IMPACTS ON FOREST PRODUCTS TRADE

Table 2 indicates that as a result of the Uruguay Round the average import tariff rate across all forest products in developed country markets are to be reduced from 3.5% to 1.1% - a decline of nearly 70%. The tariff changes will be greatest for pulp and paper products, which will benefit from the "zero-for-zero" tariff elimination agreed by major developed country importers (see Table 3). In these markets paper and paper board products and paper articles will experience a 100% reduction in tariffs on average, whereas tariff rates on printed matter will decline by 83%. The agreed tariff reductions for solid wood products in developed country markets have attempted to reduce the degree of tariff escalation. Rates will fall on average by 31% for wood-based panels, 50% for semi-manufactures and 67% for wood articles.

Comparison of the pre and post-Uruguay Round tariff rates give some indication of the overall scale of the tariff reductions across broad product ranges. Reductions in the major developed country markets are likely to lead to increased imports of these products, and thus expanded trade generally. However, in developed country markets an additional factor is that the relative adjustments of the pre-Uruguay Round MFN and GSP tariff levels to the new bound tariff will generally differ, which could affect the relative competitiveness of import products from different sources.

Tariff reductions will also be significant in key forest products for major developing country importers. For example, Thailand will reduce wood-based panel tariffs by 20-50% and furniture rates by 60%. P.R. China has agreed 30% reductions in tariffs for furniture, 20% cuts for packing cases and 10% reductions for particleboard and builders' joinery. The Republic of Korea will reduce tariffs on paper products by 9% and furniture items by 7-9%. India will cut sawnwood tariffs by 27.5%, and Indonesia furniture rates by 10%. Malaysia has agreed to reduce rates across many solid wood products by 5%, for logs and furniture by 10%, and coated paper by 7.5%. Again, the likely impact of tariff reductions for these products is increased imports and trade.

Quantitative Results

Utilizing the methodology discussed in the Annex and the Uruguay Round tariff changes, the trade creation and diversion effects of the tariff reductions when these have all been completed (ie around 2000-2004) have been estimated for selected forest product imports in key developed and developing country markets.^14/ The level of import volumes for each forest product in an importing market is based on 1991 forest product trade flows contained in FAO (1994), which were disaggregated using the UNCTAD Trade Analysis and Information System (TRAINS) data base. Table 4 summarises the results and shows the impacts for developing and developed country imports and also the total trade effect.

Table 4. Estimated Trade Effects on Selected Forest Products of Uruguay Round
Tariff Changes in Key Developed and Developing Country Markets
(US$ 1,000)

Estimates of the effects of these tariff changes for developed and developing countries on the forest products trade therefore have to take into account two impacts in importing markets:

� Trade creation - the reduction in the tariff on a forest product will cause its import price to fall, thus stimulating additional demand for imports of the product; the extent of this trade creation effect will depend on the original level of imports of the product as well as the responsiveness of import demand to changes in price (i.e. the price elasticity of demand).

� Trade diversion - if tariff changes are not uniform across all imports - e.g. in developed country markets the fall in MFN rates will generally be more than that of GSP rates (which were often zero) - then the resulting changes in import prices could lead to diversion, or substitution, between developing and developed country imports; the extent of this trade diversion effect will depend on the relative change in tariff rates on developed and developing country imports as well as the substitution response of domestic output and both sources of inputs to changes in the relative price of imports.

The estimates of trade creation and diversion effects vary for each importing market and forest product depending on the assumptions concerning the price elasticities of import demand and whether developing country imports into major developed country markets face MFN and GSP rates. Accurate estimates of own-price elasticity of demand for each type of forest product are not always available, particularly estimates that distinguish developed from developing country imports. As a consequence, for each importing market and import source a low, medium and high estimate of demand elasticity is included. Where possible, these demand elasticity estimates have been verified against empirical studies of import demand for specific forest products in various markets.

Also, although it is generally assumed that all developing country imports have benefitted from GSP rates in developed country markets, this has not always been the case. Unfortunately, it has been difficult to determine the proportion of developing country forest product imports that have actually benefitted from the GSP rates allowed by developed country importers. Thus to provide a complete range of possible estimates two different assumptions were used in the analysis: that in developed country markets all developing country imports face pre-Uruguay Round GSP rates, and alternatively, in these markets all developing country imports face pre-Uruguay Round MFN rates.

Given the assumptions behind the calculations of trade effects, estimates of the total value of the trade changes were made for each importing market. They correspond to differing assumptions concerning the price elasticity of import demand, and in addition, whether it is assumed that all developing country imports will face MFN or GSP rates initially in developed country markets.

Of the six possible estimates of total trade changes, two of the middle estimates in the range are represented in Table 4. The estimate corresponding to Scenario A assumes a medium elasticity of demand for forest product imports and that pre-Uruguay Round tariffs on imports in developed country markets are at GSP rates for developing country imports and MFN rates for developed country imports. The estimate corresponding to Scenario B assumes a medium elasticity of demand for forest product imports and that pre-Uruguay Round tariffs in all markets are at MFN rates.

In Scenario A, trade is created for both developed and developing country imports across all markets, of around US$ 51 million and US$ 289 million respectively. Most developed country markets have already posted low or zero GSP rates for forest products; thus, in Scenario A the Uruguay Round tariff changes will not create much forest products trade for developing countries. The exception is the tariff reductions in Japan, which on their own create trade worth US$ 37 million to developing countries. In contrast, tariff reductions in the European Union would create no trade for developing countries but create US$ 199 million worth of forest products trade, all of which accrues to developed countries.

However, Scenario A also produces substantial trade diversion in developed country markets of about US$ 219 million. The main reason for this substitution of developed for developing country imports is that GSP import rates for forest products in developed country markets are either static or fall less than MFN rates in these markets. The overwhelming trade diversion effect occurs in the European Union, which amounts to US$ 202 million.

Thus the total effect of Scenario A is a fall in forest products trade for developing countries of about US$ 168 million, whereas the net gains in trade for developed countries is around US$ 509 million. Consequently, although Scenario A results in a total global gain for the forest products trade of around US$ 340 million, developed country exporters would clearly gain at the expense of developing country exporters.

Scenario B results in a large increase in trade creation in forest products for developing countries. Total trade creation now amounts to US$ 183 million for developing country imports, whereas for developed country imports trade creation remains at US$ 289 million. The reason trade creation for developing countries increases under Scenario B is the assumption that prior to the Uruguay Round all developing countries faced MFN rates for forest products in developed country markets. For example, trade creation for developing country imports in the European Union is estimated to be worth US$ 66 million and in Japan US$ 75 million.

Scenario B does not lead to any trade between developing and developed country markets. This means that the total trade change is just the sum of the trade creation effects for both developed and developing country imports. This results in a total global gain in forest products trade of US$ 472 million.

In comparing the two scenarios, it is clear that Scenario B offers the more globally beneficial results for the Uruguay Round tariff reductions for the forest products and importing markets analyzed. In Scenario A, although there is a net global gain of US$ 340 million in the forest products trade, developed country exporters are the overwhelming beneficiaries from both the trade creation and diversion effects, whereas developing countries are net losers. In Scenario B, not only is the net gain in global forest products trade larger at around US$ 472 million but also both developed and developing countries benefit from the trade expansion - although the former gain by almost 60% more in relative terms.

The actual post-Uruguay Round outcome is likely to lie somewhere between Scenarios A and B. Although prior to the agreement not all developing country forest product imports into developed country markets may have benefitted from GSP rates, a number of these imports have. In addition, recent evidence suggests that tropical timber products in importing markets are subject to strong substitution effects from imports of competing products (e.g. temperate wood products) and from different sources of origin (e.g. developed countries).^15/ If both conditions hold, then some trade diversion away from developing country imports is likely to occur - although the magnitude of the diversion effect as represented in Scenario A is probably an overestimate. Thus the estimates provided by Scenarios A and B can be considered a lower and upper bound respectively on the impacts of the tariff reductions in the Uruguay Round on the forest products trade for the commodities and markets analyzed.

However, the results shown in Table 4 are subject to a few caveats:

First, although the global trade changes for Scenario B are almost 40% higher than for Scenario A, neither estimates are extremely significant in terms of the share of total forest product imports. For the seven developed country and five developing country markets analyzed, the total value of forest product imports amounted to US$ 85.6 billion in 1991. Thus, the total change estimate under Scenarios A and B amount to only 0.4% of total forest product imports in the markets analyzed.

However, not all forest products and importing markets that are likely to be affected by the Uruguay Round tariff reductions were analyzed. Given data limitations, it was possible to estimate only the trade impacts on imports of logs, sawnwood, veneer, particleboard, fibreboard, plywood, wood pulp and newsprint in major markets. It is clear that other forest products trade in these markets, such as furniture, paper products other than newsprint, packing cases and builders' joinery, may also be affected significantly by the Uruguay Round tariff reductions. In addition, import tariffs may also change for other forest products and importing. Thus the results depicted do not necessarily represent the full impacts of the Uruguay Round on the forest products trade in the markets examined.

Nevertheless, the major importing markets analyzed do account for the largest proportion of world imports, around 80% of the global trade.^16/ In addition the selected forest products that have been analyzed in this paper are generally those that account for a large share of imports from developing countries. This suggest that, if there are additional gains from tariff reductions on other forest products, these gains are likely to accrue mainly to developed countries rather than developing countries - and in fact the latter may lose even further under the assumptions of Scenario A.

The analysis used to estimate the trade creation and diversion effects is a static one. As noted in Section 3, tariff reductions will generally be phased in over a five year period, and in the case of tariff elimination for pulp and paper products, over an 8-10 year period. Moreover, as the Uruguay Round agreement has yet to be ratified, it is difficult to determine when these reductions will begin and whether countries will amend the current schedules for phasing in the reductions. During the interim period before the tariff cuts are implemented or even during the period of their being phased in, there may be important economic, technical and trade changes that may influence the actual impacts of the tariff reductions on forest products trade. As discussed in Section 1, a critical but currently uncertain factor may be the long-run supply and price of tropical hardwoods.

The analysis used is also a partial equilibrium one. It is therefore limited to the effects of tariff reductions on the forest products trade alone. It does not show the resulting impacts on the forest resource base and industries in producing countries, nor does it link changes in the forest products to other sectors in the economy. The latter may be particularly important given the growing importance of substitution effects between wood and non-wood products in many import markets. In addition, the analysis ignores the possible income effect of tariff reductions, although this effect may not be substantial given the relatively insignificant share of domestic and imported forest products expenditure in the national income of the importing country.

Nevertheless, although the income effects of the specific forest product tariff reductions considered in the analysis may be insignificant, the overall gains in world income from the Uruguay Round agreements may lead to additional expansion in international trade, including that in forest products. For example, as discussed previously, a recent analysis by the GATT (1994) has estimated potential gains in world income from the Uruguay Round of around US$ 109 to 510 billion annually. In 1992 world income or GDP amounted to over US$ 23,061 billion (World Bank 1994).

Thus the additional income gains from the Uruguay Round would be in the range of 0.47 to 2.21% annually. It is difficult to estimate what the resulting effects on the trade in forest products might be without detailed information on the income elasticity of demand for these products across countries and on the share of imports in this additional demand^17/. Depending on the situation, if such income effects occur they might be just as, if not more, significant than the gains in forest products trade from tariff reductions estimated in this paper.

Finally, the analysis examines only the implications of tariff reductions from the Uruguay Round on the forest products trade. Given obvious data limitations, the effects of non-tariff barriers were not analyzed, including those that may have been ameliorated by recent Uruguay Round agreements. Moreover, as will be discussed in Section 5, it is important to take into account the possibility of new barriers to the forest products trade that may be imposed in the near future and which could have the potential to over-ride any potential gains from the tariff reductions agreed in the Uruguay Round.

Conclusion

The total trade effects of the Uruguay Round tariff changes on selected forest products are estimated in this paper to range from US$ 340 to 472 million in key developed and developing country markets. However, these impacts amount to only 0.4% of total 1991 forest products imports in the markets analyzed, which had an aggregate value of US$ 85.6 billion.^18/

Thus the estimates provided in this paper suggest that, although the real trade gains from the tariff changes are positive and significant, they may not have a substantial impact on the global forest products trade. One factor limiting the gains from the Uruguay Round may be that the pre-Uruguay tariff rates for most forest products in major importing markets were already very low.

As discussed in Section 3, perhaps more important is the fact that forest product tariff rates in major markets will be reduced to even lower levels, and in some cases phased out completely. In addition, the new and often lower rates in developed country markets will be bound, as will an increasing proportion of tariffs in developing country markets.

Although the total forest products trade impacts estimated in this paper appear to be low compared to the overall trade flow, the different scenarios used as the basis for these estimates do suggest that the results are somewhat sensitive to key assumptions. In particular, to the extent that developing countries benefitted prior to the Uruguay Round from GSP rates in developed country markets, then the effects of the Uruguay Round tariff changes will be to divert imports from developing to developed country suppliers to these markets. As not all developing country forest products imports prior to the Uruguay Round benefitted from GSP rates in developed country markets, then any trade diversion effects are unlikely to be as large as the estimates of Scenario A indicate. The actual post-Uruguay Round outcome is likely to lie somewhere between Scenarios A and B. However, it is worth noting that the total trade effects of Scenarios A and B do not differ significantly in terms of their aggregate impact - both scenarios indicate trade gains of around 0.4% relative to existing forest products trade in the markets analyzed.

A final implication of the analysis is that in aggregate terms any further reductions in forest products tariff rates that may be agreed in subsequent GATT Rounds or under the auspices of the WTO should no longer have a trade diversion effect, as both developing and developed countries should be facing a single tariff rate in most importing markets. Given that tariff rates on forest products in major markets are on average only 1.1% for all imports and 1.7% for developing country imports (see Annex), the trade creation gains from additional tariff reductions may be significant but not substantial.

Finally, the modest real trade gains from the Uruguay Round tariff reductions may be superseded by other factors affecting the global trade in forest products. These may include technical and economic changes, the possible trade implications of the increasing scarcity of tropical hardwood resources, and above all, the impacts of non-tariff barriers. In particular, the scope for "new" trade barriers that could influence some or all of the forest products trade should not be underestimated. It is this problem which is addressed in the following section.