Exchange rates and the competitiveness of the United States timber sector in a global economy ☆ Adam J. Daigneault a, ⁎ , Brent Sohngen b , Roger Sedjo c a National Center for Environmental Economics, US Environmental Protection Agency, 1200 Pennsylvania Ave., NW (MC 1809T), Washington, DC 20460, USA b Agricultural, Environmental, and Development Economics, The Ohio State University, 2120 Fyffe Road, Columbus, OH 43210-1067, USA c Resources For the Future, 1616 P Street, NW, Washington, DC 20036, USA Received 7 August 2006; received in revised form 15 March 2007; accepted 4 July 2007 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%. © 2007 Elsevier B.V. All rights reserved. Keywords: Timber supply; Timber markets; Welfare; Competitive advantage; Industrial roundwood production 1. Introduction Exchange rates can have a large influence on a sector's competitiveness. For a country experiencing depreciation in the value of its currency, production costs compared to other re- gions of the world decline, making its goods more competitive in the global market. Although some prices inflate rather quick- ly after a currency depreciation, prices of non-traded goods and services (e.g. the prices that go into the costs of production) often adjust only very slowly (e.g., Burstein et al., 2005). The United States has had a historically strong currency, however, the recent depreciation of the United States dollar (US $) relative to the Euro, Yen, and Canadian Dollar, for instance, has potentially given U.S. manufacturers a leg-up in global com- petition. Empirically, the link between exchange rates and ex- ports in the forestry sector has been shown by several authors. For example, Uusivuori and Laaksonen-Craig (2001) illustrate that a stronger US $ in the 1990's led to lower exports and increased direct investment by US companies in the forest products industries of competing countries. Hanninen and Toppinen (1999) showed similar results for timber exports from Finland with fluctuations in their exchange rates. Although future trends in exchange rates are uncertain, recent exchange rate adjustments by economies that compete with the United States in the forestry sector suggests that it is important to consider how future trends in exchange rates may Available online at www.sciencedirect.com Forest Policy and Economics 10 (2008) 108 – 116 www.elsevier.com/locate/forpol ☆ The views expressed in this paper are those of the authors and do not necessarily represent those of the U.S. Environmental Protection Agency. No official Agency endorsement should be inferred. ⁎ Corresponding author. Tel.: +1 202 566 2348; fax: +1 202 566 2338. E-mail addresses: Daigneault.Adam@epa.gov (A.J. Daigneault), Sohngen.1@osu.edu (B. Sohngen), Sedjo@rff.org (R. Sedjo). 1389-9341/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.forpol.2007.07.001