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Liberalize the market to revive the forestry sector

Montreal, November 20, 2007 – Promoting the creation of a competitive market for timber would help the forest industry restructure and meet international competition more effectively. The industry could thereby play its major role in Quebec’s development without resorting to short-term solutions based on subsidies and protectionist regulations.

In an Economic Note published by the Montreal Economic Institute, André Duchesne, former president of the Quebec Forest Engineers Professional Corporation and of the Association des industries forestières du Québec, explains that “a return to competitiveness will necessarily require consolidating the timber taken from public land in the most profitable mills, which will have to increase their size and productivity.”

In dealing with the impact of a crisis such as that suffered by the forest industry, the usual reaction is to demand government assistance, mainly in the form of tax relief, investment assistance and subsidies carefully crafted to be tolerated by taxpayers and foreign competitors in the context of international trade agreements. Such an approach has just a short-term effect and cannot rescue the forest sector sustainably from the slump it has fallen into.

Creating a competitive market for forest products and services

The Forest Act does not permit the transfer of wood from one mill to another without the express authorization of the minister of natural resources and wildlife. Decisions are discretionary. Regional self-sufficiency is favoured at the expense of the industry’s viability. These constraints stand in the way of achieving the economies of scale and the productivity increases that consolidation of operations is likely to bring about. Moreover, the minister is prevented, both legally and politically, from revoking a mill’s timber supply and forest management agreement, even if the mill is closed, unless the timelines set out in the Act have expired and as long as there is any hope of the mill reopening. Taking account of the reduced harvests decided on by the chief forester, the Act could be revised to enable the minister immediately to rescind the agreements linked to closed mills.

Under the proposal developed by Mr. Duchesne, the forest land freed up in this way could come under a new type of contract, unconnected to a mill, that would authorize its holder to sell timber rights on the market in exchange for an annual rent and compliance with conditions ensuring the longevity of wood and wildlife resources.

This new type of contract for public land would favour the development of a forest management industry distinct from the traditional forest industry, for which this activity is merely a cost to be reduced as much as possible. The new approach would put companies in charge of the integrated management of all forest resources. It would also lead the industry to use market forces to help deal with the old conflict pitting timber users against hunters, fishermen, campers, vacationers, nature lovers and other forest users. In fact, by attempting to optimize their income, the holders of such contracts would be open to demand for each of these uses as well as to the cost of supplying each forest good and service. Because of the closings that have already occurred, a market for millions of cubic metres of timber could be created, accessible to any new or existing mill able to pay the competitive value of this wood. The most profitable mills would be the most likely to use this supply since they have the most room for manoeuvre and the greatest chances of development.

The hardships faced by the forest industry

It should be recalled that a number of factors have gradually made the forest sector vulnerable and have led to the closing of one-sixth of all mills in Quebec, involving the loss of more than 10,000 well-paying jobs. These factors include:

  • The rise of the Canadian dollar, making wood products more expensive to export.
  • Higher energy prices, making the drying of paper more costly.
  • The capital tax imposed by both levels of government, to be abolished only very gradually.
  • U.S. intervention in the lumber sector, which has penalized the industry.
  • The high (and rising) cost of raw material, compared to world market levels.

The Economic Note, titled How can the crisis in the forest sector be resolved?, was prepared by André Duchesne, F.Eng., former president of the Quebec forest engineers professional corporation and of the Association des industries forestières du Québec. He was awarded the Montreal Economic Institute’s George Petty Entrepreneurial Idea Prize for 2007.

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Information and interview requests: André Valiquette, Director of Communications, Montreal Economic Institute, Tel.: 514 273-0969 ext. 2225 / Cell: 514 574-0969 / E-mail: avaliquette@iedm.org

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