Elasticity of demand for Canadian logs and lumber in China and Japan

Over the past decade, Chinese demand for forest products has increased substantially. While domestic production has risen, this increased demand has been met mostly by imports. The boom has been a welcome benefit to large forest products exporting countries such as Canada, especially in light of the weakened demand that occurred in the United States (US) following the financial crisis. While estimates of demand parameters for the US are vast, little is known about Canada’s other two leading markets: China and Japan. Furthermore, many existing trade models assume that logs and lumber are homogenous, perfectly substitutable regardless of their origin. In this note, we apply a source-differentiated Almost Ideal Demand System (AIDS) model to Chinese and Japanese log and lumber imports, with an emphasis on imports originating from Canada. Results indicate that the price elasticity of demand for Canadian lumber and logs in China is elastic. In contrast, in Japan, the price elasticity of demand for Canadian lumber is inelastic, but like China, demand for Canadian log imports is elastic. Expenditure elasticities suggest that Canadian wood products are expected to be favoured relative to other countries as demand in China grows; this finding may be attributed to marketing programs.