imports. Aggregated by Source . . . . . . . 134 6.8 Japanese Panel Product Imparts. Aggregated by Source . . . . . . . . . . . . . . . . . . 136

7.0 CONTRIBUTIONS. LIMITATIONS AND IMPLICATIONS FOR FURTHER RESEARCH

7.1 Research Contributions and Implications for the BC Forest lndustry . . . . . . . . . 141 7.1.1 Summary of the Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

. . . . . . . 7.1.2 Implications of the Research for BC Wood Product Marketing 144 . . . . . . . . . . . . . . . . 7.1.3 Implications of the Research for BC Forest Policy 150

7.2 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 7.3 Implications for Further Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Gaston List of Tables Page v

Table 2.1 Table 2.2 Table 2.3 Table 2.4

Table 2.5

Table 2.6 Table 2.7

Table 2.8

Table 2.9

Table 4.1 Table 4.2 Table 5.1 Table 5.2

Table 5.3

Table 5.4 Table 5.5

Table 5.6

Table 5.7

Table 5.8

Table 5.9

Table 7.1

LIST OF TABLES

Own-Price Elasticity of Demand for Softwood Lumber in N.A. . . . . . . . . . . . . . 13 Cross-Price Elasticity of Demand for Similar Lumber in Dfferent Regions . . . . 15 Cross-Price Elasticity of Demand for Different Cumber . . . . . . . . . . . ....... 16 Own-Price and Cross-Price Demand Elasticities for Construction Materials:

McKillop. et a l . . . . . . . . . . . . ................................ 17 Own-Price and Cross-Price Demand Elasticities for Construction Materials:

Rockel and Buongiorno . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Own-Price and Cross-Price Demand Elasticities for US Softwood Lumber ... 19 Own-Price and Cross-Price Demand Elasticities for Selected

Canadian Construction Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Elasticities of ûemand of US Hardwood Plywood lmports

....................................... by Country of Origin 33 Elasticities of Demand of US Softwood Lumber lmports from Canada

BySpecies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Japan Tariff Association Data. Converted Codes . . . . . . . . . . . . . . . . . . . . . . -75 B.C. Offshore Lumber Exports Relative to the Whole of Canada (000s m3) . . -83 Estimates of the Japanese Demand for Aggregated Wood Imports ........ -86 Estimates of the Japanese Demand for Selected Disaggregated

WoodProducts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Estimates of the Constant Elasticity of Substitution Over Varying Degrees

of Wood lmport Aggregation. Correcting for Serial Correlation . . . . . . . 94 Calculated Constant Elasticity of Substitution Weights from Table 5.3. . . . . . . 96 Cochrane-Orcutt Estimates of the Japanese Demand for Selected Aggregations of Wood Imports. Utilizing CES Quantity and Price Indices . . . . . . . . . . . . . . . 96 Calculated Own- and Cross-Price Elasticities of Demand for the Japanese

lmports of al1 Wood Products by Type . . . . . . . . . . . . . . . . . . . . . . . . . 98 Calculated Own- and Cross-Price E lasticities of Dernand for the Japanese

lmports of Softwood Lumber by Country of Origin . . . . . . . . . . . . . . . -99 Calculated Own- and Cross-Price Elasticities of Demand for the Japanese

lmports of Canadian Sohood Lumber by Species . . . . . . . . . . . . . . 100 Cochrane-Orcutt Estimates of the Japanese Demand for Aggregated Wood

Imports. With the Inclusion of a Non-Wood Regressor . . . . . . . . . . . . 105 Destination of Canadian Softwood Lumber and Log Exports. 1992 . . . . . . . . 146

Gaston List of Figures Page vi

Figure 1.1 Figure 1.2 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Figure 3.5 Figure 3.6 Figure 3.7 Figure 3.8 Figure 3.9 Figure 3.10 Figure 3.11 Figure 3.12 Figure 3.13 Figure 3.14 Figure 3.15 Figure 4.1

Figure 4.2

Figure 4.3 Figure 5.1

Figure 5.2 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Figure 6.5 Figure 6.6 Figure 6.7 Figure 6.8 Figure 6.9 Figure 6.10 Figure 6.1 1 Figure 6.1 2 Figure 6.13 Figure 6.14 Figure 6.15

LIST OF FIGURES

Random Lengths S-P-F Lumber Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 PNW Douglas Fir Lumber Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

................. Distribution of Man-Made Forest by Age Class (Japan) - 4 2 Japanese Domestic Log Production by Species . . . . . . . . . . . . . . . . . . . . . . -43 Japanese Domestic Log Production by Ownership ..................... 44 Japanese Domestic Log Supply by Utilization . . . . . . . . . ................ 46 Japanese Housing Starts by Number ................................ 48 Japanese Housing StartsbyArea .................................. 48 Japanese lndustrial Wood Supply ................................. -49 Japanese Self-Sufiiciency in Logs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Japanese Self-Sufficiency in Lumber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53 Japanese Self-Sufficiency in Panel Products . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Japanese lmports of Softwood Lumber and Logs. 1993 . . . . . . . . . . . . . . . . . 55

. . . . . . . . . . . . . . . . . Japanese lmports of Softwood Lumber and Logs. 1965 55

. . . . . . . . . . . . . . . . . Japanese lmports of Hardwood Lumber and Logs. 1993 56

. . . . . . . . . . . . . . . . . Japanese lmports of Hardwood Lumber and Logs. 1965 56 Japanese Lumber Shipments by Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58 Nominal Price of Japanese lmports of Canadian Sitka Spruce

Lumber. BySize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Nominal Price of Japanese lmports of Canadian Yellow Cedar

Lumber. BySize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Non-wood Housing Starts in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Obsewed versus Predicted Values of Quantity Demanded of Aggregated SoftwoodLumberlmportsbyJapan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Number of Non-Wood Housing Starts in Japan . . . . . . . . . . . . . . . . . . . . . . . 104 Japanese lmports of Wood Products by Major Product Types . . . . . . . . . . . . 108 Japanese lmports of Softwood Lumber by Source . . . . . . . . . . . . . . . . . . . . . 113

. . . . . . . . . . . . Japanese lmports of Canadian Softwood Lumber by Species 117 Japanese lmports of US Softwood Lumber by Species . . . . . . . . . . . . . . . . . 123 Japanese lmports of Former USSR Softwood Lumber by Species . . . . . . . . 125 Japanese lmports of N X h i l e Softwood Lumber by Species . . . . . . . . . . . . . 126

. . . . . . . . . . . . . . Japanese lmports of "Other" Softwood Lumber by Species 128 Japanese lmports of Softwood Logs by Source . . . . . . . . . . . . . . . . . . . . . . . 129 Japanese lmports of US Softwood Logs by Species . . . . . . . . . . . . . . . . . . . . 131 Japanese lmports of Former USSR Softwood Logs by Species . . . . . . . . . . 133 Japanese lmports of Hardwood Lumber by Source . . . . . . . . . . . . . . . . . . . . 135 Japanese lmports of Hardwood Logs by Source . . . . . . . . . . . . . . . . . . . . . . 137 Japanese lmports of Veneer Sheets by Source . . . . . . . . . . . . . . . . . . . . . . . 138 Japanese lmports of Plywood by Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

. . . . . . . . . . . . . . . . . . . Japanese lmports of Particle Board and Fibreboard 140

Gaston Acknowledgments Page vil

I gratefully acknowledge Dr. David Haley as my supervisor, for his continued guidance, encouragement and support. As a side, special appreciation is extended for Dr. Haley's faith in rny teaching abilities, arranging for me to instruct FRST 31 9 (Forestry Economics) while he was on sabbatical.

I would also like to express my appreciation to the members of my advisory cornmittee, being Dr. Clark Binkley, Dr. David Cohen and Dr. Russell Uhler.

Special thanks are also due to Dr. llan Vertinsky and Dr. Casey Van Koonten at the Forest Economics and Policy Research Unit (FEPA), Dr. William Stanbury at the Faculty of Commerce and Business Administration, and Dr. Bill Wilson at the Canadian Forest Service for their comments and advice on many aspects of my research.

As for the many friends and colleagues that have helped make the long process of doing a Ph.0. bearable, I can only Say that I could never have done it without your moral support. Although the people that I have had the pleasure to get to know over the years are too numerous to mention, I wish to single out two individuals which have made particularly strong impressions on me, both in a professional and a friendship capacity. Ramvir Singh and Paul Mitchell-Banks, I thank you!

I am more than grateful for the financial assistance 1 have received to reduce the burden of doing a graduate degree. Appreciation goes to the University of BC for the Donald S. McPhee Fellowship, to FEPA for the Forest Economics and Policy Analysis Research Grant, and for the Canadian Forest Service for the FRDA Research Grant.

Finally, I wish to express my strongest appreciation of al1 to rny parents, Lloyd and Suzanne. Without their love, support and encouragement, 1 would never have drearned of such an ambitious undertaking.

Gaston Chapter One Page 1

Chapter 1 Introduction

This thesis investigates an aspect of Pacific Rim log and lumber trade which has

received surprisingly little attention to date: factor demand estimation with recognition that

wood inputs are irnperfect substitutes in production. While there have been many studies

which have estimated demand parameters for w o d inputs, virtually al1 of them have used

highly aggregated trade data (such as "soffwood lumber"). The present study investigates

demand substitution by pmduct, by mgion, and by species.

1 1 Motivation for the Research

Hiding wood characteristics through data aggregation tends to obscure important

dimensions of both forest products' trade and forest policy.

A good example of this problem is illustrated by US allegations that BC export

restraints on softwood logs constitute a subsidy for BC sawmills. By aggregating al1

softwood logs, there is a danger of obscuring the log export pattern which might exist in

the absence of export restrictions. Kalt's (1994) submission to the US Department of

Commerce in the Canadalus sofhivood lurnber countervail case offers a good example of

how to improve trade analysis with less aggregated data. He argues that British Columbia

(BC) export restraints, which primarily affect coastal logs, including a significant proportion

of logs from which clear and merchantable grade lumber can be extracted, do not

constitute a subsidy for interior sawmills producing mostly lower grade construction lumber.

Another example is offered by the determination of allowable annual cuts within the


context of BC's sustained yield policy. Haley and Luckert (1 994) and van Kooten (1 993),

for example, argue that meeting the objectives of sustained yield does not simultaneously

meet the objectives of sustainable development. In short, choosing forest rotations andfor

silvicuItural regimes which maximize volume, without any reference to value, does not

necessarily promote a strong, forest-based economy. If one adds goals to incorporate

non-timber values in forest management, ttie inherent problems in focusing on physical

volume alone become further amplified.

There are a number of important questions which require an investigation of trade

related to wood species and sources of origin. For example, will BC's second growth

Douglas-fir (Pseudotsuga menziesii(Mirb.) Franco) be able to compete with New Zealand's

plantation produced clear radiata pine (Pinus radiata O. Don)? More generally, where have

BC's comparative advantages lain in the past, and where are they likely to lie in the future?

What will be the economic consequence of BC's transition to a second growth resource,

particularly in light of increased environmental pressures to reduce the forest land base?

To what degree will non-wood materials substitute for existing forest products produced

in BC, and what will be the economic and environmental consequences of such

substitutions? How does the emergence of engineered wood products affect demand

substitution for BC timber resources?

There are two potential situations which will have to be faced as BC makes the

transition toward a forest industry that is wholly dependent on second-growth and

subsequent forest crops:

1) according to the most recent BC Ministry of Forests timber suppfy reviews,

Gaston Chapter One Page l

BC is going to witness a significant reduction in the volume of available timber over the next couple of decades;

2) according to Constantino (1 986) and Constantino and Haley (1 988), withoul appropriate changes in 6C forest policy, the qualityl of timber is going to be sig nificantly lower.

If the forest industry in BC is to minimize these potentially negative impacts on the

provincial economy, it will be necessary to examine marketing opportunities for the future,

and translate these into appropriate land use plans, levels of silvicultural activities, and

forest rotations. In other words, it is time for the forest sector to rnake the transition from

a production-oriented to a market-oriented industry. This can only be accomplished by a

detailed analysis of which BC wood products have historically contributed most to net

revenues, and which are most likely to do so in the future. This need will becorne

increasingly important as old-growth timber becomes scarcer and price increases lead to

accelerated substitution.

1.2 Background

As can be seen in Figure 1.1, cash prices for lumber more than doubled in the first

couple of months of 1993 (following decades of limited price growth). Since then, prices

have been extremely volatile, making any forecast of future price trends difficult.

There is sorne debate as to the significance of this price spike. While sorne believe

'It is not easy to define quality in a general way. For example, one definition of quality might be the presence of attributes in wood that are related to appearance. In the case of softwood lurnber, this would include such characteristics as clear grain, large dimensions, and narrow ring width. Another definition of quality might be structural strength. In other words, quality must be related to the intended purpose of üie lumber. Constantino gets around defining quality in terms of specific wood characteristics by using a price index, where quality is related to the buyer's aggregate willingness to pay.


Figure 1.1 Random Lengths S-P-F Lurnber Futures, Chicago Mercantile Exchange, Spot Contract*. Cornpiled from various issues of The Financial Post.

' As this chart always tracks the nearest delivery month, prices are analogous to the cash market.

that this occurrence was not al1 that unusual (see Sohngen and Haynes, 1994), others

suggest that the market is displaying a stmctural change (see Sutton, 1994; and Michaelis,

1994). The latter opinion would suggest that prices will either stabilize at a new plateau

at some point in the future or continue to demonstrate real price growth.

Historically, the demand for construction lumber has been price inelastic? This can

be explained by one or more of the following: there have been few substitutes (this has not

likely been the case); price has not been an issue (e-g., lumber has represented a small

2A review of the literature which reports historieal lumber elasticities, both own-price and cross-price, is offered in Chapter 2.


portion of the cost of a home); or, there have historically been no inexpensive available

substitutes relative to the price of lumber. However, demand for construction lumber may

become pr ie elastic (i.e. a structural change) if an increased price level leads to reâuced

wood consumption through the building of smaller homes andlor lumber substitution. The

economic implications of the potential for such wood product substitutes translates into the

central theme of this thesis.

Substitutes for logs, lumber or further processed wood products can take many

fonns. The most obvious is substitution with the same basic product, but from a different

location. In the literature review offered in Chapter 2, it will be seen that such cross-price

elasticities of demand for lumber are signficantly higher (even elastic) as compared to the

own-price elasticities. In other words, while the quantity of local lumber demanded is not

very price responsive (such as the dernand for US Midwest lumber given the price of

Midwest lumber), the quantity demanded is responsive to the price of similar wood from

a different area, such as imports from Canada. For example, a 1 % decrease in the pr ie

of Canadian lumber may cause the quantity of US Midwest lurnber demanded to decrease

by more than 1 %. Further, the review in Chapter 2 illustrates that cross-price elasticities

may be high even for dissimilar types of wood, such as imports of hardwood from

lndonesia to replace US consumption of local sofhvood. Some studies also show that

non-wood materials may substitute for logs and lumber.

While the apparent willingness to substitute seems rather straight forward, it must

be noted that no mention has been made of the specific characteristics of "similar"

products. Due to an apparent lack of trade data broken down by grade, little can be found


in the literature to document this potentially important aspect of substitution. Figure 3.2,

showing the prices of three grades of PNW Douglas-fir lumber over the past two decades,

illustrates the danger of describing lumber (or logs) as a single hornogeneous cornmodity.

Note that these lumber prices are in real terms, not nominal. Over the time period

indicated, clear grade Douglas-fir export prices rose roughly 3.5% per annurn, the

merchantable grade price trend was virtually flat, and the price of the structural grade fell.

Given these distinct differences in p r i e trends, it is obviously not rational to expect that

construction grade lumber, for example, can fully substitute for clear grades. Prices can

also Vary tremendously within a grade. For example, prices for clear grade coastal BC

lumber of certain species, when the timber frorn which it is cut is "hand picked" by

Japanese buyers, have been reported to exceed $1 5,000 CDN per thousand board feet

(Currie, 19943).

1.3 Scope of the Research

Analysis of silvicultural regimes, forest practices, land-use and trade policies are al1

negatively affected by the lack of information on wood product demand by some measure

of disaggregation. However, before research can be carried out which addresses the

policy and trade ramifications of using aggregated wood product data, significant

background research is needed. This must begin with a quantification of the uniqueness

of individual product types (logs, lumber and further processed products), species and

source as distinct economic goods.

3Personal communication, Valuation Branch, Timber Pricing Secüon, BC Ministry of Forests, Victoria.

Gaston Chapter One Page

+ Clear + Merchantabte - Structural

Figure 1.2 PNW Douglas Fir Lumber Prices ($US per thousand board-feet. mal, PPI adjusted, l992=lOO)

Source: Complied from Random Lengths, Vanous Yearbooks.

Grade Definitions:

- Clear Douglas-Fir, green, #2 Clear, 15% #3; 2% X 6 and wider; export p h , f.0.b. dock, Or. and Wash. (prior to 1985 prices f.a.s.1.

- Merch. Douglas-Fir, Merch., # l , 15% #Z; 6 X 12 and wider; export price, as above (prior to 1985 prices f.a.s., based on #1,25% #2).

- Struct. Douglas-Fir, green, #1 and better, random 10120; 2 X 4; dornestic price, f.0.b. mill.


As the central theme of this thesis is to quantify the degree of substitution of wood

products, the sole focus will be on demand descriptors. Further, to keep the analysis

manageable, the thesis focuses on a single market4apan. The Japanese market was

chosen as 1) it represents the largest importer of forest products today (Sedjo, 1994); 2)

it has an interesting history of evolving from reliance on dornestic production, then

importation of whole logs, and most recently importation of lumber (which allows for

quantification of the substitution between these alternative inputs); and 3) it has been a

significant buyer of both construction grade and appearance grade wood products.

The balance of this chapter is devoted to defining the problem to be investigated,

leading to the research hypotheses.

1.3.1 The Research Problem

Figure 1.2 (page 7) helps put the research problem into perspective. By comparing

the three grades of Douglas-fir lumber over the past h o decades, the growing market

premium for the clear grade (and, to a fesser extent, the merchantable grade) is obvious.

Although international trade data do not offer such grade detail, they do offer species

detail, from which grade measures can often be deduced. For example, the species mix

spruce-pine-fir (S-P-F) lumber, which is exported primarily from North America, is known

as a construction or structural grade commodity. North American lumber exports to Japan

of such species as yellow cedar (Chamaecyparis noofkatensis (D. Don) Spach) and Sitka

spruce (Picea sitchensis (Bong.) Cam.), on the other hand, are primarily of clear and

merchantable grades. Further, the source of the wood also offers an association with


grade. New Zealand log and lumber exports, for example, have historically been known

to provide sub-structural grades, which have been used in Japan primarily as packaging

materials.

The research problem is best addressed through a number of questions. For

instance, how do the own-price elasticities of demand differ in Japan by product type,

source and by species? How do the cross-price elasticities for these wood products differ,

both with other wood (type, species and source) and non-wood substitutes? Wll scarcity

in North American S-P-F lumber lead to real price growth as evidenced in higher grade

lumber, or will price rises be met with reduced demand through substitution-both wood

and non-wood (Perez-Garcia, 1993; Prins, 1993a and 1993b). Will there be less

substitution in the future in species and/or source typical of clear grades as compared to

structural?

The second ramification of the price trend distinctions shown in the figure is that

coastal BC relies on old-growth timber stands for the vast majority of its present lurnber

production. Timber yielding clear grades is exploited in such stands. Given existing

silvicultural efforts and hawest rotations, the supply of clear timber will be significantly

reduced as old-growth availability declines. This leads to the question of whether it is

possible to generate this high-grade material economically from second growth stands

(although this will largely be an implication for further study). Finally, related to the

substitution questions above, it must be asked to what extent clear lumber from second

growth can compete with clear lumber from old-growth timber (again, this question is posed

as a motivation for the present research; the answer can only corne from research which


extends beyond the scope of this study).

1.3.2 Objectives

The research problem described in the previous section can be translated into the

following three objectives:

1. To determine own-price and cross-price demand elasticities in Japan for logs, lumber and other wood products by region and species. Cross-price demand elasticities include substitution with Japanese domestic logs, and substitution with non-wood products.

2. To qualitatively extend objective one to explore Japan's demand for broad grade categories (construction versus appearance).

3. To explore the implications of the above for BC forest industry strategy and public forest policy.

1.3.3 Hypotheses

The research hypotheses to be tested are as follows:

1. BC wood species, in the fom of logs, lumber or further processed products, behave as distinct economic goods, as rneasured by own-price and cross- price elasticities of demand, in the Japanese market.

2. The market share of BC wood species in Japan, in the form of logs, lurnber or further processed products, is dependent on the individual prices relative to other species and wood products in Canada and around the world.

3. Japan's wood product import mix is affected by Japan's domestic log supply and non-wood alternatives.

4. Structural changes in international markets for logs, lumber and panels have affected price levels and trends for these products.


1.4 Organizaüon of Thesis

The objectives/hypotheses of the previous sections are addressed and presented

in this thesis as follows. Chapter 2 offers a literature review of North Arnerican studies

which have estirnated log or lurnber elasticities of demand, as well as a discussion of the

implications of such studies for the methodological approach to be used in the present

study. In Chapter 3 the Japanese wood products market is described. Chapter 4

describes the theoretical foundation, data and the empincal rnodel in detail, while Chapter

5 presents the results of this quantitative analysis. Finally, Chapter 6 offers a discussion

of the results, followed by a summary, including limitations and implications for further

research in Chapter 7.

Gaston Chaoter Two Paae t 2

C hapter 2 Litenture Review on Log and Lumber Substitutions

and Implications for Further Research

This chapter reviews the literature on log and lumber demand elasticity estimates,

including a cross-section of the methodological techniques used. The chapter concludes

with methodological implications for the present study.

2.1 The Econometric Estimates of the Price Elasticity of Demand

There are a number of potential responses to a rise in the p r i e of domestic lumber.

These responses can be placed in one or more of the following categories: i) increased

efficiency of wood use andlor reduced consumption of finished products; 2) substitution by

wood from another location, different form (for example, lumber for logs) or different

species; and 3) substitution of non-wood inputs for wood inputs. In this section, these

possibilities are examined separately in Sections 2.1 .1 throug h 2.1 -3, respectively.

2 . 1 Estimates of Wood for Wood Subsütutes

There has been a considerable amount of research which investigates demand

elasticities for timber products, primarily for US lumber. Tables 2.1 through 2.3 highlight

some of this research. The summary information is largely adapted from the review by

Phelps (1 993).

The most obvious consistency found in Table 2.1, which presents own-price

demand elasticity studies, is that softwood lumber dernand is shown to be inelastic, with

Gaston Chapter Two Page 13

--

TABLE 2.1 Own-prie Elasticity of Demand for Softwood Lumber in N.A.

Elasticity f Time Fame f Author i Comments .-..-----....--.----......---.........--.* "...............*.---.-.-.-.--..*------.-..---.....-.-.--...-..*--.-~---.-- n&@s-f,*-, k ,><% .,;,: ,~ , ..-. "..".."...-..-.........-......*..-........*.............*........~...........*..............*....-....-.~~.*...-.~-..............*...*.~.........~......................................-..

-0.173 f 1947-1974 f McKillop et al. (1980) 1 US softwood lurnber wholesale pnce i index ...........................................................................*...................-.........................*............................................................................

-0.35 i 1950-1974 f Waggener et al. i US sofh~ood lurnber price j (1978) ....-....-.....- .............~..........................................<......................................-.-...*...........--......-..............................+..+...................

-0.38 i 07l79-12/84 i Gellner et al. (1991 ) i US sofhvood lurnber pnce ........................................................................ . ....................-...iil...r..i..........................*....i*r.... ....... A..... -0.075 1947-1974 ! Adams (1977) f US sofh~ood lumber price index.

i 1 year lag

1950 (Point) 1%0( " ) 1970( " ) 1980( " )

i Spelter (1 985) j US softwood lumber price

-0.88 , i 1950-1954 f Spelter (1 985) i US softwood lumber price -0.39 . 1970-1974 ....................-..........,..-......................................,........................................-.-. CC.....-. ...................................................................

4.91 i 01/68-12/77 i Rockel and Buon- f US Douglas-fir wholesale price index i giorno (1982) ...... " ................... .....,..........................................<..............................................*............................................................................ .

-0.88 i 1947-1967 ; Robinson (1974) i Douglas-fir .. .........................-... 4..........................................4..............................................&........--.................................................................

-0.667 Oln7-12/87 i Lewandrowski f - Southem pine -0.149 i f (1992) i + Douglas-fir . ...........................................................................i..r.....................................*.......................+................................................... .. -0.55 . i 1950-1987 Adams et al. (1992) j + Residential construction -1+15 i + Non-residential construction

............................... ...........7..."..'......................................... O 1 /7 1-02/82 f Jacques et al. (1 982) ......................................................................................... 1970-1 982 j Shama (1986)

t......... "."...... .....................,.*....................................*..... .. OlffI-ûîl92 j Prins (1993)

............................................................................. Domestic çoftwood lumber purchases ............................................................................. Softwood lurnber for residential construction ... ...........-............................................................. Total shipments of softwood lumber less exports

a range of -0.023 to -1.15, and an average of roughly -0.4. In other words, these studies

suggest that a 10% increase in the domestic price of lumber will decrease the local quantity


demanded by an average of 4%- Not surprisingly, demand elasticities which are smalle

in value are from studies which estimate short-run demand responses. In the very shoi

run substitutes do not, for al1 practical purposes, exist.

Measurements of elasticities must also consider the specific years bein!

investigated. Spelter's (1 985) results illustrate this by showing that elasticities (in this cas6

share elasticities) have fallen over tirne. This trend, according to Spelter, may bc

attributable to improved technology and utilization, both of which have helped to alleviate

scarctty. One must also note that elasticity estimates are affected by the price range ove1

which they are measured. For example, elasticity estimates derived from data wherc

prices tended to be low will fikely be significantly different from a comparable study ove!

a different time period where prices tended to be high.

The range of elasticity estimates shown can also be partially explained by what is

being measured. For example, Adams, et a1.k (1 992) results show that the demand for

lumber used in residential construction is less elastic than for non-residential construction,

supporting the point that home buyers are not greatly influenced by the price of an input

which makes up a relatively small portion of the total purchase price, as well as the fact

that in non-residential construction more substitutes in the fom of non-wood materials are

available and acceptable. Lewandrowski's (1 992) results show that elasticities can Vary

by species, here suggesting that southern pines (e.g., Pinus taeda) have more substitutes

(i.e., the quantity demanded is more price sensitive) than Douglas-fir. This point is

paramount to the main theme of this thesis, and will be further explored throughout much

of this chapter.

Gaston Cha~tef Two Paae 75

I TABLE 2.2 Cross-price Elasticities of Demand for Similar Lumber in Different Reg ions

1 -48 i 01/74-01/86 i Buongiorno et al. i Demand for irnports fmm Canada; prices i (1988) i of softwood lurnber in the US. *-.. -.-.... .-.-.a.--.----*--..*- i.-.---**.----*-.--..-*.*.----*****.**..*--~-*.** ....... -....*--...*-* * .-..-.*.* *-.* ..... f ff.fffff..*.*.* **.---. *-*-.* ....--. *--*....---*-*-.--..-* ...-. - .*.-. *-- -.-.-.----

056 1950-1982 f Singh and Nautiyal j Demand for Canadian lurnber; US pnce i (1986) i index for al1 lurnber.

i 1963-85 j Flora et al. (1 991 ) +- Off shore demand facing the US in 1 i 1987; performance grade. -1 -95 - Off shore dernand facing the US in

) 1987; construction grade. ---------.---.------.-.-*--..--. i..-. -.------.-......----...---- .... -.-.-.. i.......-- ...... - ...-.. ,.,,..,... ....... ..................... - ..... .-...---.-.----------....-..-.--.-....- ............. -.. -3.088 f 1965-1985 j Chen et al. (1 988) f + Demand for Canadian sofbvood

j lumber; irnport prke fmm BC. 2.27 + Pnce of US softwood lumber.

*-0- ----.----. ------..----------;.*-- ----. ****---*-*..*..* ..---**.*-**..- A ..--..m.- * -.-*--.----..*--*...***.*....-.-.... f f..fffffffff..fff.f~.fffff.ff.. ff~ff.f~*..f.fffffff.fffff~fff...ffffffffffffffff.f

4.39 1975-1985 f Constantino (1988) ! World irnports of hardwood from Sawnwood . . Indonesia; importing country's pnce of

i hardwood. 12.30 !

Plywood j

Note: When interpreting the sign of the elasticity values, it must be noted which price is being considered. With Chen, et a/.'s (1988) results, for example, a 10% decrease in the BC price of lurnber will increase US irnport demand by over 30%. Conversely, a 10% decrease in the US price of lumber will decrease US import demand from Canada bv over 22%.

Table 2.2 shows some estimates of cross-price elasticities of demand for soffwood lumber

in different regions, in this case primarily the US demand for imports from Canada. The

most obvious point is that the demand response is now elastic (greater than l), or at least

more elastic than for own-price. This clearly shows, as would be expected, a willingness

to substitute for a similar commodity from another geographic area. One might expect


1 TABLE 2.3 Cross-price Elasticity of Demand for DMerent Lumber - -

Elasticity i tirne Frame i Author ! Cornrnents ....... ~~...~.~-~~....-~~~..~*...~~....~.~CCC~~~CCC~CC~~C~CC.C..CC*CCC.~CCCC~*..~~...*.~....*.~*~*~~*.~*.*.*~~~....~~..~.~~~~*~.~~*~~*.....-*.*~.~~.~~...*...*...*~.~*...~~.*~.~.**..*~..*.-*---*.*...~~*~

1.30 i 1975-1985 i Constantin0 (1988) 'i World imports of hardwood from , Sawnwood i i Indonesia relative to importing

j country's price of softwood. ' 0.75

Plywood i 1.--.-.... .. *..*.*-.......-..; -...-.-*.**.--..........*-*--.-*.-... **.i * I.-~I.I.....II.~.~..I.~II.III...I.I~ *..-....* * ......--*.**.------**.........---....-*..*.*.......-.-*..-***------. 1.45 1 1971-1991 Brooks (1 993) j US impocts of tropical lumber relative

l / to US price of sofhn<ood lumber. ...*----....*.~--.......*-...***.......---...*....-.*. C.*.-..*.-*.**.---.-*-..

i 1 .O6 i 1970-1989 i Youn and Yum i Korean imports of hardwood logs (1992) i relative to the import price of softwood

i logs.

these elasticity values to be higher than indicated. That they are not suggests that while

the imports are good substitutes for dornestic production, they are far from being perfect

substitutes. This may be partially due to the fact that aggregate imports in these studies

are not equivalent to aggregate domestic production, neither by species nor other

characteristics.

Finally, Table 2.3 shows some estimates of cross-price elasticities of demand for

diffemnt types of lumber. Although the estimates are mostly greater than unit, the demand

is generally less elastic than for similar wood products in different regions. This suggests

that consumers are less willing to substitute hardwoods for softwoods than Canadian S-P-F

for US southern pine.

2.1.2 Estirnates of Non-Wood for Wood Substitutes

Another possible reaction to higher lurnber prices is, of course, substitution for wood

products with non-wood commodities. For construction lumber, this includes steel,


concrete, bricks, plastics, etc. Recent pice increases in lumber have already initiated an

extensive program by the American lron and Steel lnstitute to promote the replacement of

wood structural and non-structural members in construction with steel members (Haws,

1994). Surveys undertaken in 1993 indicate that 45% of builders in California would

consider switching to steel due to the high and unstable price of wood products-

There are a number of studies which have examined the cross-price dernand

elasticities between wood and non-wood materials. A better understanding of the

substitution impact is achieved when the extent to which non-wood materials substitute for

wood is examined, and the extent to which wood substitutes for non-wood materials. Table

2.4 summarizes the results of McKillop, et al. (1980) for the US.

First, it should be noted that ail of the own-price elasticities (the diagonal from top-

left to bottom-right) have the expected negative signs and are al1 less than 1, indicating

inelastic demands. Second, the table indicates that the price of lurnber influences the

quantity dernanded of non-wood materials. By contrast, however, the price of substitutes

- - -

TABLE 2.4 Own-price and Cross-price ûernand Elasticities for Construction Materials i

1 Q Lumber Q Plywood Q Steel Q Alurninurn Q Concrete 1

1 Source: McKillo~. et el. (1 9801 1

P Lumber -0.17 i 0.79 0.24 -0.54

P Ply~ood

P Steel

P Aluminum

P Concrete

0.14 j 4.67 i -0.4 0.54 f.............i.i...---.....................*.....-....~i...-ii.i...*-.~-.~.~~...*..i.......i-.--.i....ii-.i...~~...i-rr......**...................--.

0.37 f i -0.93 f 0.74 .-.-----.................-----~~......................~.................-.~..***-..~~~-.-.....*..*~~*......~~..~....-~-*..*.~~.......................~..*-.-----.-..***..*.*.. 0.02 f O .47 4.83 ! ..----.. .-.-*---..........***.~.....-.-..........,..*..... ~,...*....*~*..~.~.~....*..-.*....~..~..*~.~~~.~.*-..~...~~...*........~~~..,..................~~~~~.------.**..*.

-0.51 . - . ___- . . .-


1 TABLE 2.5 Own-pdce and Cross-prie Demand Elasticities for Construction Materials

1 Q Lumber Q Plvwood Q Non-Wood

f Source: Rockel and Buonciiorno (1982)

does not influence the quantity demanded of lumber to the same degree. For example,

a 10% increase in the price of steel will increase the demand for lumber by 3.7%.

Conversely, a 10% increase in the price of lumber will increase the demand for steel by

7.9%.

Rockel and Buongiomo (1 982) specifically examined the demand for wood products

for residential construction (as opposed to total US demand) (Table 2.5). The non-wood

substitutes included in the study were structural steel, cernent, bricks, plurnbing and

heating fixtures, and selected fabricated rnetal products. The extremely low cross-price

elasticities indicated in the table are the result of aggregating al1 these inputs into a single

basket of goods.

In Table 2.6, the result of time on elasticities (primarily technological change) is

demonstrated by Spelter for the US. As can be seen, both the own-price and the cross-

price elasticities fell (with the exception of concrete) from the 1950s to the 1980s.

Finally, Prim (1 993) examined woodlnon-wood substitution in Canada (Table 2.7).

Note that while the results suggest that a 100% increase in the price of lumber will cause


TABLE 2.6 Own-price and Cross-prie Demand Elasticities for US Softwood Lumber

P Lumber 1 -0.285 i. -0.162 -0.13 i -0.1 11

P Plywood 0.f09 f 0.04 0.009 i 0.004 i.i...i....*..i..r...--.i---.-.--..*~*.--.-~~..-...~.~.~~~~.~~~.-A--.-----~~..~.~.~.~~.----....-.+~.....*.~*...*...*-----.-*.*---.--....

P Steel 0.026 f 0.017 i 0.012 0.005 .....-............................1............................t.----.....1............................t.----.....1............................t.-----.*tttttttttttttttttttttttttttttt.*--*---*....~...-.--..--*......*---.-.----..-.--.-.t--....-....

P Concrete 0.006 0.006 i 0.006 i 0.006

1 Source: Spelter (1 985) I

I TABLE 2.7 Own-price and Cross-price Demand Elasticities for Selected Canadian Construction Materials

1 Q Lumber Q 8rick Q Cernent Q Steel

' P Cernent

P Steel

P Gypsum 4**-.*....-..*.*-*--**.*....**..-.....**-*-.-........-.--..,..-.........

P Panels \

0.08

1 Source: Prins (1993)

only a 5% reduction in the demand for lumber, it also creates a 51% increase in the

demand for bricks, a 15% increase in cement and a 32% increase in steel. This

demonstrates the dominance of wood use in construction: 5% of al1 lumber used in

construction is a significant volume of rnaterial relative to 32% of al1 steel used. Also, note

that price increases in non-wood substitutes have a greater impact on the demand for

wood than suggested by the previous studies.

Gaston Chapter Two Page 2C

2.2 Parametric Demand Elasticity Estimation Techniques

From the outset, it should be emphasized that only a small number of the demand

elasticity studies listed in the previous tables made any attempt to disaggregate the data

beyond softwoud logs or lumber. As mentioned in the previous chapter, the likely reason

for this is the lack of published disaggregated data.

All of the studies reported to this point have involved econometric techniques in

estimating the pnce elasticities of demand. While the estimation techniques employed

were not unusual (normally ordinary least squares, two or three stage least squares, non-

linear least squares or generalized least squares), a few studies utilized an approach of

interest to the present study.

Flora and his colleagues at the USDA Forest Service, Pacific Northwest Research

Station in Seattle have conducted North American wood product demand studies which

have made direct reference to quality or grade (Flora and Lane, 1994; Flora, et al.. 1993;

Flora, 1993; Flora, 1992; Flora, et al., 1991-a; Flora, et al., 1991 -b; Flora, 1991 ; Flora, et

al., 1990; Flora and McGinnis, 1989; Flora, 1986). In one of the studies (Flora, et al..

1991-b), the researchers developed export supply functions for Pacific Rim log suppliers

(US, Canada, Chile, New Zealand and the Soviet Union), and import demand functions for

Pacific Rirn buyers (Japan, Korea, China and Taiwan). These supply and demand

functions were then surnmed across quantities to yield aggregate demand and supply

functions. To estimate trade flows pertinent to an individual region, the demand or supply

facing that region is developed by netting out al1 of the other regions' demand and supply

functions. The individual equations used by Flora tend to be veiy simple, with quantity


demanded typically a function of price, GDP and housing starts, and quantity supplied a

function of plantation area, timber hanrest, and possibly a sawrnilling cost index.

Flora's methodology suffers from three specific limitations. First, where price

projections are made, projections of al1 variables except price and volume are done outside

of the model (by making assumptions relative to a presentday "base case"). This means

either heavy reliance on other studies, use of other modelling techniques, or significant

persona1 judgement.

The second limitation is Flora's method of dealing with disaggregated trade data.

Notes Flora, et al. (1 991 -b, page 6):

Because log-trade data are rarely reported by grade, quality class, or economic category, it was necessary to judge the proportions and relative values. ... Future volume-share shifts among grades were assumed ...

This, unfortunately, offers little guidance for dealing with such data over a wide range of

applications.

Finally, Flora's models are limited to a single grade at a time. This does not allow

for the measurement of cross-price elasticities of demand across grades or species.

However, the own-prie elasticities which resulted do suggest that elasticities of demand

are negatively correlated with quality (as quality increases, demand becomes more

inelastic).

Flora (1 991-b) categorized logs into one of four grades:

Select logs whose value derives from "appearance" grade lumber;

Performance Coast and Cascade Grade No. 2 sawlogs; second- and old- growth logs with scaling diameters between 12 and 24 inches;


Construction Coast Grade No. 3 sawlogs; second-growth logs with scaling diameters between 6 and 12 inches;

Utiiity submerchantable in the export market.

Flora's conclusions suggest that the performance grade will have rising real price growth

through the turn of the century, and that the construction grade will see declines due to

international cornpetition. As shown in Table 2.2, the authors pegged the price elasticity

of demand facing the US in 1987 for the performance grade at -0.80 as compared to -1.95

for construction (the author did not analyse the two extremes in grades, reasoning that

select5 will ahvays be scarce and that the utility grade is unimportant for the export market).

Haynes and Fight (1992), also working with the USDA Forest Service in the PNW,

conducted a study on projecting prices of selected grades of Douglas-fir, Coast Hem-fir,

lnland Hem-fir and ponderosa pine lumber. Working with historical volumes and prices

from representative invoices submitted to the Western Wood Products Association for the

PNW region4, the authors estimated the relationships between the prices of the selected

lumber grades and the price of the dominant lumber grade for each species in the general

form:

Sjt = 4, + b, S, + b,, Mi, (2.1

where: S, = regional lumber price for the j" species and grade in year t; S,, = price of the dominant species and grade in year t, and; Wj, = the proportion of total lumber production in year t that cornes from

j" species and grade.

4Unlike the other methodologies reported in this section, Haynes and Fight (1992) are using domestic market data (as opposed to export data). Given the noted premium for export markets (see Flora, et al.. 1993), this will underestimate the price premium for higher grades.


Wdh the values of the b,'s estimated, the authors predicted the price for each grade

by independently projecüng the price of the dominant grade (SJ and grade production

proportions. Their results supported the notion that increasing scarcity of high-grade

material will result in higher prices. However, given the confines of their analysis,

projections out to the year 2040 showed that the relative price spread for each grade

remains virtually unchanged. This is in contrast to historical changes in p r i e spreads over

grades. As noted by Flora, for example, in Japan in 1978, Alaska Prime Spruce cants

were worth 3 times as much as US #3 hemlock logs; by 1992, the multiple increased to 20.

Sedjo, et al. (1994) offer a study which specifically investigates cross-price

elasticities of wood inputs. Noting the effect of the price of US logs on the log import

behaviour of Japan, the authors reason that imports from any region will be a function of

that region's timber price to Japan, the price of Japanese domestic timber, the level of

construction activity in Japan, the price of US timber to Japan, and the price of timber to

Japan from any other source that may substitute for the region in question's timber. A

multiple regression analysis was used, with the quantity of timber demanded from region

" A as the dependent variable, and each of the above factors taken as independent

variables, over the period 1970-1 991 :

OA = b, + b2 PA + b, PUS + b, PJ + b, HS + cPi

where: QA = quantity imported from region "A"; PA = price of region A's timber in Japan; PUS = price of US logs to Japan; PJ = Japanese domestic price of logs; HS = number of Japanese new wooden housing starts; Pi = prices of timber to Japan from regions other that "A" or the US.

Gaston Cha~ter Two Page 24

Interestingly, the results showed no significance for the domestic price in Japan

("sugi" conifer logs), suggesting either that import decisions were made independently of

domestic production (possibly suggesting different end uses), or that perhaps there was

too Iittle variation in domestic production to estimate the effect. The price parameter on

imports from Canada (Douglas-fir lumber) was also found to be insignificant, with the

authors reasoning a high degree of multicollinearity of Canadian lumber exports

(roundwood equivalent) to Japan and US Douglas-fir logs exported to Japans. The other

regions investigated, al1 of which were found significant, included the Philippines,

Indonesia, New Guinea, and Malaysia, collectively called "tropical" ( h a n veneer tropical

logs); Russia (larch logs); and ChilelNew Zealand, collectively called "radiata".

The elasticities of Japanese imports from these three regionshnrood type with

respect to the independent variables were then calculated. Due to the objective of the

study, the authors focused on the cross-price elasticity of Japanese imports with respect

to the price of US logs. This cross-price elasticity of wood quantity from region "A" (QA)

with respect to the US log price (PUS) is the percentage change in Japanese imports from

A for each unit percentage change in the US price, given by:

where: b3 = the regression coefficient of PUS in the previous equation; (PUSiQA) = value using the mear i over the study period.

'As will becorne apparent in the following review of Armington (1 969) and applications by Chou and Buongiorno (1983) and Hseu and Buongiorno (1992), such multicollinearity is a major limitation of trade studies which have many price regressors of 'similar" products in the same equation.


Using ordinary least squares, the recovered cross-price elasticities for Japanese

imports with respect to the US log price were 0.58, 5.0, and 0.84 for tropical, radiata and

Russia, respectively.

Unfortunately, none of the methodologies reviewed to this point are totally adequate

for addressing the main objective of this thesis, that is to estimate the substitution

possibilities among a significant number of disaggregated wood inputs in the Japanese

market. The problern which needs to be addressed is how to estimate own- and cross-

price elasticities for a number of potentially unique, yet similar, price series.

Amington (1 969) offers a potential solution. Recognizing the heterogenous nature

of products, even when of a similar "kind", Armington relaxes the assumption that a

particular "good" produced in a particular country is a perfect substitute for the "same"

good produced in another country (relaxing the assumption that the elasticity of substitution

between, Say, softwood lumber from Canada and sofîwood lumber from New Zealand is

infinite). This is accomplished by assuming that an importer performs a two-stage

optimization process. In stage one, the importer decides the total amount of the

commodity "kind" to import from al1 sources (say, softwood lumber, or even al1 wood

products in aggregate). In the second stage, the importer detemines the optimal levels

of "good" imports (say , softwood lumber from a number of different sources).

Arrnington makes four assumptions, "systematically simplifying the product demand

functions to the point where they are relevant to the practical purposes of estimation and

forecasting" (Armington, 1969; page 160). The first is that importer preferences are

homogeneously separable. This assumption is necessary to incorporate two-stage


optimization. It is next assumed that market shares depend only on relative prices of the

products in the market, not on the size of the market itself. In the absence of these

assumptions, a country would have mn demand functions in the general fom:

where: rn = number of supplying countries (specific product); n = number of goods (groups of products); x, = specific product demand; D = income; P, = specific product price.

Wdh Armingtonls first two assumptions, this is reduced to m+n demand functions:

P.. p.. P- x#=47 Xi,Al> ,... l A) l pi, pi2 pini

where

and: Xi is any good, and X, is any product.

From Armington's first two assumptions, Equation 2.5 requires that a linear,

homogeneous quantity index function, cpl be utilized for each market, such that Xi = cp (Xi,,

X,, ..., X,,). The reason for this is that if imports of products of the same kind from different

countries are wnsidered to be irnperfect substitutes, the arithmetic sum of various imports

would not be an appropriate index of total imports.

Recognizing that equation 2.5 is still too complicated to be of practical use when

more than a few countries are identified, Arrnington proposes two further simplifying


assumptions. These are that the elasticities of substitution are constant for each market,

and that the elasticity of substitution between any two products competing in a market is

the same as that between any other pair of products competing in the same market.

These assumptions are equivalent to specifying that the cp's above are constant elasticity

of substitution (CES) functions, having the general fon6:

Wth these added assumptions, it can be shown that equations 2.5 have the general fom:

where: (Ji = the constant elasticity of substitution in the iM market; bij = a constant.

Armington notes that equation 2.8 can also be written to express the market share as the

dependent variable:

The advantages of Amington's assurnptions are obvious. As stated by the author,

"these assumptions yield a specific fom for the relation between demand for a product, the

size of the corresponding market, and relative prices; and the only price parameter in this

6Note that this function is of the needed linear aml homogenous fom.


function [equation 2.8 or 2.91 is the (single) elasticity of substitution in that market"

(Armington, 1969; page 161). The problern of rnulticollinear data has been greatly

reduced.

The real advantages to Amington's assumptions corne in the analysis of price

changes (detemining the elasticities of demand). Total differentiation of the market

demand equation (2.6) and the product demand equation (2.8) yields the relationship

between changes in X, and changes in the explanatory variables. Beginning with the

latter7:

Dividing both sides by Xij:

Given that the partial elasticity of X, with respect to Xiequals unity:

The first term reflects the growth in the Xi market, while the second t e n reflects the

7This derivation follows Armington (1969), Appendix II.


percent change in Xi's share of the market. The next step is to differentiate equation 2.6

dXi - dD 0

dPi - - €.- - q;- + E fi. dPk

Xi ' D pi rlk-

Pk

where: ci = the income elasticity of demand for Xi; hi = the direct p r i e elasticity of demand for Xi: fi, = the cross elasticity of demand for Xi with respect to P,.

Substituting into equation 2.1 2:

It should be noted that there is no P, terni in equation 2.12, without which it is not possible

to derive an expression for the cross price elasticity of X,. Annington shows that:

dp- dpik L = x ' i k - , where S, = - "iTi Pi Pik PM,

where: S, = the market share of &, in value ternis.

This substitution for dPi /Pi is possible due to Armington's assumption of a Iinear and

homogeneous indexing function, cp.

To sum, it is shown that the effects on X, of changes in pries of products cornpeting

in the i" market depend not only on ai and fii but also on market shares. By substituting

2.1 5 into 2.14, Armington arrives at:


with the first bracketed coefficient being the own-price elasticity of demand for X,, and the

second bracketed coefficient being the cross-price elasticity of demand for Xi, with the

respect to any other product price in the im market. 60th of these bracketed expressions

contain two terms; the first notes that a price change alters relative prices, creating a

substitution effect. The second notes that a price change also alters the price level in the

market, creating a market "expansionn effect.

The Armington model has been applied in a nurnber of studies reporteci in the

fiterature; its popularity is undoubtably supported by its simplicity and its ability to deal with

multicollinearity problems. Agricultural applications are the most prevalent, a cross-section

of which can be found in Babula (1987), Grennes, et ai. (1977), Penson, et al. (1 988),

Webb, et al. (1989), and Adelman, et al. (1 989). Extensive use of the Armington model is

made in the equilibrium modelling of the International Monetary Fund (see Grennes, et al.,

1977). Although al1 of these studies stress the advantages of the model, Armington is not

without his critics. Alston, et al. (1 990), for example, find that the restrictive assumptions

used by the Armington model lead to underestimated price elasticities.

While applications of the Armington model in forest products' trade studies are

scarce, Chou and Buongiorno (1983) use this approach in their estimation of the US

demand for hardwood plywood imports by country of origin (Taiwan, Korea, Japan,

Philippines and "rest of world"). Following Arrnington's stepwise approach to import


demand specification, the authors begin by estimating the constant elasticity of

where: QilQj = quantity imported from country I and j, respectively (1 zj); Pi, P, = CIF price of Qi and Qj, respectively.

The values of the bi / $ and o coefficients are estimated from four simultaneous equations,

setting I = 1 (Taiwan) and j = 2, ..., 5 (Korea, Japan, Philippines and Vest of world"),

restricting the o to be constant and linearizing equation 2.16 by converting it to a

logarithmic form:

where: = a random residual.

Their estimate for the constant elasticity of substitution between hardwood plywood imports

of different origin, o, is -1.74 and highly significant. The fact that this value is significantly

different from zero shows that the two different sources of plywood are not considered

complements; the fact that the value is not very high suggests that plywood imports from

different sources are also far from being perfect substitutes (requiring that o = a).

The next step followed by Chou and Buongiorno is to estimate demand for total

hardwood plywood imports in the US. Expanding an earlier paper (Chou and Buongiomo.

1982), they utilize a demand function derived from residential construction:

'AS Chou and Buongiomo use rnonthly data, they utilire lags in their estimation. For the purposes of describing their overall approach, however, the lags are omitted here.


PM -' Q = al-1 Y' PDA

w here: Q = total quantity of plywood irnported by the US; PM = the price of total imports; PDA = US producer price index for al1 commodities; Y = US housing starts.

However, to link this total demand to the elasticity of substitution from above, the

researchers estimate equation 2.19 by replacing Q and PM by their equivalent CES

quantity and price indices, defined as:

PM = (1 bp PMi'-'' ) '-O

where: t = surn i frorn 1 to 5.

The bi weights needed to calculate these indices can be determined from the estimated

parameters on b, / bi in equation 2.18, adding that the sum of the 6's must sum to one; this

translates into five equations and five unknowns, allowing for the recovery of each bi.

The resuîting value of the P parameter, being the price elasticity of demand for US

hardwood plywood imports in aggregate (equation 2.19) is -2.20 and significant. This

compares to a value of -1.98 when the researchers utilize arithmetic indices (Chou and

Buongiorno, 1982) as opposed to the CES indices. Wth value of the aggregate elasticity

of demand, Q, the constant elasticity of substitution, a, and knowledge of the average

market share by value for each of the noted supplying regions, the researchers are now


Table 2.8 Elasticities of Demand of US Hardwood Plywood lmports by Country of Origin

Source: Chou and Buongiorno (1 983)

Market Korea Taiwan Japan Philip- Restof Share pines World

in the position to calculate individual own- and cross-price elasticities as outlined by

Armington. The results are shown in Table 2.8, breaking out the substitution and market

expansion effects.

The net own-price elasticities reporteci in Table 2.8 (the highlighted diagonal values)

and the net cross price elasticities are determined by adding the substitution and market

expansion values in any one cell. Beginning with the own-price, note that the net effects

have their expected minus sign, and that the substitution effect varies somewhat, with

Korean plywood standing out. Also note that the market expansion effect reduces with the

supplying country's market share, which is what one would expect. Finally, it can be noted

that the net own-price elasticities do not Vary much by country of origin, ranging from -1 -77

Korea

Taiwan

Japan

Philippines

Rest of World

0.45 f s i-0.96 i 0.42 i 0.24 0.12 i 0.17 i x i 6.99 i -0.53 i -0.31 i -0.15 f -0.22

.i---.-.i.iiiiiiii..*-...~....~a.~.11.1.11..111.....1.a...,...~..~~***.*.*~..~~~.a....*..-~..~.~..~..-...*44444*..*..44.4444444...a....-.--..-----.-------.~

0.24 s j 0.78 i -1.32 0.24 0.12 1 0.17 i x -0.99 i 4.53 -0.31 -0.15 -0.22

-.i----r..iiiii.t...*........iii--.~*~~...4~--........*~.~~~~.~~~~~~~~..~.~...*......~~.~..~.~.~*~*~.~.-.-..-*....-~..-*..*~~..... a....----..--.----.-...--.

0.14 f s i 0.78 0.42 -1.50 i 0.12 0.17 x i -0.99 i -0.53 i -0.31 i -0.15 -0.22

-...rr.i--i.r...--..*..~....-.*a~.~.~.*~..~-.*~.*.-~~..*~.~~~-....~~.~-..~..~.-...a.......~~....~.*~...-..-*.~~.*......*-..---..~..-*.-----.-----.--.--------.

0.07 ; s j 0.78 i 0.42 10.24 i-1.62 1 0.17 i x i -0-99 i -0.53 i -0.31 i 4.15 i -0.22

i...i--.-....i..ii... *.-~......~.~~~..~~~.~~~~*...~.*.~~..~~...~.~*~.*~.~..~...-~~*...--.~....~-~~....~...*11..1111111.11.111.11-.1..*..-..-----------------.

0.10 j s j 0.78 j 0.42 0.24 j 0.12 -1.57 i x -0.99 -0.53 : W..-. -* ------, - --

i -0.31 i -0.15 i -0.22

~=substitution effect; ~=market expansion effect


to -1.95. Keeping in mind that a constant elasticity of substitution is "forced", this outcome

should not corne as a surprise.

Turning to the cross-price elasticities of demand reported in the table, note that

while the substitution effects show the expected positive signs, the net effect is negative.

As stated by the authors, "a rise in the price from country j causes a reduction in the total

United States hardwood plywood imports which more than offsets the gains of country 1

arising from the substitution of country Ps plywood for that of countryj". It can be seen that

the net effect depends on the relative values of the elasticity of substitution (O) and the

aggregated import price elasticity of demand (9); when the latter is larger in value as

cornpared to the former, cross-price elasticities will be negative. It can be noted that the

net cross-price elasticities are al1 highly inelastic, with the highest value being -0.21, the

import quantdy response in the US for non-Korean hardwood plywood against a price

increase in Korean product. In al1 cases, the market expansion effect counteracts any

substitution effect.

Recognizing the potentially restrictive nature of Armington's assurnptions, a study

by Hseu and Buongiorno (1993) attempts to use a more "realistic" approach by allowing

the elasticity of substitution to Vary. Further, rather than disaggregating the second stage

demand by country of origin, the researchers investigate the US demand for Canadian

sofhvood lumber by species.

Starting with a production function for the construction of houses in the US, the

researchers begin by specifying the derived demand for total lumber imported from

Canada:


where: Q = aggregated quantity of Canadian softwood lumber imported; P = average pr ie of Q; P d = pr ie of US domestic softwood lumber; Pa = price of al1 other inputs; Y = US housing starts.

Next, the share of a particular species is assumed to depend on the price of that species

relative to the price of al1 imports:

where: Qi = is the quantity of softwood lumber of species 1 imported from Canada;

Pi = the average price of species 1; ai, 6, = constants specific to species /.

The authors note: "equation [2.22] differs slightly from Armington's (1969) theory in that the

elasticity of substitution oi varies by species". Equations 2.21 and 2.22 are estimated

separately in log-log form, and own- and cross-price elasticities calculated from the total

differential as in Armington (1969) and Chou and Buongiorno (1983).

H i l e the hypothesis that the elasticities of substitution by species are significantly

different from one another is worthy of investigation, it is not at al1 clear how the

researchers link such an hypothesis back to Armington's theory. In fact, there are a

number of major problems with this methodology.

First, getting separate estimates for the single B and the numerous oils does not

constitute a two-stage optimization; the Q in equation 2.21 must somehow be linked to the


Q in equation 2.22. Wth Armington (1969) and Chou and Buongiorno (1983) this is

accomplished by using the CES indices.

Second, estimating equation 2.22, while shown to be possible under Armington's

assumptions (see equation 2.9), becomes problematic without some way of ucollapsing"

al1 the Q,'s into Q (as is done with Amington's cp function). As is, Hseu and Buongiorno's

equation 2.22 violates one of the assumptions of the classical linear regression model.

The right-hand-side contains a component which is not independent of a left-hand-side

variable: P, being the price of the aggregate imports of softwood lurnber from Canada, is

determined as the arithmetic mean, t P i X Qi / Q. While the second problem could have

been avoided by defining Q as the total aggregate quantity less Q , and P the average

price of this new Q, other problems with the application of Armington's theory remain. Most

importantly, without the linear, homogeneous aggregation function, the substitution for dPi

I Pi in Armington's equation 2.1 5 cannot be made.

These problems not withstanding, Hseu and Buongiorno do get interesting empirical

results that are worth exploring. As shown in Table 2.9, own-price elasticities Vary

considerably across species and cross-price elasticities exceed unity in sorne cases. While

the market expansion effect remains constant over species in both the calculations of owvn-

and cross-price elasticities, note that by allowing the "share elasticity" to Vary by species,

the substitution effect changes. In calculatirtg the share elasticities, the researchers

em ploy a seeming ly unrelated regression estimation (SURE). 'To test the validity of

[Armington's] simplification, [equation 2-22] was re-estimated with the restriction that ... ai

... [was] the same across equations" (Hseu and Buongiorno, 1992, p. 595). This was


(Tabla 2.9 Elasticities of Demand of US SofLwood Lumber import. from Canada by Species

l Market Spruce Pine Fir Hemlock Red Others Share Cedar

1 Source: Hseu Buongiorno (1 992) 1

rejected with a computed XZ statistic which was significantly higher than the critical value.

2.3 Implications for the Present Study

While a detailed description of the data and modelling procedure to be utilized in this

thesis is resenred for Chapter 4, a few comments are offered here in order to provide a link

between the existing research with the stated thesis objectives.

Following an exhaustive search in BC, the US and Japan (including trade

associations, government agencies and the academic profession), it is clear that the

highest level of detail for secondary data on wood products trade for the Pacific Rim is a


breakdown by country, species (in some cases, only genus), and product (logs, chips,

lumber, or further level of processing). This suggests that it is not possible to improve on

many of the noted limitations of the studies reported in the previous section without

gathering prirnary datag. Investigation into this possibility also proved futile, both in ternis

of the confidential nature of individual exporters' data and individual Japanese irnportersl

data.

Given the stated research objectives of this thesis, being pnmarily ta estimate own-

price and cross-price elasticities of the Japanese demand for wood products across

product type, species and country of origin, the only applicable methodology found is that

suggested by Armington (1 969). The strength of this methodology lies in the fact that it

allows the researcher to estimate an unlimited number of own- and cross-price demand

elasticities without sacrificing degrees of freedom or being burdened with multicollinearity

over a large number of explanatory price variables. As has already been suggested,

however, this methodology is not without its problems. This is due to Armington's rather

restrictive assumptions, and the difficulties involved in circumventing these assurnptions.

While the rnethodology employed by Sedjo, et al., also estimates cross-price

demand elasticities between alternative wood inputs, such estimates are necessarily

timited to a very few substitution possibilities.

Finally, in both the Flora, et al., and the Haynes and Fight studies, the

methodologies are more appropriate for price forecasting by grade than for estimating

'As noted in the previous section, this is not tnie for the US domestic sofkood log market (Haynes and Fight, 1992). However, there is no secondary quantitylprice data in Canada broken dom to even species (let alone grade), for either logs or lumber.


wood input substitution. The methodologies ernployed in these studies are, therefore,

beyond the scope of the present study, and will be returned to in the final chapter when

discussing recommendations for further research.

In the following chapter, the complexity of the Japanese demand for wood products

is discussed. This is followed by the theoretical foundations and implications for empirically

analysing this demand in Chapter 4. An Annington-type, CES model will be developed,

using a similar approach to that suggested by Chou and Buongirno (1983). Given the

problems associated with the further application offered by Hseu and Buongimo (1992),

this approach is not incorporated into the methodology employed in the present research.

However, the practical intent of Hseu and Buongirno's research will be discussed in later

chapters.

Gaston Chapter Three Page 40

Chapter 3 The Market for Wood Products in Japan

This chapter investigates the market for wood products in Japan, including its

evolution over the past several decades. This investigation starts with a synopsis of

Japan's timber resources and log production, followed by a description of the demand for

this production along with the demand for imports. Finally, a discussion of Japan's lumber

and panel production, comparing domestic with imported timber inputs as well as

competition with lumber and panel imports, is presented. This is an important lead-in to

Chapter 4, which describes the economic model developed in this thesis to represent the

derived Japanese demand for logs, lumber and other wood products.

3.1 The Japanese Domestic Timber Resource

Although approximately 70 percent of Japan's 37 million hectares is covered by

forests, the population is high (approximately 125 million, Canadian Global Almanac,

1995), resulting in a per capita forest area which, at less than a fifth of a hectare, is less

than half the world average (Japan Forestry Agency, 1991).

Of the total forest land in Japan, there are 13.67 million hectares of natural forests

(54%), 10.22 million hectares of man-made forests (40%), with the balance being either

unstocked land or bamboo groves (1.37 million hectares, or 6%). The natural forest area

consists of 75% deciduous species, 13% coniferous species and 12% mixed forests. The

deciduous species include oak (Quercus mongolica and Quercus dentata), elm (Ulmus

davidiana), ash (Fraxinus mandshuica), and beech (Fagus crenata). The coniferous


species include fir (Abies veifchii Abies matksii, and Abies sachalinensis), spruce (Picea

hondoensis and Picea jezoensis), hemlock (Tsuga divemifoIia), larch (La* leptolepis),

pine (Pinus densiflom, or red pine; Pinus pentapphylla, or white pine; Pinus Thunbergii, or

black pine), Hinoki (Chamaecyparis obtusa), and Sug i (Clyptomeria japonica).

In contrast, 98% of the man-made forest is coniferous. Ten percent of the area is

larch, 11% is pine, 24% is Hinoki, 45%Sugi, 9% is spruce and fir, and 1 % miscellaneous.

The growing stock of the natural forests is roughly 1.5 billion cubic metres compared

to roughly 1 -4 billion cubic metres in the man-made forests (Japan Forestry Agency, 1991).

The man-made forests are primarily a product of extensive planting which took place in the

one to two decades following World War II. Annual growth of the plantations is roughly 76

million cubic metres, or a mean annual increment (MAI) of 7.5 cubic metres per hectare.

Figure 3.1 shows the age distribution of these trees.

In spite of this impressive growth rate on their man-made forests, it has been

suggested that the quality of the timber from these stands is not high, particularly in terms

of inadequate log diameters due to a noted lack of tree spacing (Iwai, 1986). This point

will be returned to later in this chapter.

Japan's annual harvest from 1990 to 1993 ranged from about 27 million cubic

metres to 30 million cubic metres, with roughly 60% being harvested from the man-made

forests. As can be seen from Figure 3.2, which shows log production by species, this has

dropped considerably since the 1960s. However, as made evident by Figure 3.1, the

volume harvested can be expected to increase significantly over the coming


Figure 3.1 Distribution of Man-made Forest by Age Class, 1986 (Japan Forestry Agency, 199 1)

In terms of forest land ownership, as of 1986 58% was private, 31% national and

the remaining 1 1 % was under prefecture and community control (Japan Forestry Agency,

1991). The private forests (14.68 million hectares) are owned by nearly 3 million entities

(individuals, corporations and other organizations). Approxirnately 90% is owned by

individuals, with an average holding of only 2.6 hectares (60% of the private owners own

less than 1 hectare of land). The national forest land base (7.89 million hectares) is under

the jurisdiction of the Forestry Agency. The national forests tend to be located in the steep

mountainous areas, unlike the private, prefecture and community forests, which tend to be

''Given the reforestation effort in Japan post World War II, and given that forest rotations in Japan are typically 40 to 60 pars, depending on species, site quality, etc. (Iwai, 1986), this would suggest a significant increase in the potential availability of domestic supplies early in the next century. However, these rotations will also depend on desired log quality.


- 7

[ Cedar Cypmsr Pine - - - Other Soft Total Hard

Figure 3.2 Japanese Domestic Log Production by Species (Japan Forestiy Agency Data, Provided by Dr. Y. Moi, Kyoto University, Japan)

Note: The volume scale on Figures 3.2, 3.3, 3.4, and 3.7 are identical for ease of comparison.

located in more econornically accessible areas (Japan Forestry Agency, 1991). Roughly

33% of the national forests are replanted by area (as of 1989), the vast majority of which

is in softwood (Otsuka, 1992).

Of the total annual log production in Japan in 1990, 20.5 million cubic metres came

from private lands, 1.9 million cubic metres from the prefecture and community lands, and

8.6 million cubic metres from national forests. Figure 3.3 shows how this relationship has

varied since 1960. Over 40% by area of the private lands are replanted (as of 1989)

(Otsuka, 1992).


3.2

fam

Figure 3.3 Japanese Domestic Log Production by Ownership (Japan Forest Agency Data, Provided by Dr. Y. Mori, Kyoto UniveMy, Japan)

The Use of Japanese Domestic Timber Production

Japan has a very long history of using wood, particularly for housing. The country's

iliar post and beam construction has created a demand for wood which has both

structural strength and appearance qualities. The importance of this combination lies in

the visually exposed vertical pillars joined to exposed horizontal beams and girdersl1.

The domestic timber of choice for the pillars, due to their combined strength and

high appearance characteristics are Hinoki (Japanese cypress) and Sugi (Japanese cedar,

or Cryptomena). For beams, Akamatsu (Japanese red pine) is often used for its ability to

"lt is noted that this is only tnie for traditional p s t and beam construction. Penonal communication with Bob Holm, Executive Director of the BC Wood Specialties Group, reveals that this is changing. Mr. Holm suggests that post and beam construction in Japan today is sometimes similar to North Amefican platform- ffarne construction in-so-far as the posts are hidden Rom sight with panelling.


handle large shearing stress. Foundations are often made from Hinoki due to natural rot-

resistant properties. Sugi heartwood is often used for panelling due to its decorative

colour. Sugi is also used for ceiling boards due to its light weight. OveraH, it is the Hinoki

that has been the species most valued by the Japanese, even in ancient times (Japan

Forestry Agency, 1991).

Aside from the Japanese demand for wood used in post and beam construction,

there has been a growing demand for wood suitable for platform-frame (PFC) and

prefabricated housing construction. The wood imports most suitable for these housing

types include North American S-P-F and other dried, planed, dimension softwood lumber,

as well as panel products. Largely due to the marketing efforts of the Canadian Council

of Forest Industries in the mid 1970s, PFC starts rose from zero in 1975 to 56,299 in 1993,

representing 4.8% of al1 housing starts, or just over 8% of wood housing starts (INTEREX,

1995). Prefabricated housing construction was introduced in the 1950s, and by 1993

represented just over 20% of total housing starts (246,108 starts). However, most of the

prefabricated homes are made from steel and concrete, with wooden starts being roughly

30,000 in 1991 (Pesonen, 1993). Small amounts of wood are required in steel

prefabricated houses. Once again, planed, dimension lumber and panel products are

demanded for this housing type.

Interestingly, hardwoods in Japan do not typically get used for decorative purposes.

In fact, hardwoods are primarily used as pulp furnish or other woodchip products, followed

by their use in plywood manufacture. An estimateci 35% of Japan's plywood consumption

is for the manufacture of concrete foms, with most of the balance being used as sheathing


in construction for walls, floors and roofing (Sedjo, et al., 1994).

Combined with softwood, over 60% of the domestic industrial timber in Japan has

historicaly been used for lumber, followed by roughly 30% for pulp and wood chips

combined, and a small percentage for veneer sheets for plywood and other miscellaneous

products (Japan Forestry Agency, 1991). The historical context is presented in Figure 3.4.

One of the distinctive features of lumber demand in Japan is that in addition to the

quality of the wood, dimensions are critical. Not only are the dimensions demanded

inconsistent with North American standards, for example, but they can change from one

region in Japan to the next, or even frorn one building project to the next (Sedjo, et al.,

1994; Japan Forestry Agency, 1991). This partially explains the existence of thousands

Figure 3.4 Japanese Domestic Log Supply by Utilization (Japan Forest Agency Data, Provided by Y. Mon, Kyoto University, Japan)


of local mills producing to meet highly localized demand conditions (to be discussed in

Section 3.4).

In 1992, 79% of domestic lumber shipments went into housing construction (Japan

Forestry Agency). For this reason, a look at housing starts over time can be quite

instructive; Figures 3.5 and 3.6 show both wood and non-wood housing starts since 1965,

by number and by area respectively.

The rapid growth in housing starts throughout the 1960s and early 1970s reflects

the rapid economic growth Japan was enjoying over this period. Referring back to either

Figure 3.2 or 3.3. domestic wood production also increased through much of this time.

peaking at 53 million cubic metres in 1967, and remaining over 40 million cubic metres

through the early 1970s. (As will be made clear in the next section, this domestic

production was, of course, supplemented by growing levels of irnports.)

From the mid-1970s to the early 1980s this economic growth slowed and ultimately

declined. spurred by the "oil crisis" of 1973. After 1986, economic activity stabilized and

began to show modest growth (as did housing starts).

It is interesting to note that the population in Japan has not changed significantly

over the past several decades. During the 1960s, population increased by an average of

1 % per year, peaking at roughly 2% in 1970. Ever since then the rate of population growth

declined, being roughly 0.5% per year in 1989 (Yu, et al., 1990). This suggests that

economic activity (or per capita GNP) is a better indicator of housing starts than is

population growth.

Before tuming to a description of the Japanese lumber processing sector, imports


Non-Wood

Figure 3.5 Japanese Housing Starts by Number (Japanese Ministry of Construction Data, Provided by Y. Mon, Kyoto UniveMy, Japan; 2x4 Data fmm INTERU()

1966 1970 1 990

Figure 3.6 Japanese Housing Starts by Area (Japanese Ministry of Constnrction Data, Provided by Y. Mori, Kyoto Univemity, Japaa)


of wood products are sumrnarized in the following section.

3.3 lmports of Wood Products into Japan

As can be seen in Figure 3.7, Japan has moved from a situation of alrnost total self-

sufficiency in wood products (95% of Japan's total industrial wood supply in 1955 came

from domestic production) to a very strong reliance on imports (only 25% of Japan's total

industriai wood supply in 1992 came from dornestic production).

1966

Figure 3.7 Japanese Industrial Wood Supply (Japan Forestry Agency Data, Provided by Dr. Y. Mari, Kyoto University, Japan)


,-- -- Soitwood Log. -A- Hirdwood Log* )

Figure 3.8 Japanese Self-Sufficiency in Logs (FA0 YeanSook, Various Years)

Figure 3.8 shows that Japan's self-sufficiency in Iogs alone has declined by a similar

magnitude for both softwood and hardwood. Domestic sofhvood sawlog production

declined from roughly 26 million cubic metres in the early 1960s to less than 16 million

cubic metres in the 1990s, white imports increased from 3 to over 16 million cubic metres

over the same period. The drop in domestic hardwood sawlog production is even more

dramatic, rnoving from over 6 million cubic metres to less than 2 million cubic metres over

these three decades. Unlike softwood, imports have been an important component of

hardwood log supply over the whole period, ranging around the 10 million cubic metre

mark both in the 1960s and early 7990s. In fact, in the early 1960s, Japan imported

Gaston C haoter Three Page 51

almost twice as much hardwood logs by volume than softwood. By the 1990s this turned

around, with imports of softwood logs being almost twice that of hardwood logs (1962 and

1993 percentages of softwood log imports were 32% and 62%, respectively, with the total

volume of log imports almost tripling).

It is also obvious from Figure 3.7 that Japan has shown a strong preference for

importing logs rather than lurnber, aîthough lumber imports increased throughout this

period. Lumber imports increased from 1 12,000 cubic metres in 1955 to 1 2,424,000 cubic

metres in 1 992, in roundwood equivalents. Log imports increased only up to 1 973, and

have been decreasing ever since. It is widely accepted that this decline in log imports,

relative to lumber and other wood product imports, is less a function of Japanese demand

and more a function of world supply (Cartwright, 1995; Pesonen, 1993; Sedjo, et al, 1994;

Robertson and Waggener, 1995). Indonesia, for example, traditionally a major hardwood

log supplier to Japan, adopted log export restrictions in the early 1980s, and by 1985

banned log exports al1 together. Presently. parts of Malaysia are considering similar

policies (Sedjo, et al., 1994). This trend toward log export restrictions is due in part to the

producing countries' desire to develop their own wood processing industry, and in part to

growing local economies (particularly Malaysia and Indonesia), which have increased

domestic demand for their wood products. US log supplies have also decreased,

particularly logs cut from old growth timber. The drop in the availability of such logs has

become most pronounced over the past few years, exacerbated by land withdrawals from

the public forests for non-timber uses. As one Japanese forest economist concludes, it is

difficult for second growth PNW logs or dornestic Japanese logs to compete with lumber


imported from BC, which has been produced from old growth timber (Kato, 1982).

As a resuk of decreasing log supplies, Japan has, however unwillingly, been

substituthg lumber for log imports. In 1965, 84% of al1 solid wood imports by value (logs,

lumber, panel and other further manufactured products) were in the form of logs. By 1993,

log imports as a percentage of total solid wood products had decreased to 44% (Japan

Tariff Association). Lumber irnports increased from 15% to 33% of the value of total

importç over the same period, while panel product imports increased from 1% to 23% of

the total.

Figures 3.9 and 3.10 illustrate how Japanese self-sufficiency in lumber and other

panel products changed h m 1962 to 1992. Keeping in mind that the dornestic lumber or

panel product production in these figures includes production from imported logs, the fact

that Japan's self-sufficiency in lumber and veneer has dropped significantly since the

1960s confirms its gradua1 substitution away from logs.

Lumber imports, like logs, have also seen a shift away from hardwoods in favour of

softwoods. In 1962, only 11% of lumber imports were softwood, as compared to 85% in

1993, and with roughly 15 times the volume of lumber imports in 1993 as cornpared to

1962.

Although Japan exports insignificant arnounts of logs and lumber, the country has

historically been a major exporter of hardwood plywood. In the 1950s, Japan was the

second largest plywood producer (after the US) and the largest exporter (primarily to the

US and Europe). Due to increased domestic demands, export volumes became

insignificant by the 1970s. lndonesia replaced Japan in this market, exporting large


Figure 3.9 Japanese Self-Sufficiency in Lumber (FA0 Yearbook, Va rious Years)

Figure 3.1 0 Japanese Self-Sufficiency in Selected Panel Prod ucts (FA0 YeanSook, Various Years)


volumes of tropical plywood by the early 1980s. By 1988, lndonesia was the largest

tropical plywood exporter in the world (FAO). Japan, however, is still the second largest

tropical plywood producer in the world, utilizing mostly irnported logs and veneer (primarily

from Malaysia). ln spite of this, Japan's plywood imports have increased from negligible

amounts in the early 1960s to over 4 million cubic metres in 1993. Indonesia provides

about 95% of these imports. Finally, Japan has also been producing softwood plywood

in increasing quantities in recent years (Sedjo, et a1.,1994), although imports have

remained sluggish (less than 220,000 cubic metres in 1993; Japan Tariff Association).

To date, both domestic production and imports of other panel products have been

minor compared to plywood. In 1992, Japanese production of particle board was

estimated at just over 1 million cubic metres (roundwood equivalent; FAO) compared to

imports of only 125,000 cubic metres. Equivalent values for fibreboard are 929,000 cubic

metres and 155,000 cubic metres, respectively. In neither case are Japanese exports

sig nificant.

Figures 3.1 1 through 3.14 demonstrate the rather consistent sources of Japanese

imports, especially for softwood logs and lumber. In the case of hardwood logs, the major

imports have shifted away from the Philippines, first to lndonesia and then to Malaysia.

This has not, however, been the case for further processed products, particularly wood

panels. ln 1965, the major panel irnports into Japan (primarily plywood) came from North

America and Europe, whereas in 1993, the biggest plywood imports came from Indonesia;

this was also supplemented with fibreboard imports (with New Zealand being the largest

supplier), and particle board (with Canada being the largest supplier).


.. - . . . < * . -

- Canada-

m ber

Figure 3.1 1 Japanese lmports of Sofhwood Lumber and Logs. 1993 (Japan T a M Association)

0% U.S.

Figure 3.12 Japanese lmports of Softwood Lumber and Logs, 1965 (Japan Tanff Association)


on ' -

Mali

Figure 3.13 Japanese lmports of Hardwood Lumber and Logs, 1993 (Japan T m Association)

80%

60%

ron ,

UA. !

h Hong Kong 1 Omar

Figure 3.14 Japanese lmports of Hardwood Lumber and Logs, 1965 (Japan Tariff Association)


While the sources of Japanese wood product imports have been rather consistent,

the market share that each exporting country enjoys has not. As already discussed earfier

in this section, the biggest change over this time period is the change from imports of

hardwood to softwood, foHowed by the less pronounced change in imports from logs to

lumber. This largely translates into an increase in Japanese market share enjoyed by

North America (rnostly the PNW for logs and BC for lumber).

3.4 Japanese Processing of Domestic and lmported Logs

As made evident in the previous section, Japan has shown a strong preference for

the import of unprocessed logs over lumber and other products. This section explores the

processing of logs in Japan, both domestic and imported, in the hope of shedding some

light on input preferences.

It was shown in Figure 3.4 that approximately 60-70% of Japan's dornestic logs are

used for lumber, with the balance being used primarily for pulp and wood chips, and small

amounts for veneer, fibreboard, scaffolding, and other miscellaneous uses. lt was also

shown that this rough breakdown has remained relatively consistent over the time period

shown. Virtually 100% of the imported logs from North America, the former Soviet Union

and New Zealand, by contrast, are used for lumber production. On the other hand,

imported logs from the South Sea countries are primarily used for veneer, with less than

20% being used for lumber (Japan Forest Agency). Figure 3.15 shows the breakdown

of Japanese lumber production, from combined domestic and imported logç, over time.

An average of 70-75% of the lumber production over the period of this graph was used in


Conrtuctlon: Strïpr ThlcLnoaw7.l cm Width<4 Umar thkknaar - - Constuction: Boards Thlcknorrc7.S un Width=4 Umar Ihicknoir

Figure 3.15 Japanese Lumber Shipments by Use (Japan Forestly Agency Data, Pmvided by Y. Mon Kyofo University, Japan)

construction, with the fernainder being used primarily for packaging and furniture.

As of 1989, roughly 80% of lurnber made from domestic logs went into housing

construction, as was the case for lumber processed from North American and USSR log

imports. In the case of lumber produced from South Sea logs, however, only 45% went

into housing, while an additional 20% went into packaging and the remaining 35% intu

fumiture and other miscellaneous uses. The vast majority (over 80%) of the lumber made

from New Zealand logs went into packagingI2 (Otsuka, 1992).

As of 1989, there where over 17,000 sawmills in Japan. Given lumber shipments

of approximately 30 million cubic metres at that time, this gives an overall average output

121t must be kept in mind that in 1989, New Zealand had not begun shipping significant quantities of i t ~ pruned pine. The percentage of their wood products going into Japanese housing can, therefore, be expected to change quite dramaticalty.

Gaston Chartter Three Page 59

of only 1,750 cubic metres (roundwood equivalent) per mill. Of these sawmills,

approximately 40% process domestic logs only, approxirnately 15% process imported logs

only, and the balance process both (Otsuka, 1992).

Although the average sawmill size is small, especially by BC standards, they range

significantly in size. Those mills that utilize predominantly (or only) domestic logs are

generally small family operations employing less than 10 people. These tend to be inland

mills located close to the timber source. While this makes up the majority of sawmills by

number in Japan, those that process predominately imported logs tend to be considerably

larger. These are usually either coastal mills, or mills located close to large urban centres.

Logging and sawmilling typically are not integrated in Japan. Sawmills purchase

domestic logs directly from the landowners, independent log producers, forestry

cooperatives or sawlog markets (which number in the hundreds). lmported logs are mostly

purchased frorn trading companies and wholesalers. Logs from the national forests in

Japan are sold competitively (Kato, 1982).

There are many sources in the literature which state that Japan's domestic log

suppliers have difficulty competing with imports on price (see, for example, Sedjo, et ab,

1994; Otsuka, 1992; Iwai, 1986). In the case of Japanese cypress, for example, the

stumpage cost alone averaged over 40,000 Yen/rn3 in 1990 (approximately $325 US), or

a total cost of producing a domestic log of roughly 55,000 Yenlm3 (approxirnately $425 US)

(Otsuka, 1992). This compared to the average irnport price for US hemlock logs (a

competing species) of less than 27,0001m3 Yen in 1990 (or less than $210 US) (Japan

Tariff Association). Reporting Japanese cypress log costs a decade earlier, Mochida

(1984) quotes an even higher price of over 53,000 Yen/m3 stumpage and a total log cos

of over 65,000 Yen/m3 13.

While it appears that imported lumber is also less expensive than domesticallj

produced lumber, the higher cost of shipping lumber reduces the price difierential. Otsuka

(1992), quotes three price cornparisons for lumber from a study done by the Forest

Products Research lnstitute in Japan. These cornpansons are for the production of posts

in 1990. The final cost of these posts in Japan when domestic cedar logs were used was

54,800 Yen/m3; when North American hemlock logs were used, 48,400 Yen/m3; and finally,

the cost of imported North American hemlock lumber was 43,000 Yen/m3. In terms of US

dollars, these values are approximately $420, $375 and $330/m3, respectively.

When looking at the price of lurnber produced in Japan relative to imports, however,

it is not clear, due to inconsistencies in dimension and other measures of quality, that the

two are as comparable as is the case with logs.

3.5 Summary

This chapter has highlighted the significant trends in Japan's demands for domestic

and imported wood products over the past three decades:

1) Japan has moved from almost total self-sufficiency in log inputs to a heavy reliance on log imports. Although Japan has undertaken considerable reforestation, this was mostly done after the war, leaving little opportunity to change this trend before the turn of the century.

13This higher price is likely due to the lawer level of competing log imports.


At present, roug hly 60% of Japan's dornestic log production is harvested from man- made forests. Given the lower quality and higher cost of this source, compared to domestic old growth, this lends support to the previous point.

Although the harvest from Forest Agency land has remained rather constant over this period, it has shown a gradua1 decline as a percent of total harvests; the significance of this lies in the fact that it is these lands that contain the largest percentages of old growth, albeit on less accessible lands than the private forests.

Domestic softwood log production dropped roughly 40% over this period while domestic hardwood log production dropped more than 65%. Softwood log imports increased 400% while hardwood log imports stayed relatively constant.

While log imports have shown the noted overall increase over this period, imports actually peaked in 1973 and have been dropping ever since. Against this trend, lumber imports have been increasing throughout. As was the case with logs, Japan has shifted its lumber imports away from hardwoods in favour of softwoods.

The primary reason for the drop in log imports seems to be less a function of Japanese demand and more a function of the declining availability of logs on the worid market (due to growing export restrictions and declining old growth supplies worid-wide). The former Soviet Union seems to offer the major potential for added future supply.

While the sources of softwood log and lumber imports have not changed significantly over this time period, total log and lumber market shares have.

North America and the former Soviet Union are the only significant suppliers of imported logs for housing in Japan. Logs from these two countries are used almost exclusively for lumber production. Only 20% of South Sea logs are used for lumber production, and New Zealand logs have been used almost exclusively for packaging material.

Japan has not shown a great acceptance for either softwood plywood or other panel products as substitutes for its traditional hardwood plywood (of which Japan is a significant producer-initially using domestic hardwood logs and later substituting imported hardwood logs and veneer).

Japan clearly enjoys a significant forest resource, with forested land as a

percentage of the total land base being very similar to that of BC, and growing conditions


which allow for significantly greater annual increments in their volume of timber. Given the

high population density, however, it is likely that domestic supply will continue to fall far

short of demand. Further, given that Japan has already exploited most of its accessible

old growth stocks, coupled with a heavy reliance on relatively inexpensive imports, much

of Japan's timber resources lie outside of the country's extensive margin (the existence of

the imports putting downward pressure on domestic prices). It could be hypothesised, in

fact, that much of Japan's man-made timber stocks are also outside of the extensive

margin, due to the lower cost of imports relative to the cost of intensive silviculture and

harvesting .

The question now, however, is will the Japanese substitute lower quality logs,

imported lumber and other wood products for the high quality logs, which currently

comprise a major proportion of their total imports. Or, will they begin to rely increasingly

on domestic wood supplies?.

In terms of BC, as a past and potential future supplier of wood products, Japan has

shown a strong demand for high quality lumber from BC's old growth, in spite of its

preference for logs. Given the higher cost of log production in Japan, it is Iikely that this

demand will continue for as long as BC has old-growth stocks to mill; this could last for

several decades if the expansion of BC's extensive margin outpaces that of Japan's. At

some point, however, it is possible (or even likely given BC's present level of silvicultural

efforts), that Japan's domestic stocks will be more valuable (revenue minus cost) than BC

imports. In addition, of course, is the possibility of increased lumber imports from sources

other than BC. It is to these substitution possibilities that this thesis will now turn.

Gaston Chapter Four Page 63

Chapter 4 Theoretical Foundaüons and linplications for the Empirîcal Analysis of the

Japanese Demand for Wood Products

This chapter develops the methodology for quantitatively investigating Japan's

willingness to substitute alternative wood inputs in their production of wood products,

primarily housing. The possible wood input substitutions include: 1) imported wood versus

domestic wood; 2) wood from one region versus wood from another region; 3) one type of

wood versus another type of wood (for example, softwood venus hardwood; lumber versus

logs); and 4) non-wood inputs versus wood inputs.

It was stated in Chapter 2 that the most appropriate methodology found in the

literature for investigating derived factor demands for disaggregated wood imports cornes

from the Armington two-stage approach (1 969), and its subsequent applications. This

chapter starts with a discussion of the theoretical foundation of derived demand, describes

the empirical analysis used in the present study, and concludes with a description of the

data.

4.1 Theoretical Foundations

Japanese home builders, being the primary end-users of wood products, have a

number of choices among possible material inputs. They can use domestic lumber milled

from domestic logs, domestic lumber milled from irnported logs, or imported lumber.

Builders can also choose between hardwood and softwood, and between domestic and

imported further processed wood products (such as wood panels). Finally, the builders can

change the proportion of wood to non-wood materials used. It must also be noted that the


builders' choice of input is dependent on the type of housing construction, such as post

and beam versus platform-fiame, with the former requiring larger dimensions, higher

quality, and different species (see Chapter 3).

In making these decisions, economic theory suggests that the builders (or the

building industry) will combine these alternative wood products with other inputs needed

in the production of houses (such as labour, energy, machinery and capital) in such a way

as to maximize profits or, equivalently, to minimize costs subject to the production function.

To illustrate, consider a Cobb-Douglas production function as foll~ws'~:

where: GNP = gross national product in Japan; a, = the quantities of domestic wood, imported wood. and the

quantity of 'everything else" that goes into building a house; @*ai = parameters.

The costs of building these homes can be represented as:

c = PDQD + P,Q, + PEQE

where: p, = the price of Q,

If builders are assumed to adjust their input mix in such a way as to minirnize costs

subject to the technology described by equation 4.1, this will yield the derived demand for

I41n this discussion. as in the empirical analysis used in the present study, output is taken to be per capita gross national product (GNP) as opposed to housing starts. This more general measure of output is considered appropnate as various foms of the wood input demand are being investigated, from logs to w w d panels. Logs are not directly demanded by house builden, rather the lumber from which the logs are transformed (not to mention the portion of logs which go into veneer for plywood, for example). Further, lumber imports themselves may not be directly demanded by house builden, much of which is remanufactured in Japan.

The use of GNP as the output in measuthg wood product input demand is not unique to the present study. Further. unlike North America, there exists a strong relationship between per capita GNP and housing starts in Japan, shown by Yu and Mori (1 990) to have a historical correlation coefficient of 96 percent.


input materials, as a function of only input prices and output quantity. The constrained

minimization problem is:

Minimize C = PlQI + pDQD + PEQE

s.t. GNP = @Q:' Q,"' Q,"'

The Lagrangian expression associated with this constrained minimization is:

9 = PDQD + PlQI + PEQE - A [ @ Q ~ ' Q D a 2 ~ ~ ] (4-4)

If one assumes that the house builder's input choices do not affect the input prices (i.e. that

they are pr ie takers, facing a perfectly elastic supply curve for their inputs), the first-order

conditions for a minimum are:

&? - = GNP - @QP1QDa2QEa3 = O BA

The first three of these equations can be written as:


where MP is marginal produd. Given that the Lagrangian multiplier. A, can be interpreted

as marginal cost (MC), as it reflects the change in the objective (costs) given a change in

the constraint (output), this can be re-written as'':

MC MPD = PD

MC MP, = P,

MC MPE = PE

Given that MC must equal marginal revenue (MR) under the assumption of profit

maximization :

where MRP is the marginal revenue product, or the additional revenue obtained from

selling what an additional unit of the input produces. Choice of any one input, then,

involves equating its marginal revenue product with its price (once again, given the

assumption that the buyer of the input is a price taker). In effect, the marginal revenue

product is the derived demand for the input.

Unfortunately, calculation of the derived demands for multiple inputs is not so

straight-forward. For example, given a drop in the price of domestic lumber, there should

not only be an increase in the quantity of domestic lumber demanded, ceteris paribus, but

lSSee W. Nicholson (1 989).


there will also be a change in the quantity demanded of other wood alternatives as buMers

adjust to a new cost-minimizing combination of inputs. This can be broken down into a

substitution effect (here, substiMing domestic lumber for, Say, imported lumber from BC)

and an output effect (if building a house is now cheaper due to the drop in lumber cost,

and if this saving is passed on to the ultimate consumer, the builder will likely see an

increase in the demand for houses). Obviously, both of these effects cause the quantity

demanded of an input to move in the same direction, and opposite to a price move. This

concept will be retumed to shortly, when describing the analogous situation of deriving the

demand for a specific wood import (such as Douglas-fir lumber from Canada) from the

aggregated demand for al1 imports combined.

Retuming now to equations 4.5, it is possible to detemine the derived demand for

each input. expressed in ternis of input prices and output. Solving for the derived demand

for imported lumber, the final result becomes:

In short, the derived demand takes the form of (compare to equation 2.19):

Gaston Cha~ter Four Paae 68

where the parameters and the p's are functions of the a's in equation 4.9:

By ~ p i r Ï d l y estimating equation 4.10 when Q, , for example, is the quantity of al1

imported lumber by Japan, the value of Pl would represent the own-price demand elasticity

of imported lumber (thus the expected minus sign), b and P, the cross-price elasticities for

changes in the quantity of imported lurnber demanded given changes in the prices of

Japanese domestic lumber and "everything else", respectively, and P, the change in

quantity of imported lumber demanded given a change in production output. Note that

constant returns-to-scale can be tested for and/or imposed by equating the value of P, with

one (in the constant returns-to-scale case in a Cobb-Douglas production function,

a, + a, + a, = 1 ; see the constraint in equation 4.3). Note as well that -B, = P, + P3,

or that the own-price and the sum of al1 the cross-price elasticities of the inputs should

equal zero. Once again, this can be tested for andJor imposed.

As discussed in Chapter 2, given the stated objectives of this thesis, rather than

including P, (the average pnce of imported lumber in aggregate) in equation 4.10, it would


be more desireable to disaggregate the P, into its component parts (such as Douglas-fir

lurnber from Canada, radiata pine lumber from New Zealand, etc.). This would allow for

the estimation of a number of potentially relevant cross-price elasticities between country

of origin, species or even product type?

The problem in obtaining cross-prie elasticity of demand estimates in this manner,

however, is two-fold. First, every price variable used as a regressor will use up one degree

of freedorn, which is particularly problematic when the researcher is limited in the number

of available observations (such is usually the case when one must rely on annual data).

It is not hard to imagine the number of desired price regressors exceeding the number of

observations when one considers the possible permutations of the sources of the import,

species, and product type.

The second problem is that even a few prices used as explanatory variables can

lead to problems of multicollinearity. In spite of the fact that it would be expected that there

are differences in the prices histories of, Say, BC Sitka spruce lumber and New Zealand

radiata pine lumber (or logs), it would not be surprising to see that the overall pattern is

An exarnple of this problem was offered in Chapter 2 in the description of Sedjo and

other's study (1994). Using Japan as the demander for imported timber products (see

equation 2.22), the researchers regressed the import price from region i'A's" timber on the

quantity demanded of this import, along with the p r ie of US timber, the price of Japanese

"ln order to break down the import prices by product type, the dependent variable would have to be the sum total of log, lumber and product quantities.


domestic timber, and the average import price of timber from regions other than ' 'A or the

US. As the parameters on the Japanese domestic timber price and the "other" timber price

were found to be insignificant, they were suppressed. It is possible that this insignificance

stemmed from multicollinearity among the price series; if this is the case, it is not clear that

the variables should have been omitted, due to the potential for biasI7.

In the present study, the demand for a specific wood product is being sought (such

as the Japanese demand for Canadian Douglas-fir lumber), derived from the "output" of

aggregated wood imports. The derived factor demand function can be written as (see

equation 4.9): -(a2 ' (13) a2 a3 1

a, - az - a3 QI = UJ Pl ' a2 ' a3 P? . -

Q * a2 - a3 (4.1 3)

where: QI = the quantity demanded of a specific wood product (for exarnple, Canadian Douglas-fir lumber);

p I = the price of this product; P,, P, = the prices of other products which make up the total imports, Q; Q = the aggregate quantity of irnports (the "output").

This equation could, at least theoretically, be estirnated generating the own-price elasticity

of product "1" as well as the cross-price elasticities of the quantity dernanded of "1" (say,

Japanese demand for Canadian cedar) relative to the price of either "2" or "3" (say, the

price of US cedar and New Zealand radiata pine). Note, however, that this equation

disaggregates total imports into only three cornponent parts; while this in itself could lead

'7Multiwllinearity and omitted variable bias is well documented in rnost texts on econornetric theory. Multiwllinearity tends to exaggerate the variance of the affected regressor, which leads to the likelihood of omitting a variable that should not be ornitted. Johnston (1984), pages 259-264 offers a good account of the consequences of omitted variable bias. These potential problems are explored in greater detail when discussing the results in the following chapter.


to problems of mufticollinearity, the elasticity estimates of a greater number of component

parts are desired in the present study.

As was shown in Chapter 2, Arrnington (1969) offers a potential solution. The

approach, illustrated empirïcally by Chou and Buongiorno (1983), allows for a highly

aggregated form of equation 4-10 to be used, such as the quantity of al1 lumber imports by

Japan, yet still leads to highly disaggregated price elasticity information. To recap, this is

accomplished by a two step process. First, the demand for total imports of a kind (such

as plywood) is estimated, derived from the demand for some measure of output. Second,

the demand for individual sources of the product, deived from the demand for the product

in aggregate is estimated. As shown in Chapter 2, this process can be reversed

empirically for the ease of calculating CES quantity and price indices (Le., first estimating

the constant elasticity of substitution, then using this to estimate the aggregate demand).

4.2 The Empirical Model

The following chapter will report the results from two sets of analysis. The first of

these will be individual factor demand equations (such as equation 4.1 0):

where Q, and the corresponding P, represent various levels of aggregate quantity and

pke, respectively, of imported Japanese wood products. When estimating the aggregate

derived demand for al1 imports, P, is the real domestic price of Japanese logs. When

estimating a less aggregated fom of the derived demand, such as softwood lumber from


Canada, P, is the average of both the domestic Japanese log price and the price of al1

other imports (everything other that softwood lumber from Canada). While these

regressions will not allow for the determination of disaggregated crossprke elasticity

estimates, the analysis is done for cornparison of results with the Amington, two-stage

approach. P,, being the price of everything else, is taken in this study to be a wage index

due to its significance in Japan.

The second set of analyses will largely utilize the Chou and Buongiorno (1983)

application of the Armington model, allowing for a greater range of own- and cross-price

elasticity estimation.

Specificaily, the following equations are estirnated, using a linear log-log

transformation:

and

Equation 4.26 is estimated as system of equations, repeating the process for various levels

of aggregation. For example, in the first case the system varies I over major categories of

wood (softwood logs, hardwood logs, softwood lumber, hardwood lumber, and wood-based

panel products). Subsequent systems focus in on greater detail, beginning with softwood

lumber imports by Japan from various countries of origin, then on the imports of softwood

lumber from Canada by species. Wth the estimates of a (the constant elasticity of

substitution) and the constant ternis in hand, the relative weights can be recovered for

creating the CES quantity and price indices (as explained in Chapter 2). With these


indices, equation 4.25 can be estimated in a rnanner consistent with Armington's two-stage

assumptions.

4.3 The Data Sources Used in the Empirical Analysis

The main source of data for the quantity and price relationships is the Japan Tariff

Association, lmporfs of Commodity by Country. This publication offers data on the annual

import of al1 commodities in considerable detail, giving volume and value by country of

origin. The data set used in this study covers the period 1965 to 1993, with the recognition

that the level of detail diminishes as one goes further back in tirne. The reason that the

study does not utilize data prior to 1965 is that the level of detal was considered to be

inadequate.

In 1 965, this publication reported imports from over 50 countries, broken down into

a total of 80 categories of wood products. This included 10 categories of softwood logs,

14 categories of hardwood logs, 16 categories of softwood lumber, I O categories of

hardwood lumber, 14 categories of panel products, and 16 categories of further

manufactured products. Unlike later years, the wood product detail is primarily in the form

of species. At the other extrerne, 1993 showed considerably more detail. The total

number of wood product categories increased to 145, broken down to 10, 20,21, 23,41,

and 30, respectively, as above. The detail on country of origin also increased, exceeding

80.

In order to run time series regressions over the entire 29 year period, it was

necessary to aggregate rnuch of the detail offered by these data in the Iater years in order


to obtain consistent product categories through al1 years. While this task was considerable

in itself, it was further complicated by the fact that the Japan Tariff Association utilized

three different comrnodity classification systerns over this tirne period. This meant that the

data had to once again be aggregated to the cornmon denominator found over the three

commodity classification systerns. As this requires a deg ree of subjective judgement, the

end result of the aggregations used in this study is reported in detail in Table 4.1.

As seen in the table, in spite of the need for aggregation due to changes in the data

series over tirne, considerable detail was retained. There are 10 categories of softwood

logs (SLG-X) and 10 categories of hardwood logs (HLG-X), the breakdown being purely

by species. The first category in each, which is treated as lumber in this study, is logs

which are roughly squared or half squared (cants). Although it might have been expected

that prices within this category would be significantly higher than prices of dimension

lumber, such is not the case; further, the reported volumes in this category are very low.

For this reason, SLG-1 and HLG-1 were aggregated with SLM-9 and HLM-9, respectively,

these latter categories being sofhvood and hardwood lumber, not elsewhere specified

(n-es.), respectively. (For definitions of SLG-1, etc., see Table 4.1 .)

There are 20 final categories of sofh~ood lumber (SLM-X), along with 8 categories

of hardwood lumber (HLM-X). In the case of sofbvood lumber the categories include detail

on size breakdown (greater or less than 160 mm) as well as species. Unfortunately, this

breakdown was not consistently offered throughout the entire period, starting only in 1974

and 1977 in most cases. It is possible that there was no lumber imported by Japan less

than 160 mm previous to these years. Further, just as was the case with cants, although


Table 4.1 : Japm Tariff Association Data, Converted Codes New 65-75 76-87 88-93 Description SLG-1 242-299 44.04-31 O 4403.20-010 Coniferous Logs, roughly squared or half squared

SLG-2 242-210 44.03-321 4403.2 0-091 Sawlogs & veneer logs, Pinus

SLG-3 242-221 44-03-322 4403.20-092 Sawlogs 8 veneer logs, S i a sprue -- SLG4 242-229 44-03-323 4403.20-093 Sawlogs & veneer logs, Abies and Picea, excluding

S i i a spnice --

SLG-5 242-230 44.03-324 4403.20494 Sawldgs 8 veneer logs, La&

SLGb 242-240 44.03-325 4403.20495 Sawlogs & veneer logs, white cedar, yellow cedar,

& other Charnaecyparis -- - - - - -

SLG-7 242-250 44.03-326 4403.20-096 Sawlogs 8 veneer logs, hemlock 8 other Tsuga

SLG-8 242-260 44.03-327 4403.20-097 Sawlogs 8 veneer logs, red cedar 8 other Thuja

SLG-9 242-270 44.03-328 4403.20498 Sawlogs & veneer logs, Douglas-fir 8 other Pseudotsuga

SLG-10 242-298 44.03-329 4403.20-099 Sawlogs & veneer logs, conifer, n.e.s. HLG-1 242-391 + 44.04-1 00 + 4403.99-21 0 + Non-coniferous fogs, roughly squared or half squamd

242-399 44.04-390 4403.99-31 1 +

4403.32-ûlO +

4403.3341 1 --- --- -. - -- - - -

HLG-2 242-310 + 44.03-331 + 4403.31490 + Sawlogs 8 veneer logs, lauans and apitons to '75; lauan,

242-381 44.03-336 4403.32-090 + kruirng mersawa and other Dipterocarpaceae family 76-'87;

4403.33419 + Al1 Meranti, Keniing, and kapur. '88 onward, plus mahogany

4403.99-290

HLG-3 242-320 44.03-100 4403.99-319 + Sawlogs 8 v e k r logs. Kwann. Tsuge or bomood. Tagayasan

4403.99-31 0 + (Cassia siamea Lam.), red sandal wood, rosewood, or

4403.33499 -- ebonywood (excl. ebony wl white streaks) - - - . - - - - . - - - -

HLG4 242-340 44.03-333 4403.99-391 Sawlogs & veneer logs. cottonwood and aspens

HLG-5 242-350 44.03-200 4403.99-1 90 Sawlogs 8 veneer Iogs, kiri (Paulownia)

HLG-6 242-360 44.03-334 Sawlogs & veneer logs. lignum vitae

HLG-7 242-370 44.03-335 4403.33-091 Sawlogs 8 veneer logs, teak

HLGd 342-382 44.03-337 4403.99-392 Sawlogs 8 veneer logs, American black wôlnut .---- -- --- -- -- - - - -. - - - -

HLG-9 242-383 + 44.03-338 Sawlogs & veneer logs. sandalwood

-- 242-384 -- - - - - - -a - - - - - - - - - - -- - . - - - -

HLG-IO 242-389 + 44.03-339 + 4403.99-399 + Sawlogs & veneer logs, non-coniferous, n.e.s. (incl. oak

242-330 44.03-390 + 4403.91600 + and beech post 1987)

44.03-332 4403.92-000 +

4403.34400 +

4403.35400

Gaston Cha~ter Four Page 76

Table 4.1 : Continued New 65-75 7647 88-93 Description

4407.10-330 Lumber, SPF. not more than 160 mm in thickness

4407.1 0-320 Lumber, planed or sanded, n.e.s.

SU-1 a 243-21 1 44.05-31 0 4407.10-121 + Lumber, Pinus, not exœeding 160 mm in thickness

SLM-1 b 243-21 2 M.05-5101511 Lumber, Pinus, exceeding 160 mm in thickness ---- -.

SLM-2a 243-221 44.05-51 2/52l 4407.1 0-341 Lumber, Sitka spruce (corn bined; post 1 9f7, not

exceeding 160 mm)

SLM-2b 44.05-522 4407.1 0-349 Lumber, Sitka spruce exceeding 160 mm (after 1977) - - - - -- - - - -

SLM-3ô 243-222 44.05320 4407.1 0-129 + Lumber. Abies (exciuding Calif. red fir, grand fir, noble

4407.10-350 fir, etc.) & Picea, not exceeding 160 mm ----- --

SLM-3b 243-223 44-05-51 31530 Lurnber, Abies (excluding Caiii. red fir, grand fir, noble fir.

etc.) 8 Piœa, exceeding 160 mm -- - - - - - -

SLM- 243-231 44.05-330 4407.10-210 + Lumber. Larix, not exceeding 160 mm

44O?.lO-Z9O

SLM4b 243-232 44.05-540 .

Lumber. Larix, exceeâing 160 mm - - . . - - - -

SLM-Sa 243-240 44.05-5151551 4407.10-361 Lumber, white and yellow cedar and other Chamaecyparîs

(post 1977, not exceeding 160 mm) SLM-Sb 44.05-552 4407.10-369 Lumber, white and yellow cedar and other Charnaecypads,

exceeding 160 mm (post 1977) -

SLM-ôa 243-2501251 4405-5161561 4407.10-371 Lumber. hemlock and other Tsuga (post 1974, not

exceeding 160 mm) - - - - - - .- - - - - - - - -- - - - - - - - - - -

SLM-ôb 243-252 M.OMli/562 4407.10-379 Lumber, hemlock and other Tsuga, exceeding 160 mm

(post 1974) . - - - -- - - - -- -- -

SLM-Ta 243-260 44.05-51W571 4407.10-381 Lumber, G l a s - f i r and other Pseudotsuga (post 1977. not

exceeding 160 mm) - -

SLM-7b 44.05-572 4407.10-389 Lumber, Doug las-fir and other Pseudotsuga, exceeding

160 mm (post 1977) -- - - - - -- - - -- SLM-8 243-271 + 44.05-521 1581 + 44Oi.lO-3lO Lurnber, incense cedar

243-279 44.055 W 5 8 9 -- - - -- -- - . - - A - -. -- -- - - SLM-Sa 243-280 44.05-5291591 4407.10-391 Lumber, conifer, n.e.s. (post 1977, not exceeding 160 mm)

SLM-Sb 44.05-592 4407.10-399 Lumber, conifer, n.e.s., exceeding 160 mm (post 1977)

SLM-t O 243-29 1 44.1 3-300 4409.10-31 0 Planed, grooved or tongued; Pinus, Abies, Picea and Larix

SLM-11 243-299 44.13-510 4409.10-320 Planed, grooved or tongued, conifer, n.9.s.

Gaston Chapter Four Page ï7

Table 4.1 : Continued New 65-75 7647 88-93 Description HLM4 243-310 44.05100 4407.99-1 10 + Lumber, Kwarin, Tsuge or boxwood, Tagayasan (Cassia

4407.99-1 90 siamea Lam.), red sandal wood. rosewood, or ebonywood

HLM-2 243-320 44.05200 4407.99-21 O + Lumber. Kin

HLM-3 243-330 44.055311593 4407.21-1 t 0 + Lumber. teak

HLM4 243-340 44.055321594 4407.99-410 + Lumber, Iignum vlae

4407.99490

HLM-5 243-350 44.05400 4407.21-270 + Lumber. lauan, kruing. mersawa and other Dipterocarpacea

4407.25000 -- ~ -

HLM4 243-360 44.055391599 4407.99-500 + Lumber. nonanifer, n.e.s.

4407.91-000 + (oak)

4407.92-000 + (beech)

4407.22-000

HLM-7 243-393 44.13-400 &l9.20-330 Lumber, planed. grooved or tongued. lauan. kruing, menawa

and other Dipterocarpaceae . - - . -. -

HLM4 243-399 + 44.13-590 + 4409,20350 + Lumber, planed. grooved or tongued, non-confer. n.e.s.

243-392 44.1 3-200 4409.20-320

VS-1 631-1 11 44.14-100 4408.90-100 Veneer sheets. Kwarin, Tsuge or boxwood. Tagcyasan, red

sandalwood. rosewood and ebony wood- . - --

VS-2 631-1 12 + 44.14-220 4408.90-200 Veneer sheeîs, Teak

VS-3 631-119 + 44.14-210 + 4408.10-010 + Veneer sheeis, n.e.s.


Table 4.1 : Conünued New 65-75 76-87 Oescription PLY 631-210 +

631-21 1 +

631-212 +

631 -21 3 +

631 -21 4 +

631 -21 9 +

631 -220

441 8.90-100

PB 631420 44.1 &IO0 + 4410.1 0-01 0 + Particle board; "reconstiiuted"; "densified"

441 O.9O-OlO

FB 44.1 1-100 + 441 1.1 1-000 -> Fibreboard; "hardboard"; "building board"

44.1 1-900 441 1.99400

LAM 631410 44.15200 + 4412.29010 + Laminated: "irnproved"

MISC 631-870 -> 44.19400 -> 4409.10-200 + Misc.; incl. wood beadinglmoulding, boxes. casks.

632-899 44.28-290 4409.20-200 + barrels, wood for decoative use, etc.

4414-00-000 ->

4421 .go499


there is a price spread behrveen the two size categories for most species, this spread is not

as dramatic as one might expect. This is illustrated in Figures 4.1 and 4.2, which show

size cornparisons for Japanese imports of selected Canadian lumber species. As a result,

the size detail was not maintained in the regressions reported in this study; volumes and

total values were summed within each category.

It can also be noted in Table 4.1 that spruce-pine-fir (S-P-F) lumber and "planed or

sandedJ1, n.e.s. imports were not reported individually until 1988. It is assurned that

previous to this date such imports were reported in the category of "planed, grooved or

tongued"; the regressions reported in this study, therefore, aggregate SLM-O, SLM-10 and

SLM-11 into a single category. In the case of hardwood, the two categories of planed,

grooved or tongued lumber, HLMJ and HLM-8, are aggregated into one category for the

regressions.

It is with the panel products that the Japan Tariff Association data loses the greatest

level of detail in the earlier years. While the data from 1988 onward includes breakdown

by species (or at least hardwood versus softwood), and often other characteristics such as

density and thickness, previous years lose detail progressively. For the regressions

reported in this study, a single category is used for each of the following: veneer sheets

(VS-1 through VS-3 are aggregated), plywood, particle board, fibreboard, and laminated

lumber. Other assumptions regarding panel descriptions found in the data series are noted

in Table 4.1 (for exarnple, including ucellular" and "blockboard" in the plywood category).

Finally, the Japan Tariff Association data include considerable detail under the

category of miscellaneous, such as mouldings, wood beadings, and other further

Gaston Chapter Four Page 8C

+ less than 160 mm + greater than 160 mm

Figure 4.1 Nominal Price of Japanese ImpoRs of Canadian Sitka Spruce Lumber By Size Category (Japan Tariff Association)

1 20

+ less than 160 mm + greater than 160 mm

Figure 4.2 Nominal Price of Japanese Imports of White and Yellow Cedar Lumber By Size Category (Japan Tariff Association)


manufactured wood products. lmports in this category were not incIuded in the present

analysis due to their comparatively insignificant volumes, and the problems associated with

converting volumes to a common unit.

All log and lumber volumes are reported in cubic metres, roundwood equivalent.

In the aggregate regressions, where log imports are included with lumber and/or wood

panel imports, consideration was given to using a lumber recovery factor. However, this

was not done for two main reasons. First, lumber recovery can Vary widely, not only due

to processing differences among sawmills, but also because of differences in the fibre

source, species, log characteristics and product being produced. Secondly, one might just

as rightly state that the lumber irnports by Japan should also include a "lumber recovery

factor" insofar as Japan remanufactures a significant quantity of its raw imports. This is,

of course, particularly true for cants or other large dimensions. As assigning a value to this

recovery would be highly arbitrafy, it was decided to leave al1 volumes as reported.

Panel products are reported in a number of different units, which makes conversions

more difficult. While 1000 square metres of panel products which are 1 mm thick equal

one cubic metre, the product categories used in this study span a great variety of

thicknesses, not al1 of which are reported. To get around this problem, it was noticed that

the value of panel imports reported by the Japan Tariff Association very closely parallel

those quoted by the FA0 over the same time period (once converted to a common

currency)(Forest Products Yearfiook, various issues). As a result, the panel product

volumes in this study were converted using the average values suggested by the FA0

data.


As particle board and laminated lumber are quoted in cubic metres (solid wood

equivalent), they required no conversions for the present study. Plywood and veneer

sheets are quoted in square metres and were converted to cubic metres by dividing by 135

(FAO). Fibreboard is quoted in kilograms and was converted to cubic metres by dividing

by 300 (FAO).

As the country of origin detail was much too high for the purposes of this study, six

country groups were created and data aggregated accordingly: Canada, the United

StatesfB, the former Soviet Union, the combined imports from New Zealand and Chile

(representing the major plantation producers of radiata pine), the combined imports from

the South Seas, and the combined imports from the "rest-of-world" (al1 other countries

exporting wood products to Japan). While The Japan Tariff Association does not break

down Canadian imports by province, as Table 4.2 demonstrates for lumber, the vast

majorrty of Canadian off-shore solid wood product exports originate from British Columbia.

A number of additional time-series data were needed for the present study. As

noted in Chapter 3, dornestic log and lumber production were obtained from the Japan

Forestry Agency, Table of Demand and Supply. Prices for dornestic logs and lumber were

obtained from the Japan Wood Products Information & Research Centre; from 1984 on

these prices were received directly from their in-house publication (various issues), while

prices before this date were obtained from the Global Trade Model data bank at the

lBGiven the similarity of wood products imported from Canada and the United States, it would have been reasonable to combine these two into 'North America". However, this disaggregation was desired due to the emphasis on Canada in the results and discussion in Chapters 5 through 7.


I Table 4.2 B.C. Offshore Lumber Exports Relative to the Whole of Canada (000s m3)

--

Year B.C. Canada 6.C.ICanada

I Source: Selected Forestry Statistics Canada, Information Report E-X-47. Natural Resources Canada, 1993.

University of Washingt~n'~.

To convert the price series used in the estimation of aggregate imports to real

values, the deflator employed was the Japanese producer price index for imported "wood,

lumber & related productsJ' (Bank of Japan).

For the "cost of everything elseJy, noted as P, in Sections 4.1 and 4.2, a monthly

wage earnings index for Japan was used, obtained from FAO's International Financial

Statistics Yearbook (1994). In those regressions where it was desirable to investigate

cross-price elasticities between the quantity of a wood product demanded and a non-wood

import, individual wholesale price indices for iron 8 steel products, cerarnics, stone 8 clay

products, and for plastic products were used, obtained from the Bank of Japan.

Finaily, the per-capita GNP values were obtained from FAO's International Financial

IQCenter for International Trade in Forest Products (CINTRAFOR).


Statistics Yearbook (1 994).

Gaston Chapter Five Page 85

Chapter 5 Empirical Results

This chapter reports the results of the econometric analysis. Estirnates of Japanese

aggregate derived demand of al1 wood product imports are presented in Section 5.1, as

well as the derived demands of selected disaggregated products. The disaggreg ated

product own-prie elasticities are desired for comparison with the Armington two-stage

model, following aie empirical approach suggested by Chou and Buongiomo (1983). The

two-stage resufs are presented in Section 5.2. First, the constant elasticity of substitution

is estirnated over three individual systems, with each system disaggregating Japanese

demand for wood product imports by varying degrees of product detaii. This is followed

by the estimation of the CES demand function and the resulting calculation of the own- and

cross-price elasticities. In Section 5.3, the results from the direct own-price elasticity

estimations are compared to the calcuiated values from the two-stage approach, leading

to a brief discussion of the appropriateness of Armington's assumptions. Finally, Section

5.4 offers the estirnates of non-wood substitution by the Japanese importer.

5.1 Direct Estimation of Japanese Price Elasticities of Demand for Wood lmports

Table 5.1 shows the ordinary least square (OLS) and the Cochrane-Orcutt estimates

of the Japanese demand for aggregated wood product imports (including logs, lumber and

panel products, both softwood and hardwood). In log-log form, the quantity of import

demand is regressed on the real unit price of the aggregate wood products import (P,), the

domestic price of logs in Japan (P,), an index of wage rates in Japan (P,) and the


Table 5.1 Estimates of the Japanese demand for aggregated wood importç. 1 -- -

Constant 1 PI 1 PD 1 PE GNP 1 Rz-Adj. 1 DW

Ordinary Least Square 1

12.741 i -0.1607 f 1.208 i -0.802 f 0.842 0.646 i 0.590 (11.630) i (-0.642) i (3.366) f (-5.347) f (6.935) i

Cochrane-Orcutt Durbin's h

13.625 i . -0.0373 f 0.862 i -0.719 0.8253 i 0.816 0.233 (12.280) i (-0.194) (2.324) i (-3.341) i (4.919)

I ~p

Note: P, , PD, P, , and GNP, are the logarithms of the price of aggregate wood imports (logs, lumber and panels), the pdce of Japanese domestic logs, the monthly average wage index in Japan, and percapita GNP in Japan, respectively. Numbers ,ii parentheses are t-values.

per capita gross national product in Japan (GNP).

The reason for including the Cochrane-Orcutt estimate is apparent from the

investigation of the Durbin-Watson (DW) statistic in the OLS regression. The lower and

upper bound critical values for the DW test for five parameters and 29 observations are

1.124 and 1.743, respectively20. As the DW statistic from the OLS regression lies below

the Iower bound, suggesting that this regression is potentially serially correlated, a

Cochrane-Orcutt regression is used.

The value of Durbin's h statistic on the Cochrane-Orcutt regression is 0.233,

indicating that there is no evidence of higher order autocorrelation. Under the nuIl

hypothesis of no higher order autocorrelation, Durbin's h is asymptotically normal with zero

mean and unit variance. This nuIl hypothesis is rejected if the statistic is greater than 1.645

ZODurbin-Watson critical values are quoted from Judge, et al. (1988). reproduced from Savin and White (1 977).


at the 5 percent level of signïficance (1 -645 being the t-value at 5 percent significance with

degrees of freedom) (see Judge, et al., 1988; and Whit, 1993).

In the previous chapter, it was shown that the parameters on the aggregate import

price, the Japanese log price and the price of "everything else" should theoretically sum

to zero (see equation 4.1 1). The appropriate test on the regression reported in Table 5.1

yields an F-value of 1.1491, which is well below the critical value of 4.26 with 1 and 24

degrees of freedom. As a result, there was no reason to impose this restriction.

It was also shown in the previous chapter that the returns ta scale can be

determined by taking the reciprocal of the Japanese per capita GNP parameter. The

appropriate test to determine whether this regression demonstrates constant returns to

scale is to equate the GNP parameter with 1.0. As this yiekls an F-value of 1.0843, once

again being below the critical value indicated above, it can be concluded that this model

demonstrates a return to scale which is not significantly different from being constant.

As a final test on the direct factor demand regression reported in Table 4.1,

evidence of structural change was sought in two ways. First, a sequential Chow test was

performed. Second, the regression was re-nin with the inclusion of dummy variables, both

on the intercept and on the import price. The dumrny variable was defined as being zero

for the first x years and one otherwise. This was done with two different values of x. The

first period is defined as being from 1965 to 1973 due to the rapid growth in Japanese

housing starts as compared to 1974 to 1993. Further, Japan utilized fixed exchange rates

based on the gold standard until the early 1970s. The second period is defined as being

1965 to 1980, due to the introduction of log export controls by two major South Sea


- Observed - Predicted

Figure 5.1 Observed versus predicted values of quantity demanded of aggregate softwood lumber importç by Japan when regressed on the average import price, possible wood substitute price (other wood imports and domestic logs), the Japanese wage index, and per capita GNP.

hardwood log producers in the early 1980s.

The Chow test rejects structural change, and there are insignificant t-values on the

intercept and import price dummy variables.

In addition to these tests, Table 5.1 dernonstrates that this regression offers a

reasonably good fit, with an adjusted correlation coefficient of 0.816. This is graphically

illustrated in Figure 5.1. Further, al1 of the parameter values meet a priori expectations in

ternis of sign, and al1 parameter values are significant with the exception of that on the

imported wood price. That this parameter is insignificant cornes as no great surprise; one

would expect the own-prie elasticity of aggregate imports of al1 wood products to be highly


inelastic (few available substitutes). The parameter shown c m be interpreted as not being

significantly different from zero.

Table 5.2 shows the results of estimating the derived demand for selected

disaggregations of Japanese wood product imports. Cochrane-Orcutt regressions are

again employed due to evidence of serial correlation. Each row in the table represents an

individual regression, changing the dependent variable Qi and independent variable Pi in

each case, with the / representing the specific product indicated. The individual

regressions also include a second price variable, being the average real unit price of al1

other possible wood substitutes. This includes the price of imported products other than

Qi and the price of domestic logs in Japan. The average real price per unit of these two

substitution possibilities is indicted as Po in the table. The other independent variables,

being the wage rate index in Japan (P,) and the Japanese per capita gross national

product (GNP) are common to al1 of the regressions.

As was the case with the regression on the aggregate demand for al1 wood imports

by Japan (Table 51), it can be noted that the parameters on the specific import price, the

p r i e of ail possible wood substitutes, and the wage index should theoretically sum to zero.

lndividual tests yield F-values which are below the critical values in each case, again

making it unnecessary to impose this restriction. As regards returns to scale, while the

GNP parameter in some of the regressions would suggest decreasing returns to scale, the

appropriate tests also yield F-values which are below the critical value.

Over all, the regressions offer reasonably good fits, with adjusted correlation

coefficients typically over 0.8. Further, almost al1 of the parameter values meet a prion


1 Table 5.2 Estimates of the Japanese demand for selected disaggregated wood imports.

Constant 1 PI 1 Po 1 PE 1 GNP 1 R2-Adj. ( Duibin's t

Softwood lumber from al1 sources 11.109 . i -0.650 i 1.469 f -0.710 f 1.562 i 0.940 i 0.499 (9.313) i (-2.340) f (3.351) f (4.105) i (8.839)

1 SonWood lurnber fmm Canada

1 Yellow cedar lumber from Canada

1 Sitka spruce fmrn Canada 8.124 i -1.109 1.553 j -0.366 1.222 f 0.676 f 0.119

(2.222) f (-2.287) i (2.543) i (-1.259) i (3.111) f

Douglas fir lumber from Canada 5.1 97 -1.255 1.993 i -0.993 j 1.422 i 0.911 i 0.259

(8.814) i (-3.012) i. (2.265) i (-0.831) j (6.619)

Hemlock lumber from Canada 4.593 -0.209 i 0.439 j -0.577 i 1.198 f 0.618 f 0.926 (3.770) (-0.255) i (0.630) j (-3.169) i (2.999)

Other lumber from Canada 12.282 . i -1.536 f 2.003 i -0.387 i 1.500 0.809 0.456 (6.991) j (-2.558) (2.931) i (-1.553) (8.803) f

"Planedm lumber fmm Canada 3.730 j -3.591 3.596 -0.470 1.338 0.9% i 0.188

(0.694) i (-3.216) f (2.302) f (-0.446) f (6.172) f

Softwood lumber from the US 3.61 9 -1.329 f 2.531 -0.891 1.626 0.788 0.557

(1.922) i (-1.529) i (2.013) f (-0.809) f (4.233) f

Red cedar lumber from the US 8.808 -0.040 i 0.983 -1.202 1.577 f 0.713 i 0.707 (6.811) i (-1.893) f (1.689) f (-1.098) f (2.633) j

Note: P,, Pm P, and GNP, are the logaflthms of the ptice of the indicated wood product, the average price of other imported wood products and Japanese domestic logs combined, the monthly average wage index in Japan, and per capita GNP in Japari, respectively. Nurnbers in parentheses are t-values.


1 Table 5.2 (Cont) Estimates of the Japanese demand for selected disaggregated wood im ports.

Constant 1 pi 1 PO 1 PE 1 GNP 1 R2-Adj. ( Durbin's h 1

"Planedu lumber from the US 9.331 ; -5.309 i 4.863 j -0.239 f 1.207 0.866 i 0.122

(3.167) i (-2.981) i (2.887) i (-0.883) i (4.454) - - - -

Softwood lumber from New Zealand

6.1 18 -3.217 i 2.881 -0.408 j 0.967 f 0.777 i 0.142 (4.298) . i (-2.009) i (2.514) ! (-1.255) f (4.833) f

1 Softwood lumber from the former Soviet Union 1.181 ! 0.045 j 0.454 f -0.611 f 0.983 j 0.606 j 0.983

(2.645) (1.563) j (-0.607)

Softwood lumber from Other 9.91 0 ; -1.417 j 2.691 -0.436 f 1.262 i 0.903 f 0.188

(4.1 11)

Hemlock lumber from Other 14.232 i -3.417 i 3.139 f -0.228 f 1.403 f 0.897 i 0.558 (7.31 9) i (-2.999) (3.222) 1 (-1.936) (8.278)

. . - -

"Planedm lurnber from Other 6.689 i -0.517 f 1 A04 -0.655 1.239 i 0.770 i 0.812

(2.300) i (-2.300) f (5.309) j -

Softwood l o g ~ from al1 sources 15.609 f -0.0901 0.174 -0.372 j 0.651 j 0.752 i 0.774 (20.99) i (-0.294) j (0.703) i (-1.345) (2.475) i

Softwood logs from the US 11.712 i -0.209 f 1.146 i -0.653 i 0.777 f 0.634 j 0.0387 (6.843) i (-1.660) f (1.943) i (-2.318) f (3.653) f

Sitka spruce logs from the US 5.177 i -0.104 i 0.399 f -0.481 i 1.293 f 0.701 j 0.836

(4.008) i (-1.809) (2.166) f (-1.563) i (2.599) f - - - - - - -- - - - -- - .

Abieslpicea logs from the US

3.696 ; -0.339 i 1.190 -0.936 f 0.880 f 0.793 f 0.254 (1 -990) i (-1.458) i (2.203) j (-0.816) j (3.636) i

Yellow cedar logs from the US 8.294 i -0.400 f 0.525 j -0.267 i 1.193 j 0.660 f 0.779 (5.073) i (-1.826) i (1.927) f (1.193) i (3.101) j

Note: Pi, Pa 6, and GNP, are the loganthms of the price of the indicated wood product, the average price of other imported wood products and Japanese domestic logs combined, the monthly average wage index in Japan, and per capita GNP in Japan, respectively. Numbers in ~arentheses are t-values.

Gaston Chapter Five Page 9:

( Table 5.2 (Cont.) Estimates of the Japanese demand for selected disaggregated wood imports.

Constant 1 pi 1 Po 1 PE GNP 1 R2-Adj. 1 Durbin's h

1 Hemlock logs frorn the US 10.363 f -0.388 f 1.121 i -0.622 0,655 i 0.819 0.903 (4.468) f (-2.473) f (2.301) i (-2.456) f (2.709) i

Douglas fir logs from the US 3.290 f -0.554 j 0.906 f -0.355 0.773 0.791 0.127

(6.309) (-2.936) f (2.631) f (-1.853) f (2.985) j

Softwood logs from Canada 2.333 i -2.318 f 1.939 i -0.800 f 1.283 j 0.613 0.505

(8.300) i (-1.709) i (1.882) 1 (-2.067) (3.929)

Softwood logs from the NZlChile 11.255 i -3.015 f 3.093 -0.553 f 1.098 f 0.788 0.816 (3.901) f (-2.190) f (2.361) f (-1.637) i, (1.986) i

Softwood logs from the former Soviet Union 5.1 O0 f -0.109 f 0.666 f -0.839 1.459 i 0.512 f 1.233

(1 -994) (-0.029) i (1.107) (-0.934) f (2.069) a

Softwood logs from 'Othern 9.112 i -1.747 f 2.447 -1.143 i 0.769 0.876 f 0.311

(4.373) i (-7.419) f (4.938) (-5.046) (2.349)

Hardwood lumber from al1 sources 13.989 -1.158 i 1.685 i -0.672 i 1.693 i 0.954 0.421 (9.526) (-4.477) i (3.685) (-1.632) i (5.519) i

Hardwood logs from al1 sources 12.875 -0.0827 f 0.675 -0.604 0.723 f 0.820 i 0.808 (9.709) i (-0.631) f (1.913) (-2.310) (2.419) 1

Panel products from al1 sources 14.139 i -2.531 f 2.334 i -0.887 f 1.481 i 0.883 i 0.866

i (-3.400) i (-3.965) f (2.360) i (-0.632) f (1.195) i

I Note: Pi, Po P,, and GNP, are the logarithms of the pifce of the indicated wood product, the average pnce of other imported wood products and Japanese domestic Iogs combined, the monthly average wage index in Japan, and per capita GNP in Japan, respectively. Numbers in parentheses are t-values.


expectations in terrns of sign, and the majority of the parameter values are significant.

Finally, tests for structural change were again rejected in each case.

lt is interesting to note the differences in own-price elasticities based on product

(with imported log demand being highly inelastic, panels being rather elastic and lumber

lying sornewhere in-between), source (for example, demand for US softwood logs being

highly inelastic and softwood logs from "other" being elastic), and species (for example,

the demand for yellow cedar lumber from Canada being highly inelastic and "planned"

lurnber being quite elastic). The significance of this variation will be returned to in Section

5.3, as well as in Chapter 6.

5.2 Estimation of the Armington Two-Stage Model of the Japanese Oemand for Total Wood Imports

Following Chou and Buongiorno's (1983) approach for estimating a two-stage

demand system, the constant elasticity of substitution of the produci imports is deterrnined

first. Table 5.3 shows the result of three rnodels (equation 2-18), utilizing various

aggregates of Japanese irnports. In the first case, wood products are broken down by

major product type (softwood logs, softwood lumber, hardwood logs, hardwood lurnber and

aggregated wood-based panels). In the second case, the investigation is lirnited to

softwood lumber imports by country of origin (Canada, United States, New Zealand, the

former Soviet Union, and "other" countries). Finally, in the third case the investigation is

lirnited to sofh~ood lurnber impoiis from Canada by species (yellow cedar, Sitka spruce,

hernlock, Douglas fir, "planed lumber", and "other" species). In al1 three systems of


I ".' Estimates of the Constant Elasticity of Substitution over Varying Degrees of Wood lmport Aggregation, Correcting for Serial Correlation.

1 Wood Pmduet by Type

a -- ~ S U 1 ~ S L G ~ L M 1 ~ H L = ~ L M 1 ~ H U ~ S U 1 ~ P A N - - - - - - - -

-7 -456 -0.1 553 -0.1484 0.3705 0.5342 (-2.321 1) (-2.583) (-2.233) (3.380) (2.622)

Softwood Lumber by Source

- -- - -- - -

a -- b ~ L U - ~ ~ I bSLM-CAN b~~~~ --- I ~sLM-FSU b ~ ~ ~ - ~ ~ I b ~ ~ - N Z b ~ L M - ~ ~ - - - I - b ~ ~ - ~ ~ ~ - - - - - - - - - . - -

4.633 4.4619 2.451 1 1.7920 2.061 2 (-3.953) (4.3465) (3.9532) (2.888) (14.976)

- -- A- --

Canadian Softwood Lumber by Species

bsu-mer 1 b s w - m a , 1 b s ~ ~ - m a r 1 b s u - m e r 1 b s u - m e r 1 bsu-ritiu -- &LM-Y. csdir b ~ ~ - ~ e n i l o c k bsucp. flr bsur_piried- - . - -- -- -- - . l

equations, the estimates are corrected for firçt-order autocorrelation, and the values of the

elasticity of substitution (a) are constrained to be equal across equations. The systems are

estimated using Zellner's seemingly unrelated regression method (Judge, et al., 1988).

In each case, the elasticity of substitution has the expected sign and is significant.

As these values are al1 significantly different from zero, the component parts of the

Japanese imports are indeed substitutes rather than complements. As the values are not


very large, however, the alternative imports are also far from being perfect substitutes for

one another.

While there are no expectations on the sign of the constant ternis, it can be noted

that, with one exception, al1 of the parameters are significant.

It should be noted at this point that the appropriate test on the equality restriction

on the elasticities of substitution is mjected in al/ t h e cases. The consequences of

employing this restricüon will be retumed to in the next section.

As shown in Chapter 2. the bi weights needed to calculate the CES quantity and

price indices can be recovered frorn the constant values reported in Table 5.3, combined

with the knowledge that the sum of the b$ must sum to one (five equations with five

unknowns for the first Wo systems, and six equations with six unknowns for the third

system). Table 5.4 shows the resulting weights for each of the three systems. Combining

these weights with the constant elasticity of substitution (a) yields the CES quantity and

price indices needed to estimate the aggregate Japanese dernand for wood imports,

repeating the process for each of the aggregation levels reported in Table 5.3. The results

of the regressions appear in Table 5.5.

As is the case in the regressions reported in Tables 5.1 and 5.2, the explanatory Po

variable represents the pdce of al1 possible alternatives to the independent variable. In the

first regression reported in Table 5.5, this is the average real price of Japanese domestic

logs. In the second two regressions, Po is the average real price of combined Japanese

domestic logs and al1 other imports besides aggregate softwood lumber and softwood

lumber from Canada, respectively. As before, the Japanese wage index (Pd and the per


Table 5.4 Calculated CES Weights (b,'s) from Table 5.3

Wood product by type

Softwood tumber by source

CochrantOrcutt Estimates of the Japanese Demand for Seiected Aggregations of Wood Irnports. Utilking CES Quantity and Pnce Indices.

Constant 1 PI (CEII) 1 PO 1 PE 1 GNP 1 Ra-Adj. 1 Duibin's h

( Aggregate imports of ail wood products 1

- - - - -. .

1 Aggregate irnports of softwood lurnber fom al1 sources

( Aggregate irnports of al1 species of softwood lurnber from Canada 1

Note: Pi, PD. P, , and GNP. am the logarithms of the price of aggregate wooû i m m (Iogs, lumber and panels), Me price of Japanese domestic log* the monfhly average wage index in Japan. and per capita GNP in Japan, respective&. Numbers in parentheses are t-values.

capita gross national product (GNP) are common to al1 three regressions. Cochrane-Orcutt

estimates are obtained to correct for serial correlation.

When cornparhg these results with those of Tables 5.1 and 5.2, it can be noted that


the regressions again offer good fits, with correlation coefficients which are of a similar

magnitude. The signs are as expected in each case, and the parameters are mostly

significant (with the notable exception of the price parameter of the aggregate import of al1

wood products).

It is interesting to note that in each case, the own-price elasticity of the aggregate

import is somewhat lower than those reported in Tables 5.1 and 5.2. This is not consistent

with the results reported by Chou and Buongiorno (1983) for the US imports of plywood,

where their regressions employing CES quantity and prices indices are slightly higher than

when using arithmetic means.

With the estimates of the aggregate irnport demand elasticity and the constant

elasticity of substitution for the component parts within each system, it is now possible to

calculate the individual own- and cross-price elasticities. These are reported in Table 5.6

for the first aggregation, being al1 wood product imports broken into types (softwood

lumber, softwood logs, etc.).

It can be noted from the table that al1 of the own-price elasticities (the diagonal from

upper left to lower right) have the expected negative sign, with both softwood and

hardwood logs reflecting slightly inelastic demand and softwood lumber, hardwood lumber

and panels reflecting elastic demands. The cross-price elasticities also have the expected

signs, and are less than unitary in al1 cases. Note that the cross-price elasticities indicate

a greater willingness to substitute lumber and panels in response to increases in the price

of logs than the other way around.

Table 5.6 also breaks out the substitution and market expansion effects of the

Gaston Chapter F ive Page 98

brpble 5.6 Calculated own- and cross-prie elasticiües of demand for the 1 1 Ja~anese imports of al1 wood products bv tv~e.

SLG Sub X

HLG Sub X

SLM Sub X

HLM Sub X

PAN Sub X

SLG, HLG, SLM, HLM, PAN refer to softwwd logs, hardwood logs, softwood lumber, hardwood lumber, and aggregate wood-based panels, respectively,

The elasticity of substitution (O) = 1.456 The elasticity of the Japanese demand for aggregate importç (B) = 0.122

* Shares (Si) are calculated by value at aie mean. Own-price elasticity of each product type is calculated as (1-Si)u + Si B Cross-price elasticity between product types is calculated as Si a - Si P

* Sub = substitution effect: X = market expansion effect

calculated elasticities, as discussed in Chapter 2. As the own-price elasticity of the

aggregate demand of al1 wood product imports (B, in equation 4.25) is extremely low,

however, the market expansion effect is always negligible.

Table 5.7 shows the calculated own- and cross-price elasticities of demand when

imports are defined as softwood lumber by country of origin. The own-pnce elasticities are

represented by the sum of the two values in each cell (the addition of the substitution and

market expansion effects), and are again of the expected sign. All values reflect inelastic

demand, with little variation by source of the softwood lumber.

The signs of the cross-price elasticities, on the other hand, are not what one might

initially expect. In al1 cases, the sum of the two values (again, the substitution and market

Gaston Chaoter Five Paae 99

'able 5.7 Calculated own- and cross-price elasticities of demand for the Ja~anese imports of softwood lumber by countrv of oriçiin.

SLM- Sub X

=Mus Sub X

SLMw Sub X

SL&u Sub X

s w m Sub X

Shares

* SLM-, SLMus, SLM,, SLMRu, and SLM,, refer to sofhnrood lumber from Canada. the US. New Zealand, the former Soviet Union, and U~ther" countries. respectively

The elasticity of substitution (a) = 0.6331 * The elasticity of the Japanese demand for imports of al1 softwood lumber (P) = 0.768 * Shares (Si) are calculated by value at the mean.

Own-price elasticity of each product type is calculated as (lSi)a + Si p Cross-pnce elasticity between product types is calculated as Sj o - Si (3

* Sub = substitution effect X = market expansion effect

expansion effects) is negative; without investigation of the component parts one cornes to

the conclusion that softwood lumber from different sources are complements rather than

substitutes. This is shown by the positive substitution effects not to be the case, however.

The negative net effect occurs because the market expansion effect counteracts the

substitution effect in al1 cases, as the constant elasticity of substitution is smaller in value

than the elasticity of demand of the aggregate import of softwood lumber from al1 sources.

The result of this 6'cancelling" effect is that the cross-price elasticities are very low in al1

cases.

Finally, Table 5.8 shows the calculated own- and cross-price elasticities of demand

Gaston Chapter Fie Page 100

'able 5.8 Calculated own- and cross-price elasticities of demand for the Japanese imports of Canadian softwood lumber bv s~ecies.

S L k Sub X

SLMcs Sub X

SLM- Sub X

SLM, Sub X

SL%o Sub X

SLM, Sub X

Shares

SLM,, SLM=, SLM,, SLM,,, SLMC-, and SLMco refer to Canadian Sitka spruce lumber, yellow cedar, hemlock, Douglas fir, "other" species, and "planed", respectively.

* The elasticity of substitution (a) = 0.477 The elasticity of the Japanese demand for imports of softwood lumber from Canada (0) = 1.299 Shares (Si) are calculated by value at the mean. Own-prïce elasticity of each product type is calculated as (lSi)u + Si B Cross-pnce elasticity between product types is calculated as Si a - Si P

* Sub = substitution effect: X = market expansion effect

when focussing on the Japanese imports of Canadian softwood lumber by species. The

signs are again as expected, being negative for both the own- and cross-price elasticities,

noting once again that the market expansion effect in the latter is more than offsetting the

substitution effect.

5.3 Cornparison of the Two-Stage and Direct Estimates of the Own-Price Elasticities of Demand for Wood Product lmports in Japan

ft can be noted tt-iat there exists considerable difference between the own-price

elasticities reported in Tables 5.6 through 5.8 as compared to the values reported in Table


5.2. Beginning with the disaggregations by product type in Table 5.6, being the estimates

from the two-stage analysis, the own-price elasticities are shown to range from -0.888 for

softwood logs to -1 -395 for panels. This compares to the direct estimates from Table 5.2,

where the range is from -0.090 for softwood logs to -2.531 for panel products. While the

overall grouping is largely maintained, with more processed products being more elastic,

with the two-stage process this is only by degree; in fact the elasticity estimate for panel

products is shown to be indistinguishably different from hardwood lumber.

As regards the cross-price elasticities generated from the ho-stage model, Table

5.6 shows that there appears to be a greater willingness for the Japanese buyer to

substitute more processed products for less processed products than there is for the other

way around. For example, while a price increase in softvvood logs leads to a significant

substitution with panel products, a price increase in panel products leads to minor

substitution with soflwood logs. A possible explanation for this is that as the price of

irnported panel products goes up, Japanese log processors recover a higher proportion of

these products relative to lumber (i-e., substitute domestically produced panel products in

response to price increases in irnported panel products).

As a more general observation on the cross-price elasticities shown in Table 5.6,

note the expected result of identical increases in the quantity demanded of, for example,

hardwood logs, softwood and hardwood lumber, and panels in response to a price change

in softwood logs. This somewhat counterintuitive result is, of course, a direct consequence

of imposing an equal elasticity of substitution across product types.

Cornparisons of the direct and two-stage estimates of the own-price elasticities of

Gaston Chapter f i e Page 102

softwood lumber by source and Canadian sofhtvood lumber by species show even greater

inconsistencies. In both cases, it is seen that the range in elasticity values is significantly

narrower with the Iwo-stage estimation procedure, suggesting that Japanese dernand

response to price changes daes not Vary dramatically by either source of the product or

species. This is not what is implied by the direst estimation results.

Given the assumption of the constant elasticity of substitution which underlies the

two-stage procedure, however, this result is again not surpnsing. After all, this assumption

states that the Japanese wood buyer views the substitution of sofbvood lumber from New

Zealand for sofiwood lumber from the US, for example, exactly the same as the buyer

views substituting Canadian lumber. Given that softwood lurnber from New Zealand has

historically been considered to be of only packaging quality, such an assurnption may

indeed be far too restrictive. As a reminder, the appropriate tests on the equality restriction

of the elasticity of substitution (Section 5.2) was rejected. The Japanese import data used

in this study does not support the notion of a constant elasticity of substitution across al1

substitution possibilities investigated.

Ironically, this means that the procedure suggested by Armington (1 969), and later

forwarded by Chou and Buongiorno (1983), largely negates what Arrnington set out to

accornplish to begin with. This was to show that the assurnption of homogeneous

"commodity" demand is potentiall y over-restrictive. It would a ppear from the results

presented here that what is being suggested by Armington for dealing with this restriction

Gaston Cha~ter Five Pane 103

ends up being self-defeating2'.

This is undoubtably what prompted Hseu and Buongiomo (1 W2), who also found

that their data rejected the equality restriction on the elasticity of substitution, to pursue

their research. As was discussed in some detail in Chapter 2, however, their findings can

only be considered empirical; that is, it is not supported by theoretical foundations. As a

matter of interest, a similar procedure to that followed by Hseu and Buongiorno was

applied to the Japanese import data used in the present study. This is of interest as the

results closely parallel the findings of Hseu and Buongiorno, and the direct own-price

elasticity estimates shown in Table 5.2. While these results are not presented for reasons

already outlined, it does reinforce the need for further research which addresses the non-

commodity nature of wood products.

5.4 Non-Wood Substitution in Japan

As the final set of results, this section presents direct elasticity of demand

estimates for non-wood materials, with corresponding estimates for the cross-price

elasticity for aggregated wood imports in Japan. It was shown in Chapter 3 that Japan has

made growing use of non-wood materials in its construction of homes. This trend is

emphasized by Figure 5.2, showing the non-wood housing starts over the study period.

While the substitution of non-wood materials for wood is clear from the figure,

quantifying the trend is not without its problems. Inclusion of price indices for ironlsteel,

''The results obtained by Chou and Buongiomo (1983) for the US imports of hardwood plywood support this finding, with little variation found in the own-price elasticities by country of origin.


Figure 5.2 Number of Non-Wood Housing Starts in Japan (Japanese Ministry of Construction)

ceramicslstone/clay or plastic products, either together or separately, tended to be

associated with insignificant parameter values, possibly due to multicollinearity of these

data with the irnport andior dornestic wood price data. Further, as the collection of a

detailed tirne series on the quantities and pnces for non-wood materials was beyond the

swpe of this study, this problem could not be circumvented with the two-stage approach

employed in this study.

Table 5.5 shows the same regression reported in Table 5.1, but with the addition

of a price index for iron/steel. The parameter on this non-wood "substitute" comes as


-- -- - - - - -- 1 ~ a b l e 5.9 Cochrane-Orcutt estimates of the Japanese demand for aggregated wood imports, with the inclusion of a non-wood regressor.

constant 1 pi 1 PD 1 PE 1 PSW 1 GNP 1 R2-Adj. ( Durbin's l

I Note: P, , PD, P, , P , and GNP, are the logarithms of the price of aggregate wood imports (logs, lumbe and panels), the price of Japanese domestic logs, the monthly average wage index in Japan. the ptfc, index of irWstee1 in Japan, and per capita GNP in Japan, respectively. Numbers in parentheses afi

I t-values.

somewhat of a surprise, as it has a negative sign (although the parameter is not

significant). This suggests that ironlsteel acts as a complemenf to wood in the Japanese

output of products (as measured by the per capita GNP), rather than as a substitute. Aside

from the possibility of multicollinearity among these regressors (Le., that the ironisteel

parameter is not meaningful due to very high variances), one would have to conclude that

for the Japanese output which requires wood as an input (which is primarily housing

construction in Japan), ironlsteel is also desired in combination.

5.5 Summary

This chapter has presented the results of two econometric analyses. The firçt was

the direct estimate of the demand elasticities for Japanese imports of various wood

products inputs, including various levels of aggregation. The second was the resuks of the

Mo-stage approach initially suggested by Armington in 1969, with three levels of

aggregation (al1 wood imports by type, softwood lurnber imports by source, and Canadian

softwood lumber imports by species).

It was shown that the own-price elasticity estimates mostly meet a priori


expectations in terrns of sign and relative magnitude. The cross-price elasticities derived

from the two-stage methodology also met a prion expectations in terms of their signs. It

was found that with the exception of the first case, where imports of al1 wood products are

broken into major product categories, that the net cross-price effects tend to be very small,

with any substitution effect being counteracted by a market expansion effect.

Hawever, it was also shown that considerable difference exist between the direct

and the two-stage own-price elasticity estimates. This is attributed to the required

restriction of a constant elasticity of substitution across al1 input pairs being investigated

in the two-stage estimations.

Finally, it was shown that individual commodities within each level of aggregation,

whether by product type, source or species act as distinct economic units. This is made

evident in the direct estimates of the price elasticities of demand through the large variation

in the own-price demand elasticities, and confinned by the rejection of the test on the

equality of the elasticities of substitution in the two-stage model.

In the following chapter, the econometric results presented here are discussed in

the context of Japanese wood product import trends from 1965 to 1993. While the

theoretical foundation of the two-stage approach was found to be sound, the needed

restrictions cast considerable doubt as to its practical application. As a result, the

discussion will Iimit itself to the direct own-price elasticity estimates offered in Table 5.2,

and a few general observations regarding cross-price elasticities from the two-stage

results.

Gaston Cha~ter Six Page 107

Chapter 6 Discussion of the ResulQ

Considerable detail has been offered in the previous chapters on the analysis of

forest product import substitutions by Japan. This included a review of the North Amencan

literature on wood product substitutions (Chapter 2), a description of the Japanese forest

industry and wood usage trends (Chapter 3), the theoretical foundations for quantifying

Japanese wood import demand price elasticities (Chapter 4), and, finally , a description of

the empirical results (Chapter 5). In this chapter, the relevance of these results is

discussed.

To facilitate this discussion, it will be helpful to visualize the Japanese import

quantities and corresponding real p r i e trends. starting with the most aggregated Japanese

import basket, and moving to the least aggregated. M i l e import quantity trends were

summarized in Chapter 3, the simultaneous consideration of real price trends2* will be

helpful in understanding substitution effects. To this end, Figures 6.1 through 6.16

graphically summarize the Japanese Tariff Association data used in the econometric

analysis.

6.1 Japanese Wood Product Imports, Aggregated by Product Type

Starting with Figure 6.1, showing the volume and correspanding real prices of the

Japanese imports by major product types, a number of general observations can be made.

aAs discussed in Chapter 4, real prices were generated by adjusting nominal prices to 1993 dollars, using the Japanese GNP deflator.

Gaston Chapter Six Page 108

- SLM

+ HLG

+ HLM SLG

+ VSlPLYlPARTlFlB

Figure 6.1 Japanese imports of wood products by major product types; volume and real value. SLM, HLM, SLG, HLG, and VSIPLYIPARTIFIB refer to softwood lumber, hardwood lumber, sofhood logs, hardwood logs, and combined panel products, respectively.


First and foremost, with al1 of the categories of wood products, in aggregate, with the

possible exception of hardwood logs, Japanese importers were paying less (real Yen per

d) for theirimporfs in 1993 than they were in 1965. When one considers the strength of

the Japanese Yen relative to the currencies of any of the major fibre suppliers discussed

in this study, this becomes clear. For example, in 1965 the aggregate price of softwood

lumber is shown in the figure to be roughly 55 thousand Yen per rn3, and roughly 40

thousand Yen per m3 in 1993, real. In terms of Canadian dollars, these two values are

roughly $170 per m3 and $500 per m3, respectively. This growth in the purchasing power

of the Yen is very important to the interpretation of the results of this study, and will be

revisited when discussing implications for the BC forest industry in Chapter 7.

A further observation regarding the prices of the aggregated fibre imports is that

they are not identical, neither in magnitudes nor in theirprecise trends over time. Clearly,

hardwood lumber has seen the largest price prernium over other fibre categories, and the

largest price volatility. This is followed by veneer sheets and other panel products and then

by softwood lumber. Finally, the lowest real price per m3 is shared by softwood and

hardwood logs. It can also be seen from the figure that softwood lumber and softwood

logs share a similar price pattern. This is not too surprising given that both are prirnarily

used for housing construction in Japan (for both structural and appearance purposes).

That softwood lumber trades at a premium to softwood logs is also not too surprising, given

the higher waste and cost associated with the Japanese processing of log imports as

cornpared to lumber imports. In other words, the derived demand for logs, after subtracting

al1 other costs associated with building a house, for example, is logically lower than for

Gaston Chapter Six Page 1 10

lumber.

When comparing hardwood lumber with hardwood logs, the price patterns are not

as similar as for softwood, and the price premiurn for lumber over Iogs is much wider.

Unlike the softwood comparison, these two products do not tend to go into the same end

product. Hardwood lumber, as evidenced by its price premium, is prized for its appearance

qualities. While this appearance quality is primarily exploited for fumiture, it is used in

housing to a smaller degree, mainly as panelling and trim. Hardwood logs, on the other

hand, are largely used by Japan's sizeable plywood industry.

As regards the corresponding volumes imported, it can be seen that these data

confirm the trends discussed in Chapter 3. First, there was a strong increase in volume

of softwood and hardwood log imports from 1965 to 1973, partially due to substitution of

imports for domestic production, and partially due to rapid increases in Japanese housing

starts. This was followed by a period of flux from 1974 to 1981, when Japan witnessed a

decline in economic activity and a corresponding decline in the number of wooden housing

starts. Finally, there were slightly increasing and declining volumes for softwood logs and

hardwood logs, respectively, from 1982 on, corresponding to small increases in wooden

housing starts and export controls on hardwood logs by two major producers, respectively.

Softwood lumber imports show a gradual increase throughout the study period, as

does hardwood lumber on a smaller scale. This shows the gradual trend of substitution

of lumber for logs. Panel imports, on the other hand, became prominent only from the

early 1980s on, contributing to Japan's import substitution away from Iogs.

Relating this visual picture to the elasticity results presented in Chapter 5 yields few

Gaston Cha~ter Six Page 1 II

surprises. Referring back to the results of the direct estimations for own-price elasticities

for selected irnports (Table 5.2), it was shown that both sofhivood and hardwood logs reflect

highly inelastic demand in aggregate (in fact, not significantly different from zero),

compared to a moderately inelastic value for softwood and a slightly elastic value for

hardwood lumber. This suggests that there are more substitutes for imported lumber than

there are for imported logs. As mentioned in the previous chapter, this makes sense as

Japan can substitute both domestic lumber and domestic logs for imported lumber.

Further, dornestic lumber can be made from both domestic and imported logs. lmported

logs, on the other hand, can only be directly substituted with domestic logs. The panel

products are shown to have a quite elastic dernand, which when one extends the

substitution possibility logic just presented, also makes common sense.

Bearing in mind the limitations of the two-stage results presented in the previous

chapter due to the restrictive nature of the constant elasticity of substitution assumption

across al1 product pairs, it is interesting to note that there appears to be a greater

willingness for the Japanese buyer to substitute more processed products for less

processed products than conversely (see Table 5.6). For example, while a price increase

in softwood logs leads to a significant substitution with panel products, a price increase in

panel products leads to minor substitution with softwood logs. A possible explanation for

this is that as the price of irnported panel products goes up, Japanese log processors

recover a higher proportion of these products relative to lumber ( ie. , substitute

domestically produced panel products in response to pdce increases in imported panel

prod ucts).


6.2 Japanese Softwood Lumber Imports, Aggregated by Source

Figure 6.2 offers a graphical representation of the next level of disaggregation of the

Japanese Tariff Association import data: total sofhivood lumber imports by county of origin.

Section 6.3 follows with a discussion of sofhnrood lurnber by species. This is then repeated

in subsequent sections for hardwood lumber, softwood and hardwood logs, and panel

products by country of origin, and, where appropriate, by species. The greatest detail is

ofiered for softwood lumber, due to its importance to the BC forest industry.

Starting once again with general observations on the price levels and trends, it

can be seen that there are three basic groups. Going from least to most expensive, there

is the former Soviet Union and New ZealandlChile group, the CanadaNS group, and the

'other" group. Once again it can be noted that al1 groups have witnessed real price

declines over the penod of the study. Further, there was a slight widening between the first

two groups over time. and the "other" group saw the largest price drop over time, as well

as the largest price volatility. As regards this last point, softwood lumber imports falling into

the 'other'' category originated originally from Asia, and later from the South Seas, Asia,

and Scandinavia. It is unclear why there was such a large price premium for softwood

lumber from these sources. One possible explanation is that Japan was purchasing a

particularly high quality softwood. Another possible explanation is that these lower

volumes represent marginal purchases above and beyond Japan's main supply of

softwood lumber, and a resulting willingness to pay more.

As regards the difference observed between the North Amerka group and the New

Zealand/Chile/former Soviet Union group, the lower prices indicated for the latter are


- Canada + US + USSR + NZICtiile +s+ Other

Figure 6.2 Japanese imports of s o ~ o o d lumber by source; volume and real value.


intuitively explained by quality differences. When one considers that North American

lumber over most of this tirne period largely represented product from old growth PNW and

BC forests, it may be a source of some surprise, in fact, that there was not a larger price

spread than that shown. The average landed price in Japan for softwood lumber from

Canada was roughly CDN $490 per m3 in 1993, compared to CDN $275 per m3 from New

ZealandIChile. It must be stressed, however, that these are averages. While this average

Iikely represents a relatively small range of prices in the case of New ZealandIChile,

representing primarily radiata pine and, historically, of only a low grade, the North

American average is over a wide range of species and grades. As the question of species

will be dealt with below, discussion is reserved to that point. To give a sense of the

variability at this point, however, the 1993 value of Japanese imports of yellow cedar

exceeded $CDN 950 per m3, which is again a potentially misleading average across

grades. The price of the highest grade of yellow cedar lumber reported by a leading BC

producerlexporter in 1995, "C" clear and better, was nearly $2,700 per m3, f.a.~.*~,

recognizing that this is still aggregated over ail sizes within this grade.

As a final comment on the p r i e cornparisons shown, it comes as some surprise that

from 1991 on there was a price premium for softwood lumber imported from the US over

that from Canada. Even when aggregated over grades, it would have been expected that

the price premium should have belonged to Canada. While rnost of the Canadian lumber

shipped to Japan is still obtained from old growth timber, the US have shipped significantly

23Note that cornparison of this value with the landed values in Japan reported in this study would require the addition of loading and transportation costs.


lower quantities of old growth lumber for quite some time. At least a partial explanation for

this observation cornes from the fact that planed lumber in the 1990s made up a larger

component of Canada's market mix to Japan than that from the US. In 1993, the planed

share for Canada and the US was 8.14% and 4.35% of al1 wood products imported by

Japan (logs, lumber and panels), respectively. This is an interesting point, one that will be

returned to later, especially given that the average share of planed lumber over 1965 to

1993 for the two countries is virtually identi~al*~.

In ternis of the market share of soffwood lumber by exporting country, 1 can be seen

that in spite of year ta year differences, the overall trend has stayed relatively constant,

with the exception of Canada's gain in share at the expense of the US after 1989. Canada

has maintained its position as the largest sofbvood lumber supplier to Japan, followed by

the US and distantly followed by other sources.

The direct owngrice ehsticity estimates from Chapter 5 (Table 5.2) do suggest that

the level of substitutability does Vary for softwood lumber by source. The demand for

Canadian soffwood lumber is slightly inelastic, the demand for US and "other" softwood

lurnber moderately elastic, and the demand for New Zealand lumber is quite elastic. The

estimated value for the former Soviet Union, being a positive value of 0.045, is an

unexpected result that cannot be explained beyond the comments made in the previous

chapter.

24When refemng to planed lumber in this thesis, reference is being made to the Japan Tariff Association's category termed 'planed, grooved or tongued" before 1988, and "S-P-Fn plus 'planed and saoded, n.e.s." from 1988 on. It is assumed that this corresponds to North America's loosely defined "kiln dried, dimension lumbern. as opposed to green lumber going to Japan, being prirnarily squares and baby squares.


As mentioned in the previous chapter, the calculated cross-price elasticities from the

ho-stage estimations for softwood lumber by source Fable 5.7) indicated the unexpected

result of a negative net value. This is attributed ta the non-zero elasticity of demand for

softwood lumber in aggregate, in this case yielding a market expansion effect that more

that reverses the substitution effect. For example, a 10% increase in the price of sofhivood

lumber from Canada leads to a 3.15% increase in the demand for softwood lurnber from

any other country (the same increase once again due to the assumption of a constant

elasticity of substitution across al1 pairs of countries). Counteracting this, however is a

negative market contraction effect of 3.82%, leading to a net cross-price effect of - 0.067.

The results against price increases from any country are similar, with very small cross-prie

effects between countries.

Given the constant elasticity of substitution across pairs of lumber sources, the small

cross-price values do not corne as a great surprise. It suggests that Japanese buyers are

not apt to make significant adjustments to their import mix of softwood lumber by source

due to relative price changes, but rather substitute with other product types andior their

own domestic production. Such substitution is clearly indicated in Tables 5.1 and 5.2.

Even without such a strong assumption as that imposed in the two-stage rnodel. low cross-

price elasticities could be expected for sirnilar reasons.

6.3 Japanese Softwood Lumber lmports from Canada, Aggregated by Species

Tuming to Figure 6.3, detail is offered on the Japanese import of softwood lumber

from Canada by species. Note that this level of detail reveals that not al1 species had


- Sitka + Y. Cedar -c- Hemlock

+ Doug-fir Planed - Other

Figure 6.3 Japanese imports of Canadian sofhvood lumber by species; volume and real value.


declining real price trends over the period 1965 to 1993. Both yellow cedar and Douglas-fir

showed modest price increases, with the former showing the greatest price volatility. If one

restricts the period of observation to 1974 onward, however, only Douglas-fir showed

rnodest price increases over time.

Yellow cedar clearly enjoyed the highest price premiums over time. Planed lumber

and hernlock lumber occupied the other end of the spectrum, showing the lowest and least

volatile prices over the study period, although the small volumes of planed lumber traded

at high relative values early in the study period. Sitka spruce, Douglas-fir and "other"

lumber prices are positioned somewhere in between.

Even at the level of species detail, it is an important observation for this study that

considerable price variation exists. The proposition that individual species of softwood

lumber act as distinct economic units seems obvious from the figure, and was confirmed

by rejection of the equality restriction on the elasticities of substitution.

The hnro most prominent species, in terms of volume, are shown to be hemlock,

which has shown fairly consistent levels throughout, and planed lumber, which has seen

exponential growth since the mid-1970s. If is also interesthg to note that these are the

fwo lowesf pnced species.

The volumes of al1 other species imported from Canada25 have gradually risen over

the study pen'od and in recent years have represented very similar volumes. The increased

market share of planed lumber in Japan over time has largely

25The vast majority of Canadian exports from Japan are from BC.

been at the expense of the

See Table 4.2.


hemlock share.

The direct estimates of own-price elasticities of demand Vary considerably over

species (Table 5.2). Yellow cedar shows the least elastic values, indicating a lack of

willingness of Japanese buyers to reduce quantities purchased in response to price

increases (note, too that this species is also the highest priced). The own-price elasticities

for Sitka spruce, Douglas-fir and "other" are similar to each other, demonstrating unitary

to slightly elastic demand. The most elastic dernand is demonstrated by planed lumber,

with an elasticity value of -3.591. Curiously, the elasticity parameter on hemlock is not

significant.

Before moving on to the Japanese imports of softwood lumber from other sources,

it must once again be pointed out that the prices shown in Figure 6.3 represent an average

over al1 grades of lumber within a species, and over ranges of size, etc., within a grade.

While the range of own-price elasticities noted above largely appeals to a p ion reasoning

in terms of planed versus non-planed lumber, no further quantification of quality by species

can be made from the data used in this study. Quaiitatively, the fact that yellow cedar

lurnber demonstrates an inelastic demand, compared to Douglas-fir's slig htly elastic

demand, also appeals to a prion reasoning , as it is yellow cedar which is thoug ht to be the

''superior" product in terms of its value in appearance usage. However, without trade data

by grade, this cannot be properly quantified. For example, the highest grade of Douglas-fir

may be more highly valued than the lowest grade of yellow cedar; al1 that can be said is

that yellow cedar on average demonstrates fewer substitution possibilities than Douglas-fir

on average, and that the former has historically traded at a premium average value as a


result.

Further, while it is obvious that al1 of the species except hemlock traded at average

price premiums over planed lumber, not so obvious is that these premiums are

understated. The reason for this understatement is largely technological. Japanese

buyers have been willing to paya premium price for lumber which contains clear material

for the "appearance effectm used in their traditionai post-and-beam construction (Chapter

3). However, this appearance effect can be sirnulated, thanks to the technology which

makes possible the use of thin laminates and glueing. In other words, Japanese builders

now need less clear raw material to produce an equivalent number of post and beams, yet

they are still willing to pay a price premium for the input. In the absence of this technology,

therefore, the price premiums would likely have been considerably higher than those

shown in Figure 6.3'=.

To add a sense of the range of quality that exists within any one species, a brief

summary of the 1995 grade distribution of softwood lumber exports to Japan by a leading

BC producerlexporter are briefly discussed. Unfortunately, trade data by grade are only

available for this fim for 1994 on, disallowing direct comparison to the econometric

analysis.

Of the 1994 shipments of this coastal BC fin, sofh~ood lumber shipments to Japan

were primarily made up of fir and hemlock, with smaller quantities of Sitka spruce, red

cedar, yellow cedar and S-P-F. Prices ranged from nearly $2,500 per m3 to less than $60

26Although there was no evidence of structural change to support this, it is possible that the acceptance of veneered posts was too slow to register as a break at a particular point in time.


per m3, CDN. As these prices are aggregated over al1 sizes, one would also expect a wide

range in prices within each of these grades.

It is important to note that these data indicate that pnces were much more grade

specific than species specific. Even with red cedar and S-P-F, which had the lowest

average prices, prices reached levels of roughly $1,000 and $700 per m3, respectively, for

the clear grades.

These grade data revealed that there was a relatively small volume of clear grade

shipments, being roughly 10% by volume and 20% by value in 1994. Shipments of al1

species and grades (entirely clear) which exceeded $1000 per m3 represented less than

3% of the volume and a little over 8% of the value of this company's export mix. Shipments

of lumber at prices exceeding $500 per m3 represented roughly 17% of the total volume

and 32% of the total value. These still mostly represent high grades down to #4 clear and

#1 merchantable. Shipments exceeding $400 per m3 represented roughly 47% and 63%

of the total volume and value, respectively, while shipments exceeding $300 per m3

represented 74% and 85%, respectively. These are largely merchantable grades. The

rernainder of this company's coastal shipments, at less than 15% by value, represent

structural, utility and economy grades. The average price over al1 grades is roughly $560

per m3.

There are hnro important points which emerge from these data in the context of the

analysis done in the present study. First, the variation in price by grade exceeds the

variation in price by species. This suggests that the results of the present study, detailing

only species, should be interpreted with caution, and strongly supports the need to extend


this analysis to the level of grade. Second, these data clearly point out that while the

volumes of the very high quality lumber are relatively small, coastal BC shipments include

only minor quantities of structural grade lumber. Given that the majority of Canadian

lumber exports to Japan are from BC, and the majority of the lumber exports to Japan from

the lnterior of BC are S-P-F, this suggests that the vast majority of Canadian exports of al1

non-S-P-F species originate from old-growth forest of the BC Coast are of appearance

quality and range from merchantable to clear grades.

6.4 Japanese Softwood Lumber lmports from NonCanadian Sources, Aggregateâ by Species

To complete the picture of softwood lumber, Figures 6.4 through 6.7 graphically

illustrate the quantity and real price trends for US, former Soviet Union, NZlChile and

"other" country im ports, res pectivel y.

In Figure 6.4, showing softwood lumber imports from the US, the picture is seen to

be similar to that for Canada. In terms of volumes, the US also saw dramatic increases in

planed lumber shipments, although dropping from 1988 on. The US, however, had higher

shipments of Sitka spruce from 1965 to the late 1970s. The major differences in price were

for red cedar (there were no significant quantities of yellow cedar lumber reported), which

showed dramatic premiums until the mid 1980s, at which point only hemlock and planed

lumber were lower priced. Also, unlike Canada, Douglas-fir lumber enjoyed a price

premium over Sitka spnice lumber throughout much of the study period. Finally, from 1989

on, "other" lumber held a price premium over al1 other species. Once again,


- Sitka -c Hemlock - Doug-fir - Red Cedar - Planed Other

Figure 6.4 Japanese imports of US softwood lumber by species; volume and real value.


this premium is most likely due to the negligible volumes traded, showing a higher

willingness to pay on such marginal purchases.

The own-price elasticities of demand (Table 5.2) are similar to those shown for

Canada, insofar as the demand for cedar is inelastic as compared to a very elastic demand

for planed lumber.

The Japanese import picture from the former Soviet Union, shown in Figure 6.5,

shows that there are only three relevant species, dominated by abieslpicea species for

most of the study period, followed by pine (except from 1977 to 1988) and larix. The

overall volume has remained fairly consistent over time, but the volume by species has

been quite volatile. Finally, it should be noted that the overall volume is relatively minor as

compared to softwood lumber imports from North America.

Wth the exception of 1979 and 1980, real prïces showed a steady decline over the

entire study period, with pine and abieslpicea species showing a considerable premium

over larix. This price decline is more prominent than for lumber frorn all other countries

except New ZealandlChile. As mentioned in the aggregate discussion, lumber imported

from the former Soviet Union shares New Zealand's position of having the lowest prices

compared to other countries.

The own-pnce elasticities by species are not reported in Table 5.2 as there was no

improvement in the results over the aggregate regression reported earlier.

In Figure 6.6, showing the New ZealandlChile situation, it can be seen that pine (in

this case radiata pine) has been the only signifiant species imported by Japan historically.

The volume consistently increased over time and the real price showed more dramatic


- Pinus - AbiedPicea - Larix

Figure 6.5 Japanese imports of former USSR soffwood lumber by species; volume and reaI value.


Figure 6.6 Japanese imports of NUChile softwood lurnber by species; volume and real value.


Decreases than from any other source of Japanese supply. As shown in Table 5.2, the

demand for New ZealandlChile radiata pine is quite elastic.

Finally, Figure 6.7 illustrates the softwood lumber trade from ('otherW countries. Note

the similarity of the planed volume trend compared to North Amerka, and the sporadic

hemlock volume. In ternis of price, it can be noted that the overall level is higher than for

the countries already discussed, and that the price premium for yellow cedar is even more

prominent. Also, the price trends tended to be flatter (ranging from minor to zero real

declines over tirne), and in the case of cedar more positive.

The own-price elasticities are different fiom the countries already discussed in two

respects, being highly elastic for hemlock, and inelastic for planed lumber. The source of

this planed lumber is alrnost exclusively Scandinavia and Western Europe (mostly the

former). "Other" hemlock is almost exclusively obtained from Asia.

6.5 Japanese Softwood Log Irnports, Aggregated by Source

Figure 6.8 illustrates the quantity and real price trends for sofhnrood logs by country

of origin. Once again, real prices decline in ail cases, with differences in price levels and

trends by grouping. The nature of the grouping is identical to the case of softwood lumber,

but this time the imports from 'other" countries were even more volatile and tended to show

smaller prïce premiurns (or after 1989, price discounts). This volatility can most likely be

attributed to the srnall volumes. "Other" logs were primarily imported from Asia in the early

part of the study period, and by 1993 from Scandinavia, Asia and Eastern Europe, in that

order.


+ W N Cedar + Hemlock - Doug-fir

+ Planed -- Other

Figure 6.7 Japanese imports of "othern softwood lumber by species; volume and real value.


+ Canada - US USSR + NUChile + Other

0 1 ' ' t 9k5 1&9' ' '1973' ' '19'77' ' '19'81' ' '19b5' ' '19'89' ' '19'93 1

Figure 6.8 Japanese imports of softwood logs by source; volume and real value.


The Canadian dollar equivalents of the Japanese landed prices for softwood logs

from North America and the former Soviet Union, respectively, are roughly $440 per m3

and $150 per m3, which shows a sornewhat larger spread than that of softwood lumber.

The own-pnce elasticities for softwood logs Vary considerably by ongin (Table 5.2).

The value for the US indicates a quite inelastic demand, as is the case for the former

Soviet Union (although the pnce parameter is insignificant). The demand is shown to be

quite elastic for New ZealandJChile, Canada and "other" sohood logs.

The own-price elasticities of softwood logs imported from both the former Soviet

Union and Canada come as a surprise for intuitive reasons, prirnarily from a quality

perspective. While an inelastic value for the Soviet Union may be partially explained by

reasons cited earlier (contractual arrangements preventing price from properly explaining

quantity demanded), the reason for the elastic value for Canada is more dificult to explain.

Given the export restrictions that Canada imposes on its log producers. which

require that logs are proven to be in excess of domestic demand before exports are

allowed, it is possible that quantities purchased by Japan correspond to periods of log

surpluses and resulting depressed prices. In other words, if the shipment of logs to Japan

is driven by supply, the market suppiy assumptions employed in this study would fail to

capture this information. This is a potential limitation of this study that cannot be solved

with existing data constraints.

6.6 Japanese Softwood Log Irnports, Aggregated by Species

Figures 6.9 and 6.10 offer detail on softwood log trade by species for the US and


+ Sitka

+ Hemlock

+ AbiesIPicea WîY Cedar

Doug-fir

Figure 6.9 Japanese imports of US softwood logs by species; volume and real value.


the former Soviet Union. Aside from New ZealandKhile, these two sources account for

the vast rnajority of softwood log imports by Ja~an*~ .

Beginning with the US, there are two general observations which stand out. First,

hemlock and Douglas-fir have dominated the log trade. Hemlock had the largest share in

the beginning of the study period, while Douglas-fir took over from 1978 on. This is in part

due to a preference change by the Japanese market, where only hemlock was initially

considered a suitable substitute for their domestic species used for appearance

applications. While this was primarily due to the whiteness of hemlock wood, over time

Japan began accepting the slightly more yellow Douglas-fi?'.

The second general observation regarding Japanese imports of softwood logs from

the US is that with the exception of yellow cedar, which enjoyed a considerable price

premium over the entire study period, al1 species had very similar price trends and

relatively small price spreads. As compared to lumber, therefore, it appears that there is

less uniqueness associated with softwood logs by species.

This second point is at least partially supported by the quantitative analysis offered

in Chapter 5. As can be seen in Table 5.2, own-price elasticities narrowly ranged from -

0.10 to -0.55 (inelastic demand).

Figure 6.1 0 completes the picture for softwood logs, showing the trade summaries

by species for the former Soviet Union. Other than a increase in the spread of volume by

27As softwoad 109s from New ZealandIChile and "other" muntries are dominated by a single species, there is no reason to repeat the discussion offered earlier.

"1t was also the case that the small sawmills, which dominated in the earlier part of the study period, had a distinct preference for hemlock over Douglas-fir. Evidently, this was not the case with the large sawmills, which grew in importance toward the latter part of the study period (Robertson and Waggener, 1995).


- Pinus + AbieslPicea - Larix

Figure 6.10 Japanese imports of fomer USSR softwood logs by species; volume and real value.

Gaston Chapter Six Page t 34

species, with abieslpicea species remaining dominant, note that there is M e difference

from the aggregate result presented in Section 6.5. The own-price elasticities by species

are not presented in Table 5.2 due to the same lack of significance as for the aggregate.

6.7 Japanese Hardwood Lumber and Log Imports, Aggregated by Source

Figure 6.1 i details Japanese imports of hardwood lumber by country of origin. It

is interesting to note that there was a wide variation in real prices, which gmdually

diminished over time. In 1965 there was a dramatic price premium for hardwood lumber

from the US, followed by hardwood lumber from "other" countries (primarily Asia. with less

amounts frorn Europe, Central and South America, and Africa), and finally hardwood

lumber from the South Seas. Also of interest, hardwood lumber imports from the South

Seas are one of the very few products discussed in this study that actually witnessed real

price growth in Japan over the study period (albeit minor).

Table 5.2 showed a near unitary own-price demand elasticity for hardwood

lumber, which is somewhat curious given the price premiums paid by Japan over soffwood

lumber. A partial expianation for this is found by noting Japan's large imports of hardwood

logs (discussed below), which can generate an abundant source of domestic substitution

for imported hardwood lumber by changing the lumber recovery.

Although there is no lack of data on Japanese imports of hardwood lurnber by

species as well as source, trade is not detailed here due to the relatively small volume

compared to other products and the desire to ultimately focus on implications for the BC

forest industry.


- South Seas - US - Other

Figure 6.11 Japanese imports of hardwood lumber by county of origin; volume and real value.

Gaston Cha~ter Six Page 136

Unlike hardwood lumber, hardwood logs have been dominated by imports from the

South Seas alone over the study period, as shown in Figure 6.12. Minor quantities at

historic price premiums have been imported from "other" sources, which in 1965 was

dominated by shipments from the US, followed by Asia, the former Soviet Union and Africa,

in that order. By 1993, the "other" category was dominated by the former Soviet Union and

Africa, followed by Asia and the US.

6.8 Japanese Panel Product Imports, Aggregated by Source

The final set of illustrations in this chapter, shown in Figures 6.1 3 through 6.15,

detaii the veneer and panel products trade. It is easy to see that al! of these products have

gained in importance over the study period, with the South Seas being the most dominant

player. Board products show the lowest volume, and are only significant after 1985.

Both veneer sheets and plywood showed decreasing price volatility over time, while

board products had more sporadic pricing throughout (note that there were no fibreboard

imports by Japan pn'or to 1979). As indicated in Table 5.2, the Japanese demand for panel

products in aggregate is quite elastic.


- South Seas - Other

Figure 6.12 Japanese imports of hardwood logs by county of origin; volume and real value.

Gaston Cha~ter Six Paae 138

- South Seas - US - Other

Figure 6.13 Japanese imports of veneer sheets by county of origin; volume and real value.


+ South Seas - Other

Figure 6.14 Japanese imports of plywood by county of origin; volume and real value.


+ Particle Board Fibreboard

Figure 6.15 Japanese irnports of particle board and fibreboard; volume and real value.

Gaston Chapter Seven Page 141

Chapter 7 Contributions, Limitations and Implications for Further Research

By investigating the Japanese demand for wood imports disaggregated by product,

region and species, this research has shown that wood inputs are imperfect substitutes in

production. This important finding suggests that hiding wood characteristics through data

aggregation potentially obscures important dimensions of both forest product trade and

forest policy.

This chapter summarizes the results which have led to this observation, including

a discussion on the implications of these results for the BC forest industry, followed by the

limitations of this study and recomrnendations for further research.

7.1 Research Contributions and Implications for the BC Forest lndustry

The primary contribution of this study is to offer some of the needed background

information to develop a more detailed understanding of international wood product trade.

To date, there have been very few studies which have investigated the factor demand for

wood beyond very broad product categories, such as "softwood logs", or "softwood

lumber". It is hoped that this study has succeeded in demonstrating the need to move

beyond such limiting product aggregations.

As a background study, no hard conclusions nor recommendations can be made.

This task is left for future extensions and additions to the present research. However,

there are a number of implications of this study for the BC forest industry which can be

discussed, particularly those which relate to the marketing of BC solid wood products. This


discussion is offered below (Sections 7.1.2 and 7.1.3), following a brief summary of the

research findings.

7.1.1 Summary of the Results

This study began with four primary research hypotheses. The first was that BC

wood species, in the form of logs, lumber or further processed products, behave as distinct

economic goods. As discussed in Chapters 5 and 6, and summarized below, this

hypothesis is clearly accepted for species of softwood lumber, including imports of

softwood lumber fmm Canada in aggregate compared to imports from other sources.

The second hypothesis was that the market share of individual BC products in

Japan is dependent on relative prices with substitute products. This hypothesis is

accepted insofar as it was detemined that individual wood product imports are substitutes,

aibeit imperfect. At the same tirne, however, while some products were shown to have a

high own-price elasticity of demand in Japan, the cross-price effects were shown to be very

low. This suggests that Japanese buyers do not adjust their import rnix as a result of

relative price changes, rather that they adjust their overall level of wood product imports.

Due to the noted limitations of the two-stage methodology employed, however, this result

should be interpreted with caution.

The third hypothesis was that Japan's wood product import rnix is effected by its

domestic log supply and non-wood alternatives. The first part of this hypothesis is clearly

accepted; non-wood alternatives, however, were shown to act as complements, not

substitutes.


The final hypothesis was that a structural change over the course of the study period

affected the Japanese demand for logs, lumber or further processed products. This

hypothesis could not be accepted for any of the direct estimates of wood product irnports,

either for various levels of aggregations or as individual products.

The main conclusions of the analysis offered in this study, discussed in detail in the

previous two chapters, are:

Individual wood products, whether aggregated by product type, country of origin . or species, behave as distinct economic units. This was quanfitatively extended to include quality insofar as trade detail was available for planed versus non-planed lumber. This was quaiitatively extended to quality through the knowledge and informal judgements about the nature of wood products typical of individual sources.

In terms of product type, the own-price elasticity of demand was found to be the smallest for softwood logs, largest for panel products. with lumber's elasticity lying somewhere in between. Said another way, softwood logs displayed the fewest number of substitutes, and panel products displayed the greatest number of substitutes.

In terms of the county of origin for softwood lumber, the own-price elasticity of demand was found to be the smallest for Canada (not including the former Soviet Union, which represented a small proportion of soihivood lumber imports), largest for NZIChile, with softwood lumber frorn other sources lying sornewhere in between.

In terms of the species of softwood lumber form Canada, planed lumber (such as S-P-F) was shown to have by far the highest own-price elasticity, while yellow cedar showed the smallest.

In the case of softwood logs, the lowest own-price elasticity was for US logs, and the highest was for NZlChile logs. The own-price elasticity for the former Soviet Union has a positive sign, a non-intuitive result which may be explained by the presence of long-term contracts. Campared to lurnber, there was little difference by species shown for the own-price elasticities for US logs.

The cross-pdce elasticities were found to be highly inelastic, demonstrating a


willingness to substitute one wood product for another to some degree (impeffect substitutes). Generally, it was found that the substitution effect was offset by a market expansion effect. Japanese buyers appear to be more willing to substitute more processed products in response to price increases for less processed products than the other way around. This may reflect changes in the product mix of domestically processed logs.

lncreases in the price of Japan's domestic logs cause the Japanese to substitute imported wood products. Given the significance of the Japanese domestic log supply over the course of the study period, symmetry would suggest that increases in the prices of imported wood products lead to significant substitution with domestic logs.

In spite of the increasing purchasing power of the Yen over the period covered by this study, it was determined that Japanese buyers have remained price sensitive, yet have been willing to pay considerable price premiums for certain products.

There was no evidence of structural change in the Japanese market for wood imports.

In Japanese markets, ironlsteel and wood inputs appear to be complementary, Iikely due to the importance of both non-wood housing starts and non-residential construction.

Implications of the Research for BC Wood Product Marketing

An obvious application of the results of this study is in BC's choice of markets. While

BC has been a significant source of softwood lumber for the Japanese market over the

entire period of this study, a little over a decade ago Canadian softwood lumber exports

to Japan as a percent of al1 markets was only 8% by value, or fess than 4% by volume

(Canadian Forestry Service, 1984). At this time, lumber produced from old growth coastal

timber largely found its way to the mix of dimension lumber destined for the US housing

market. Further, high grades of lumber from the BC lnterior were not commonly separated

from the S-P-F mix destined for this same US market. This US market has remained a


"commodity" market where it is difficult to differentiate the product to price advantage. It

is for this reason that the coastal forest industry, fuelled by the recession of the early 1980s

and falling tirnber supplies, realized the need to diversify its customer base. This

realization materialized in the BC lnterior industry shortly thereafter. Over the past decade,

the forest industry has indeed become more market oriented. Scarcity induced price

premiums for certain grades or attributes of lumber have led to better log sorting, cutting

to customer dernanded sizes, the adoption of kiln drying and international quality

certification, etc. Recognizing the difficulties in employing a diversification strategy in the

US, Canada (primarily BC) increased its share of soffwood lurnber exports to Japan to 21 %

by value in 1992 (Natural Resources Canada, 1993), as well as increasirig exports to

Europe.

The overall market mix in 1992 is shown in Table 7.1. The difference in the nature

of the lumber product shipped to the US versus Japan is supported by examining the

average price per cubic metre, with shipments to Japan being worth more than twice per

cubic metre than those to the US. While this is not shown to be true in the case of

softwood logs, any cornparison here is likely to be obscured by Canada's log export

restrictions. Note that Canada (primarily BC) exported only 22% of its lumber, by volume,

to non-US destinations. Of this 22%, it can also be seen that roughly 60% of these exports

went to Japan, with the balance destined mostly to Europe. It is this emphasis on the

Japanese market that this section will now address.

First of all, it should be made ciear that Japan is not BC's only potential market for

differentiated lurnber products. As shown in Table 4.1, exports to most off-shore


Ï Table 7.1 ~estination of Canadian ~oftwood ~umber and Log Exports, 1992. Sofhnood Lumber

O00 $ m3 $ per m3 l

us 4,195,276 65.76% 30,848,622 78.42% 136

Africa 15.846 0.25% 89.766 0.23% 1 77

Algeria 1 1.942 0.19% 5 1.975 0.13% 230

l Europe 629,209 9.860h 2,549,763 6.48% 247

Belgium 69.548 1 .09% 206.774 0.53% 336

France 26.517 0.42% 78,263 0.20% 339

Gem~any 67.736 1.060h 114,996 0.29% 589

I ltaly 77.537 1 22% 146,458 0.37% 529

UK 349,393 5.48% 1,847,858 4.70% 189

Asia 1,464.601 22.96% 5,598,317 14.23% 262

Japan 1,325,474 20.78% 4,732,838 12.03% 280

Australia 62.164 0.97% 201 -21 8 0.51% 309

Other 12.533 0.20% 51-46 0.13% 244

W0dd 6,379.629 100.00% 39.339.1 32 100.00% 162

us 20.951 14.04%

Asia 128.082 85.83%

Japan 124,148 83.19%

Other 203 0.14%

W0rld 149,236 186.10% 1.107,OOO 100.OOOh 135

destinations in 1992 were at higher average prices than for sales to Japan (in the case of

Germany, in fact, more than twice as high as the average export p r ie to Japan). Further,

growing Asian economies hold promise for adding to the list of potential markets for BC's

wood products. Given the advantages of trading in non-commodity markets, the

advantages of further diversification seems justified. When one introduces the uncertainty

of future prices in Japan, to which the discussion now turns, the potential advantages


become even more clear.

From a BC marketing point of view, perhaps the single most important element in

trying to predict what the future holds in ternis of wood product prices sold to Japan (vis-a-

vis premiums over the other BC markets) is the JapaneseiCanadian exchange rate2'. As

has been noted, Japan has actually been paying less each year, on average, for even high

quality products such as softwood logs from the PNW and soffwood lumber from the BC

Coast. The question that cannot help but corne to mind is whether they would be willing

to pay more? What is likely to happen if the Japanese Yen stabilizes or weakens in the

future?

There are three possible scenarios which could unfold given this eventuality. The

first is that Japan will start paying higher real prices for at least the higher quality

commodities which are, after all, becoming more and more scarce, technological advances

notwithstanding. From the Canadian or Amencan point of view, there would be little

change in the Canadian or US dollar price trends that have been seen al1 along (down for

low quality, up for high quality).

The second possibility is that Japan will resist higher Yen prices by substituting

other comrnodities. Unless the Yen does not depreciate equally over al1 currencies, this

could mean substituting appearance quality wood with structural quality wood andlor non-

wood substitutes. As was suggested in the previous chapter, this would also include

q h e Canadian-Japanese exchange rate is not the only rate BC exporters should be worried about. It has been estimated that a 1 cent increase in the Canadian dollar relative to the US dollar, maintained for one year, translates into a loss in revenues to the Canadian forest industry of $450 million (Pnce Waterhouse, 1 995).


continued substitution of lumber and panel products against nsing log prices. The growing

acceptance of platform-frame construction would support this possibility.

The third possibility is that Japan reverses its growing dependence on wood imports,

and invests in its domestic forest resource. In fact, it has been proposed in this study that

the only reason that Japan imports as much wood as it does is because the vast rnajority

of its domestic suppIy lies outside the extensive margin. But this tignt extensive margin is

a direct result of "cheap imports" (in Yen terrns), with which domestic sources have

difficulty in competing. Remernbering the resource description offered in Chapter 3,

including the extensive post war plantings which would become merchantable in Iight of

rising prices, it is possible that BC's biggest future cornpetitor for the Japanese market will

be Japan ifselfgo. This observation should, however, be ternpered with Japan's growing

non-timber valuation of its forest resource.

The results of the present study suggest that al1 three possibilities could come into

play. Given the very small own-price elasticities shown for many of the wood products

imported by Japan, the scenario of higher real Yen prices is certainly possible for these

wood products. The second and third possibility are best supported when taken together.

The present study suggests that price rises for those wood products with high own-price

elasticities lead to substitution with domestically produced lumber and panel products (from

imported and domestic log supplies). Given that all three possibilities are supported,

qhere is some doubt, however, as to Japan's ability to harvest significant quantities of appearance grade timber, at least in the short- to medium-nin. As there has been little financial incentive to do so, it has been suggested that Japan's forest plantations have not been rnanaged to maximize value (personal communication, John Powles, Director for Asia, Council of Forest Industry).


depending on the wood product under consideration, this suggests that the existence of

a price premium for some wood products over others is Iikely to persist.

However, it must be cautioned that the elasticity values offered in this study were

estimated over a period of declining real Yen prices, with an overall down trend. Is the

incidence of low own-price elasticities for selected wood products likely to hold at higher

real pnces than Japan has historically paid? It is possible that the only reason the PNW

and BC have enjoyed price premiums for high grade logs and lumber is because of the

strength of the Japanese Yen. In spite of the fact that BC has sold similar products for

even higher prices to European buyers (Table 7.1), there is some validity to the argument

that the Japanese have driven up the world price as a direct result of their strong currency,

and would drive down this world price in the advent of a falling Yen. Even the preliminary

evidence offered in this study, however, caste considerable doubt on this hypothesis. It

is more likely that Japan has made every effort to pay as little as necessary to secure these

fibre supplies. This was confirmed by the range of own-price elasticities presented in this

study. Had Japan been willing to "pay anything" as a result of its strong purchasing power

(in the incorne sense, leading to "cheap" irnports), own-price elasticities would have al1

been low, regardless of species or origin. To the contrary, wood products such as planed

lumber from the US and Canada, and logs from NaChile display highly elastic demands.

If the price goes up even a little (due to a falling Yen) the quantity demanded goes down

considerably. ln short, Japan has been shown to be price conscious in spite of its "wealth".


7.1.3 Implications of the Research for BC Forest Policy

When describing the motivation for this research in the introductory chapter, it was

pointed out that over the next couple of decades, BC is going to witness a significant

reduction in the volume of available timber. Given the selected forest rotations for BC's

second growth stands and the existing siIvicultural efforts, it was also pointed out that the

quality of timber is also going to be lower.

These facts contribute to the market implications discussed in Section 7.1.2 insofar

as they describe the nature of the future pmduct. Given that the BC Crown controls the

vast majority of the forest land base, it is primarily forest policy, not industry market

strategies, that will impact on the future ability to adopt a market orientation.

It was argued in the previous section that there is no reason to expect that the

market premium for certain wood products will disappear. While there may be no way to

predict what attributes of the wood in the future will comrnand such price premiums, one

fact does remain: ifthe level of silviculture andlor length of forest rotations does not change

from present practices, there will be no old growth quality timber available at some point

in the future. In addition to this study's implications for a more diversified BC forest product

market, then, the related implication is for a continued diversity in the product itself. Even

if there is not a premium market for products produced from clear, slowly grown, large

timber in the long-run, this tirnber can always be used for alternative purposes (including

the potentiaf of the forests for the production of non-timber values). Without provision for

these products, however, the option will be iost.

While there are a nurnber of governrnent initiatives which could help facilitate the


p reseivation of future product diversity , discussion of such initiatives is clearly beyond the

scope of this thesis. There is a need for considerably more research in this area. which

will be briefly sumrnarized later in this chapter, following a discussion of the limitations of

the present study.

7.2 Limitations

The most obvious limitation cornes from the investigation of the second hypothesis

of this study, being to quantify the degree and nature of import substitution as a result of

a price increase in a specific product. Due to reasons of multicollinear data, detenining

such cross-price effects requires a unique rnethodology, one which Armington (1969)

provided and which has largely been accepted in the literature. However, it has been

shown here that this methodology is not without its own limitations, centred around overly

restrictive assumptions, and that these translate directly into limitations for the present

study. While Hseu and Buongiorno (1993) attempted to deal with the problem of the

restrictive assumptions used by Armington, it has been shown that this was not done

successfully.

The second limitation of this study is the lack of adequate secondary data on the

quality of wood products traded in the Pacific Rirn market. This fact limited quality aspects

of the discussion to planed versus non-planed lumber, with further comparisons by species

or source being largely a matter of judgment. As a related point, detail on highly processed

products (beyond wood-based panels) was not included in the present analysis due to the

small historical volumes reported. The volumes of such products, including engineered


wood, has been growing rapidly over the last few years of the data set, and will

undoubtably be an important component in the future.

Limitations resulting from the lack of data can be broken down into two components:

the treatment of wood input supply, and the use of a single output production function.

In the estimation of the Japanese wood factor demands, it was assumed that the

market supply was completely elastic, with Japanese buyers behaving as a "price takers".

In other words, Japan cannot affect the price of its wood purchases by varying the amount

purchased. The "price taker" assumption, while common practice in demand studies of this

nature, may not be justified. Japan is one of the world's largest wood product importers,

and may indeed exercise some level of market power in its purchases. In fact, if Japan

does indeed face an upward sloping supply function (global excess supply) for particular

products, it would effect the elasticities of substitution discussed in the present study. This

would included Japan's choice between imported and domestic products, and, where the

degree of market power varies, in one imported product relative to another.

Unfortunately, potential limitations created by the supply assumption can not be

addressed without data which allows for the estimation of supply functions by geographic

source, by product, and by species.

The second methodological limitation of this study involves the underlying

production functian from which the derived demand equations for the factor demands were

obtained. It was proposed that the Japanese demand for wood products is derived from

the per capita GNP in Japan, regardless of the differing species and implied quality. This

assumption was supported by the recognition that Japanese housing construction, being


the largest single end use for wood imports3', requires a range of qualities. Appearance

grades are required for posts and beams, panelling, and so on; structural grades are

required for the non-visible house components of post and beam construction, and for a

growing percentage of platform fiame and prefabricated housing construction; and "utility"

grades are required for sub-flooring, filler for laminated posts, concrete moulds, and so on.

It is possible, however, that this single output production function is overly simplistic to

adequately deal with quality issues, particularly when quantifying substitutions (cross-price

elasticities). For example, the buyer of structural or utility grades, which are "capital" or

"producer" goods, will likely treat the demand for fibre in the true "derived" sense. That is,

if the sale p r ie of a house goes up, al1 else being equal, the house builder woutd be willing

to pay that much more for the inputs. Appearance grades, however, may more closely

resemble "consumer" goods, insofar as consumer income, tastes, education, tradition, etc.,

are al1 capable of shifting the quantity demanded independent of price. The buyers of this

fibre would be exhibiting direct willingness to pay for specific characteristics.

It was shown in Chapter 3 that the growing percentage of platform-frame and

prefabricated housing relies on construction grade imports, and could largely explain the

demand for Japan's imports of S-P-F and other planed, dimension lumber. In the context

of the present study, it could be suggested that in response to higher softwood log prices,

Japan has shown a willingness to substitute one form of housing construction for another.

The limitations of this study, however, do not allow this to be quantified. Aside frorn the

31Further, imported wood products are used outside of the construction sector, such as imported logs as pulpwood.


requirement of more detailed trade data3', it must be recognized that al1 three construction

types use both appearance and structural grades of lumber.

A further limitation to the production function employed in this study, is that wood

inputs were expressed in their cubic metre equivalents. regardless of the product type.

This fails to recognize the range of costs associated with the Japanese processing of logs

versus lumber versus further processed inputs. Although this treatment can be justified by

using a general output indicator such as GNP as opposed to housing starts, and by noting

Japan's preference for re-manufacturing even processed imports, added detail on the

Japanese cost structure could prove insig htful.

The choice of Japan as the dernand focus could be considered a further limitation

to this study. Although there were good reasons for making this choice, as discussed in

Chapter 1, it may limit the overall applicability of the results.

The first potential limitation is that real prices for alrnost all of Japan's wood product

imports dropped over the course of the study period, corresponding to a fairly consistent

increase in the purchasing power of the Japanese Yen. This suggests that it was not

possible to define more than a fairly narrow price range within the demand functions

characterising Japanese wood purchases. In other words. it is possible that the estimated

demand elasticities would have been significantly different in the absence of a strong Yen.

A second, and related limitation, is that in light of Japan's growing purchasing

power, this country rnay not be representative of other markets. Further, given that Japan

32As a reminder, there exists a wide range of quality within both appearance and structural classifications of lumber.


is rather unique in its post and beam construction preferences, the nature of the demand

for appearance grade wood products outside of this country has not been identified.

7.3 Implications for F urther Research

Given what has been learned about the negative effect of Armington's needed

assumptions for his two-stage approach to product demand within a market, there is a

strong need to continue to challenge its application. This is particularly important in light

of the wide acceptance of his approach, and the potentially misleadhg published results.

The difficulty in dealing with multicollinear data problems has more than likely contdbuted

to the lack of research dealing with heterogeneous product trade to be found in the

literature. This is obviously not a trivial problem, and its solution is well beyond the scope

of the present research. Yet the importance of developing methodologies that better

address the unique nature of products must be stressed.

In addition to the methodological problems associated with rnodelling heterogenous

products, it must be pointed out that the underlying limitation discussed in the previous

section, being the lack of disaggregated wood product trade data, is likely to Iimit potential

extensions of this study. As a qualifying recornmendation for further research, then, it is

suggested that the place to start is in overcoming these data obstacles. It is hoped that

a continued recognition of the importance of these data will expose primary sources andfor

the future availability of better secondary sources.

As stated, most of the limitations of this study could be addressed in the absence

of these data restrictions. Given the noted limitation of not recognizing the different


demand characteristics of structural lumber, for example, as compared to appearance

grade lumber, more detailed data would allow for a more sophisticated, multiple output

production function. Due to its importance, this point deserves additional consideration in

the context of its implications for further research.

As was apparent from the data on lumber grades from a major produceriexporter

from the BC Coast (Section 6.3), there exists a considerable range in prices within the

definition of "appearance" or "structural" lumber, or even within dstailed grade

classifications. Keeping in mind that these data represent exports of coastal production

only, this range in price would be even wider if one were to include interior production. In

other words, the necessity to describe "quality" as planed versus non-planed lumber in this

study, for example, can be misleading. It must be recognized that planed and non-planed

lumber alike can be of high or low quality, and that the implications for BC's marketing

strategy must take these quality ranges into account. It is possible, for example, that the

higher quality S-P-F lumber from the BC lnterior is demanded for post and beam

construction in Japan, while the lower quality green squares from the BC Coast are not.

Aside from the quality of the resource, future studies should also include attention

to the quality of the product. By this it is meant that there has been a growth in the

production of, and the demand for, further processed products, such as panels and

engineered products. While the present study has included an analysis of veneer and

panel products, data were not available to document the demand for further value-added

products such as engineered wood products, wood "systemsn, and other further

manufactured products such as door and window frames. In fact, it is also an important


implication for further research that the present study was notable to differentiate between,

for example, S-P-F lumber from the BC interior cut to metric sizes, compared to S-P-F

lumber from the US which, if destined for the Japanese market, likely requires a higher

degree of remanufacture. In short, 'value-added" may evolve in small, rather than

dramatic, steps (Cohen, 1992).

More generally, as the present study has focussed on the demand for wood

products by category, species and source for a single buyer, a natural extension of this

research would be to broaden the level of detaif to include product grade within a species,

and to investigate other international demanders.

It is further recommended that future research include an analysis of the major wood

producing countries' supply functions with as much attention to product detail as possible.

Aside from improving extensions of the present analysis as noted, this would allow for a

better understanding of future trade flow scenarios, and offer price forecasting abilities.

Finally, as this study has utilized a static analysis, estirnating short-run (one-year)

demand responses, it would be desirable to utilize a dynarnic approach to obtain longer-run

demand elasticities.

In summary, this thesis has shown that there has been a wide range in the strength

of the Japanese demand for various wood products. To the extent possible, it was shown

that the Japanese have been willing to pay for quality, and that this it is not likely to change

in the future. From the dernand side, this research needs to be extended to further

quantify this demand for quality, and to extend the analysis beyond Japan. This includes,

but is not limited to, developing better rnethodologies for investigating cross-price effects.


Even more importantly, this research should be complernented with research on the supply

of wood products by category, species, and by grade, concentrating initially on BC. Only

at this point will it be possible to utilize more powerful tools, such as spatial trade

modelling, as an aid in price forecasting, identrfying future market potentials, and as a tool

in forest policy.

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