THE WORLD TIMBER MARKET

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THE WORLD TIMBER MARKET

• WHY IS THERE TRADE?
• WHAT ARE ITS CHARACTERISTICS?

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Quote for the Week

• It matters not what you think, but how you think.
  George Orwell.

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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.

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Lets 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.
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THE STATE OF THE WORLDS FORESTS
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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

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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.

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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

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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

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Now, lets 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.)

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Now, lets 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)

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Notice that as a product entails more value added
it is economical to transport it further. A
better way to put it is the converseyou 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.

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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 vealwhy?) 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?).

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So let us now focus on the questionwhy 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

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Why these differences in making the very same
product?

• Differential labor costs
• Differential energy costs
• Differential land costs
• Differential transportation costs

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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.

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First lets 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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DOMESTIC MARKET IMPORT DEMAND
PC P1 P2

S
MD
D
Q Q
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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.

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Now lets consider the foreign market that
comprises the export side of international trade
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FOREIGN MARKET EXPORT SUPPLY

P2 P1 PC
S
XS
D
Q Q
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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.

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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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THE INTERNATIONAL TIMBER MARKET
PW
XS
MD
QW QUANTITY
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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.

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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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THE INTERNATIONAL TIMBER MARKET
PWT PW
XST
XS
T
MD
QWT QW QUANTITY
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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 worlds forest are rapidly disappearing.
• As a renewable natural resource, there is much
  RE-forestation taking place in the world.