Forest products marketing and trade

Timber certification
Product substitution
Internal market barriers
External market barriers
Demand for forest products

Forest products are the source of significant employment and income in the Asia Pacific Region (see Table 10). Where resources have been relatively abundant, local domestic consumption has frequently been quite low, at least for commercial forest products. Production at a level and scale consistent with resource capacity requires the marketing of products well beyond the local arena, and as illustrated in this review, often in widely diverse international markets. Participation is international markets is uniquely different than serving local needs and traditional end users. The requirements for knowledge and information on global market trends and requirements, pricing, arrangements for credit, product grades and quality, transportation and shipping, and a host of issues arise that can directly affect the economic viability of forest sector operations. As noted, the scale of operations must often expand due to marketing and distributional requirements separate from internal manufacturing considerations. The proper role of government in the promotion and control of trade, by both importer and exporter countries, lead directly to many issues of competitiveness and open trade.

Consumer services and support are frequently cited as being as important or more so than strictly price competitiveness. Assurances of reliability in filling orders, quality control, shipment schedules, settlement of disputes and a host of other business related issues impact marketing and trade decisions. National and international relations at higher levels also shape trade in forest products. Development of regional trade blocs with preferential trade treatment among member countries can often offer advantages and efficiencies in marketing and trade, but can also provide the means for increased trade barriers.

Control of marketing and distribution also raises issues of potential monopoly or non-competitive business practices and/or allegations of subsidy or 'unfair' advantages. Frequent trade disputes between the USA and Canada, for example, revolve around the allocation and marketing of timber under Provincial control in Canada. Development of a substantial wood-based panel industry in Indonesia together with the phase-out of log exports was accompanied by many allegations of unfair competition and monopoly control and subsidies by government.

Timber certification

More recently, major issues surrounding certification of timber, primarily tropical timber, as a means of assuring environmentally sound and sustainable forest management have given rise to concerns of market control. Whether markets will respond favorably to certification, in terms of the willingness of consumers to pay premiums for 'certified timber' sufficient to differentiate markets is presently uncertain. Further, whether certification and the potential of closing markets to non-certified producers is either a necessary or sufficient incentive to change forest management is also unresolved. Fundamental disputes regarding what qualifies as 'certified' sustainable management, who determines certification, and labeling or tracking wood through complex layers of transactions and processing up to the consumer levels raise practical issues of implementation. The potential for distorting markets, and the adverse impact of added costs on market demand are also important issues confronting wood producers in the Asia Pacific Region. The less transparent costs to consumers in terms of added price and the consequences in terms of user reactions remain largely conjectural. ITTO (1996) reported on on-going efforts to document various certification proposals and schemes, and indicated that some Asia Pacific producers, led by Indonesia, are considering their own certification programs. Further, ITTO cites World Bank findings that certification 'benefits' to tropical timber producers could potentially reach $577 million per year, primarily in the form of preventing loss of markets and recovering markets already 'lost' due to non-certification, but apparently does not include costs of certification programs nor added costs for sustainable management (ITTO 1996, p. 4).

Product substitution

A related marketing issue relates to the potential for substitution of other timber and non-wood based materials for traditional uses of Asia Pacific forest products in response to scarcity and price movements. Consumption decisions involving forest products include the consideration of other available products and price. A major determinant of demand is the price of a specific timber product relative to other products. Normal economic relationships captured in the concept of demand specify that as price of a good increases, consumers will choose less of that item. As the relative price increases, consumers will choose to switch to acceptable substitute products. This relationship is expressed as "own-price" elasticity and 'cross-price' elasticity, but both indicate the relative responsiveness of demand to price changes.

As was noted above in discussing price trends, Asia Pacific timber producers have experienced increasing real prices over time. There is also some indication that this region has seen price increases greater than price changes for other tropical producers, at least through the peak prices experienced in 1993. The short term demand for forest products is generally considered to be reasonably price 'inelastic', meaning that quantity consumed will change proportionately, by an amount less than an increase in price. For example, if price elasticity is -0.5, this implies that the quantity consumed would fall by 0.5 percent in response to a 1.0 percent increase in price. A value greater than 1.0 would be 'elastic', indicating that consumption quantity would change proportionately greater than price.

A summary of estimated price elasticities for various products and markets are shown in Table 47. In only a few selected cases do elasticities have a value (-) exceeding 1.0. Japan and Korean markets for plywood and sawnwood are the most price responsive.

Table 47. Price Elasticities of Demand for Timber

Source	Period	Countries		Products	Elasticity
Bourke	1988	Japanese imports from developing countries		sawn timber	-1.3
				veneer and plywood	-1.8
Brooks	1971-91	United States imports		hardwood plywood	-1.2
Cardellichio et al.	1965-87	N. America/W. Europe		non-coniferous sawnwood	-0.5
		Japan			-2.42
		Korea			-1.06
		N. America/W. Europe		coniferous sawnwood	-0.3
		Japan			-0.67
		Korea			-1.51
		N. America/W. Europe		non-coniferous plywood	-0.5
		Japan			-0.55
		Korea			-0.85
ECE/FAO	1964-81	Group 1 countries:		sawn hardwood	-0.46
			France		-0.28
			Germany		-0.34
			Netherlands		-
			Switzerland		-1.07
			United Kingdom		-0.49
		Group 1 countries		sawn softwood	-0.58
		Group 1 countries		plywood	-0.24
Kallio et al.	1987	Countries with per capita income above US$ 3,000		non-coniferous sawnwood	-1.2
				coniferous sawnwood	-0.5
				veneer and plywood	-0.4
Meyer	1952-75	Switzerland		industrial wood	-1.4
NEI	1961-81	17 W. European countries		tropical hardwood	-0.34
Slangen	1963-81	Netherlands		coniferous roundwood	-0.78
Wibe	1970-79	60 countries with per capita income above US$ 2.500 in 1975		non-coniferous sawnwood	-1.19
				coniferous sawnwood	-0.54
				wood panels	-0.18

Sources: Brooks (1993); Cardellichio et al. (1989); Netherlands Economic Institute (1989).

Source: ITTO. 1993a. The economic linkages between the international trade in tropical timber and the sustainable management of tropical forests.

Clearly, consumption is affected by price. In the short run, it is assumed that the price of all other goods and services are held constant, together with all other demand 'shifters' including the availability of alternative goods being constant. In the longer term, these conditions do not hold and relative prices and availability of substitutes can adjust, leading to 'higher' measures of elasticity and hence substitution. While longer term elasticities are frequently estimated as 'inelastic' (meaning the absolute value is less than 1.0), values are higher, often placed in the range of 0.6-0.8, simply meaning that proportionately larger changes in consumption are likely when higher real relative prices occur over time.

Higher prices also provide an incentive for development of alternative products by potential competitors. The development of wood composites, plastics, and other non-traditional products has taken place as evidenced by changes in the Japanese markets. Further, species substitution has occurred as supply conditions in various regions change. The potential for conifer-non conifer substitution is particularly significant for Asia Pacific producers as additional constraints are placed on roundwood production under sustainable management practices.

These effects would, of course, be captured in estimates of long term elasticities. Present econometric estimates are, however, quite variable and frequently subject to widely different assumptions and methods of estimation, leading to conflicting and variable estimates. Further, potential shifts in elasticities over time are not well understood, although existing studies indicate a general expectation that over time the long term elasticities have been increasing.

The understanding of real price trends, changes in real relative prices, and the competitive position of Asia Pacific producers in competition with other suppliers and sources of alternative products is incomplete. The dynamics of global markets will require a better basis for assessing competitiveness, including the role of price trends on both producers and consumers.

Internal market barriers

The role of government and markets for the allocation of resources within Asia Pacific countries is also at issue, where governments are the primary 'owner' and source of resources. Major decisions regarding the terms and conditions for access to resources, controls over the allocation for specific uses (including export), taxes and fees, royalties or other terms of payment for timber, and differential policies for alternative uses and marketing of products (export taxes, incentive domestic processing rebates on royalties), all influence decisions on the levels of production and the markets served. Likewise, trade barriers on imports for the purpose of protecting domestic industries and/or to discourage consumption also impact the structure of industry and the allocation of production to markets, both domestic and international.

The potential for under-pricing of timber through royalty or concession problems has been widely recognized as creating incentives and pressures for excessive harvesting, and ultimately excess capacity in harvesting and processing. Lower prices also act as a disincentive for investments in forest management.

External market barriers

The Asia Pacific region also confronts external market barriers in the form of import tariffs imposed on products, quotas and other non-tariff barriers, and the emerging trend towards certification and the possible imposition of bans on non-certified products. All of these barriers restrict access to potential markets and/or impose costs that place Asia Producers at a possible disadvantage. A summary of trade barriers facing tropical timber producers in ITTO Consumer countries was reported in Table 46. As indicated, important barriers remain, particularly for value-added or secondary manufactured products. As illustrated in Table 46, barriers exist for both countries within the Asia Pacific region as well as for countries external to the region.

Global movement towards more open and free trade would result in a continuing trend of reducing such barriers. Formation of regional trade blocs, however, could move towards a set of regional trade preferences to the disadvantage of external countries. Evolution of the EC trade policies, the North American Trade Agreement, and the possibility of new and expanded agreements to the exclusion of ASEAN is a continuing issue of importance to the Asia Pacific Region. In spite of major initiatives to reduce trade barriers, the outlook is not entirely encouraging. A 'subjective assessment' by Bourke (1992) as to the status of trade barriers during three time periods starting with the 1960's is reproduced as Table 48. While it is felt that tariff barriers have declined throughout the time period covered, other barriers are judged as either static or increasing. Perhaps more importantly, estimates are that both price controls and levies as well as outright quotas or prohibitions placed on exports have continuously increased since the 1960's.

Table 48. Trends in the Incidence of Trade Barriers Affecting Forest Products¹

IMPORT RESTRICTIONS	DIRECTION OF MOVEMENT
	1960's - 1979	1979 - 1985	Since 1985
Tariff	Declining	Declining	Declining
Tariff-quota	Increasing	Static	Static
Total prohibition	Increasing	Static	Static/increasing
Conditional prohibition	Increasing	Static	Static/increasing
Quota	Increasing	Static	Static/increasing
Import licence	Increasing	Static/increasing	Static/increasing
Import procedures	N.A.	N.A.	N.A.
Variable levy	N.A.	N.A.	N.A.
Anti-dumping/countervailing duties	Increasing	Increasing	Static
Voluntary export restraints	N.A.	N.A.	N.A.
Price control	N.A.	N.A.	N.A.
Standards	Increasing	Static/declining	Increasing
Government procurement	Increasing	Static/declining	Static/increasing
Marking and packing	Increasing	Static/declining	Static/increasing
EXPORT RESTRICTIONS	1960's - 1979	1979 - 1985	Since 1985
Price controls, levies, etc.	Increasing	Increasing	Increasing
Quotas, prohibitions	Increasing	Increasing	Increasing

N.A. = little or no importance.

Source: ITTO. 1993a. The economic linkages between the international trade in tropical timber and the sustainable management of tropical forests.

¹ Subjective assessment by I.J. Bourke (1992a) based on a review of available information. The assessment does not involve any weighting by the volume of trade.

Demand for forest products

Global aggregate demand for forest products continues to grow in response to growing population and developing economies increasing the ability of many countries to increase the consumption levels. Uses of timber for construction and other end uses differ by region and culture and in large part is shaped by historical availability and price of timber. Yet as these underlying determinants to demand change, individual countries and regions will experience varying patterns of shifting demand. As noted above, the relative responses to these changes with respect to prices (elasticities) will significantly affect the ultimate patterns of distribution of forest products and consumption.

Changes in the global tastes and preferences for wood (largely a cultural factor) can also be expected in major markets. While this is partly induced by changing price structures, more fundamental physiological factors influencing perceptions of wood will be reflected in demand. Issues of wood "quality", renewability, and environmental impacts will influence consumers and hence demand. Renewability of forests can be a positive influence on consumers increasingly interested in sustainability of all natural resources and conservation. On the other hand, destructive exploitation of forests is easily translated into images of damaged environments and irreversible loss of long term capacity - a factor working against consumer preferences for wood products.

A major influence on demand within the Asia Pacific Region relates to the non-industrial demands on forests, particularly for fuelwood. Within this region, total apparent consumption of roundwood increased from 917.9 million cubic meters in 1980 to over 1,164.8 million cubic meters for 1994 or about 27 percent. By far the largest share of this increase was for non-industrial consumption of non-conifer species which reached 749.2 million cubic meters in 1994, equaling 81.5 percent of all non-conifer consumption and over 64.3 percent of all roundwood consumption. Demand for energy for both commercial and household purposes will undoubtedly increase with population and economic development, and the limitations on alternative energy sources will continue to place heavy pressure on forests.