In the last few years, several major U.S. hardwood plywood, engineered flooring, and veneer plants have shut their doors permanently. The permanent loss of good paying jobs, typically in rural communities, and foregone tax revenues to the local, state, and federal treasuries have resulted. Their manufacturing equipment is often sold to Chinese producers.    

Here are the shocking macroeconomic facts from 2009:

• The U.S. exported a measly $7,000 of hardwood plywood to China and imported $389,000,000 of hardwood plywood from China.
• The U.S. continued to export $64 million of hardwood plywood; virtually all of it to Canada and the Caribbean.
• Chinese hardwood plywood has a 55% market share of the U.S. market while over 50% of the   U.S. production capacity sits idle. Five major U.S. producers are out of business in the last 3 years. 
• The U.S. exported $170 million of non-value-added hardwood logs to China and only $12 million of hardwood veneer. China slices more veneer from U.S. logs now than U.S. veneer producers do.
• The U.S. imported over $5 billion of wood furniture from China, up from the previous year. The U.S. furniture industry exported $575 million to its global markets, down 22% from 2008. Wood furniture is a major market segment particularly for veneer but also hardwood plywood.
• We have a relative even balance of trade of these products with Canada and a $5 billion trade deficit imbalance with China.

Why? How can U.S. hardwood logs be shipped to China, processed there into veneer, manufactured into hardwood plywood, engineered wood flooring, or wood furniture, then be imported back into the U.S. at 30-40%  price advantage to similar U.S. manufactured engineered hardwood products?

Certainly, cheap labor and nebulous environmental and workplace safety standards in China give producers there a huge cost advantage compared to their U.S. and Canadian competitors. The long debated fixed rate rather than floating exchange rates between the Yuan and the dollar is still stalled. Some economists estimate the Yuan is undervalued by as much as 40 percent. Then there are the Chinese government subsidies and strategic VAT rebates.

While it is true that all wood products are derived from the same raw material base -the forest; it is not true that all forest products are therefore created equally.  Start with illegally sourced logs which some economists estimate give a manufacturing company using those logs an immediate 15-20% cost advantage.

Notwithstanding that the Lacey Act requires due diligence for wood products imported into the U.S., traceability of logs to the forest that sourced them is still a major issue. While chain of custody programs including third-party certification programs such as the Forest Stewardship Council and others are commonplace in the U.S. and Canada, the same cannot be said for other regions. The Environmental Investigation Agency highlights trouble spots in Asia compared to the U.S. and Canada which are very low-risk environments for these illegal activities. We have too many lawyers and sheriffs.  
The other issue is the sustainable management of the forest resource itself. Some simple facts about the U.S. and Canadian hardwood forest: there are more trees today than in 1950 and more net growth than harvesting and death from disease and insect infestation. This cannot be said for other forested regions.

Another critically important differentiating factor is third party certification of product performance. The U.S. and Canadian manufacturers have national consensus standards for hardwood plywood and engineered wood flooring that address formaldehyde emissions and delaminating which are two major concerns if you are a consumer. With producers in North America who certify to these standards, you manage your risks and satisfy your customers’ needs with certified quality products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As China’s domestic economy took off, Chinese buyers were sent scouring the globe for new wood supplies. Why? Because after massive floods blamed on deforestation of China’s forests, China sharply restricted logging at home. According to the Environmental Investigation Agency (EIA), in 2009 one-third of all the timber sold worldwide was bought by China, with little regard to its origin. After analyzing trade data for 36 supplier countries, the EIA has concluded that approximately 10% of the logs and sawed timber is illegal, representing “turnover” of $3.7 billion. 

China is not known for a strong environmental protection or safety record in products or the workplace. The August 10th, 2013 edition of The Economist’ cover calls China: “The world’s worst polluter – Can China clean up fast enough?” Environment International reported: “Over the last 20 years, China’s formaldehyde industry has experienced unprecedented growth, and now produces one-third of the world’s formaldehyde. More than 65% of the Chinese formaldehyde output is used to produce resins mainly found in wood products – the major source of indoor pollution in China. Although the Chinese government has issued a series of standards to regulate formaldehyde exposure, concentrations in homes, office buildings, workshops, public places and food often exceed the national standards. The wood processing industry has the highest average industrial formaldehyde concentration, caused in part by unventilated workshops and a lack of safety precautions.” 

A slew of other recent reports have found Chinese homes and work spaces basically swimming in formaldehyde. Berkely released a study in 2009 specifically examining exposure levels and health effects in China. Here’s one disturbing excerpt from their conclusion:

Although the Chinese government has implemented a series of standards to regulate formaldehyde, the lack of enforcement has resulted in only limited success in controlling exposures. Consequently, a large number of Chinese individuals continually encounter multiple sources of formaldehyde exposure every day. These include environmental, occupational, residential and contaminated food.

Given the magnitude of formaldehyde exposure in China, both in terms of the number of people exposed and the levels of formaldehyde exposure, the potential health consequences of formaldehyde are of serious concern. (4)

So does it all get down then to “May the cheapest win!”?

Will domestic cabinet industry be harmed if they do not have access to cheap Chinese hardwood plywood if duties are imposed to address the trade law violations?

The very point of dumping and subsidization is to capture a foreign market. Eventually, the unfair traders monopolize the foreign market (by driving competitors out through price undercutting). And, in any monopoly, without strict controls, prices increase dramatically. This is China’s aim, even while it keeps its own domestic market protected. They export $670 million of HWPW and we export to them $250,000 of HWPW and $17.6 million of hardwood veneer. Chinese hardwood plywood imports into the U.S. increased 37% from 2010 to 2012. Ready to assemble kitchen cabinets from China into the U.S. market increased 25% over that same 2 year period to $451 million. There is a pattern here I suspect.

There are no hardwood products which are currently imported from China that cannot be manufactured by domestic producers. If a cabinet or furniture company wants to source their requirements from domestic producers, they surely can. And, since the domestic producers are operating at about 50 percent of their production capacity, there is plenty of room to ratchet up production to meet increased demand.

By ratcheting up production to meet increased demand, domestic manufacturers can spread their fixed overhead costs over a larger production pool. This, by itself, would serve as a natural “brake” on any price increases. But, there is another fundamental point regarding pricing: fairly traded products tend to cost more than unfairly traded products.

Chinese imports squeezed out other countries who used to have a larger share of the U.S. market. These suppliers will also come back into the market as well. There will not be supply shortages. There will be a new market equilibrium which will be based on the fair trade of hardwood plywood from all producing countries.