Exchange rates and the competitiveness of the United States timber sector in a global economy

Abstract

This article examines the competitiveness of the US timber industry under different exchange rate policies using a dynamic optimization model of global timber markets. Recent exchange rate adjustments by economies that compete with the United States in the timber sector suggest that it is important to consider how future trends in exchange rates may affect roundwood producers in the US that are already facing competitive pressures from abroad due to differences in capital and labor costs, environmental restrictions, and other factors. We assume that exchange rates affect the cost structure of harvesting and managing forests and simulate the model for baseline conditions and six additional real exchange rate policies. Two policies consider a strengthening United States dollar (US $) scenario, two policies examine weak South American currencies, and two scenarios assume a persistently weak US $. The results indicate that US competitiveness in the forestry sector is sensitive both to strong US $ policies and to the weak currency policies pursued by South American governments, as well as a weak dollar policy that is intended to improve the United States' competitiveness in the global timber market and reduce the large trade gap and account deficit. A 20% increase in value of the US $ compared to all other currencies can reduce harvests by 4–7% in the United States over the next 50 years, while a similar reduction in currency values in South America can reduce U.S. production less than 1%. A 20% devaluation of the US $ can increase annual domestic timber harvests by 2–3% and net present value of producer surplus by 3–10%.