THE WORLD TIMBER MARKET

1. 1 THE WORLD TIMBER MARKET WHY IS THERE TRADE? WHAT ARE ITS CHARACTERISTICS?

2. 2 Quote for the Week It matters not what you think, but how you think. [George Orwell].

3. 3 I. One dominant theme is the extent to which forests and biodiversity are being destroyed in the poorest nations. Some of this destruction is said to arise because poor landless people are forced to clear and colonize the forest in order to grow necessary food. Another source is said to be large-scale logging interests who cut trees for the world market.

4. 4 Let�s consider deforestation and land-use changes in the global context.The next slide contains data from various regions and from this we can gain some idea of what is going on.

5. 5 THE STATE OF THE WORLD�S FORESTS

6. 6 The �horrors� of deforestation, like population growth, seem a bit overwrought Still forests are disappearing except in Europe Notice the regional differences in forest treatment But the big action is in Southeast Asia and to a lesser extent parts of Africa. This is logging for the export of tropical hardwoods

7. 7 We can get a better picture of this process by thinking about �commodity chains.� By commodity chains we mean following a particular commodity from its origin through to its final consumption. A commodity chain for mahogany would start at a tropical forest and end up at a fine bookcase sitting in a den in England.

8. 8 So, consider the commodity chain (product pathway) for tropical timber Approximately 75% of exports of tropical hardwood raw logs come from: Malaysia Indonesia Philippines Of these exported logs, Japan purchases approximately 60 %, followed by China, Korea, Singapore

9. 9 There is a smaller African market Here, the major exporters are The Ivory Coast Gabon Cameroon The major importers from Africa are France, Italy, Spain, and Germany

10. 10 Now, let�s look at logs with a minimum of processing (value added). These are called �sawn logs� and the dominant exporters are (with destination): Malaysia ? (Singapore, Netherlands, Germany, Thailand, Japan, U.K., Australia) Indonesia ? (Japan, Italy, Singapore, U.K., China) Singapore ? (Saudi Arabia, Netherlands, China, Belgium) Philippines ? (Japan, U.K., France, U.S.) Brazil ? (U.S., U.K.)

11. 11 Now, let�s look at even more value added (more embodied labor and capital)�this concerns the export of hardwood plywood. Indonesia & Malaysia ? (U.S., Singapore, U.K., China) Singapore ? (entire world) Korea and China ? (U.S., Saudi Arabia)

12. 12 Notice that as a product entails more value added it is �economical� to transport it further. A better way to put it is the converse�you can only ship things long distance if they have a high value per unit weight (in order to cover the necessary transportation costs). This principle helps us to understand why Wisconsin is the �cheese state� rather than the �milk state.�

13. 13 That is, we have an excess of cows in comparison to the population able to consume milk. And why are there so many cows in Wisconsin? Back to �trade:� Wisconsin trades cheese, beer (why?), (and veal�why?) with other states and we import winter vegetables, beef, chickens, watermelons and wine. It is more economical to convert our milk to cheese and ship the cheese (why?).

14. 14 So let us now focus on the question�why is there international trade, in general, and in forest products in particular? Consider the following: A ton of bleached hardwood pulp for making paper has a manufacturing cost of: $78 in Brazil $156 in Eastern Canada $199 in Sweden

15. 15 Why these differences in making the very same product? Differential labor costs Differential energy costs Differential land costs Differential transportation costs

16. 16 This means that it is more economical to make paper in a place where there may not be a sufficient demand for the product. Indeed it is localized abundance that fuels trade That is, a region makes (or has) more of something than can be consumed locally.

17. 17 First let�s consider the domestic market that represents the import market for tropical timber. These imports could be for raw logs, for sawn timber, or for processed timber (plywood).

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19. 19 Notice that we DERIVE the demand curve for imported timber FROM the excess demand for the product in the domestic market. We do this by noticing that for all prices below the choke price (PC) there is excess demand. This excess demand at each price becomes the derived demand curve for imports. The derived demand curve for imports is labeled MD.

20. 20 Now let�s consider the foreign market that comprises the export side of international trade

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22. 22 Notice that we DERIVE the supply curve for exported timber FROM the excess supply of the product in the foreign market. We do this by noticing that for all prices above the �choke� price (PC) there is excess supply. This excess supply at each price becomes the derived supply curve for exports. The derived supply curve for exports is labeled XS.

23. 23 We now combine the excess demand curve from the importing country and the excess supply curve from the exporting country. This will give us the equilibrium price and quantity traded in the international market.

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25. 25 The world price for timber will be less than the old choke price in the domestic market, and greater than the old choke price in the foreign market. Hence, trade helps consumers in the importing country, and it helps producers in the exporting country.

26. 26 But we have not considered the cost of transportation to get the product from the exporting country to the importing country. This inclusion of transportation costs will alter slightly the trade equilibrium Assume that the exporters pay the transportation costs (T)

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28. 28 Conclusions Whether or not landless poor people are savaging tropical forests, it is clear that nations with a much poverty and many trees have a strong incentive to harvest those trees and sell them in world markets. And many rich countries interested in importing timber may well have abundant forest lands (the U.S. in particular), but we may be more interested in protecting our forests and buying our timber abroad. The price differences often make this an attractive deal Despite this, it is not accurate to assert that the world�s forest are �rapidly disappearing.�  As a renewable natural resource, there is much RE-forestation taking place in the world.