If a tree falls in an Italian forest does it make a sound in the European trade?

by Cristian Roner

An exceptional bad weather hit the North-Eastern part of Italy last October. Many trees fell because of the strong windblasts. Now, the urgent disposal of the timber should also consider the economic benefit and the cost effectiveness of trading it abroad.

If a tree falls in an Italian forest does it make a sound in the European trade?[1]

At the end of last October, an exceptional wave of bad weather hit the northeastern part of Italy. The most notable feature of this episode was the wind speed that in some places reached over 200 kph. The force thus released, together with the intensity and amount of rainfall, wreaked havoc on the region. In Trentino-Alto Adige/South Tyrol it caused three deaths and relevant damages to both building and environmental heritage. The strong windblasts uprooted many trees, and among them many secular plants. The overall quantity of fallen trees has been estimated between 1 and 1,2 million cubic meters for South Tyrol and about 1,5 million cubic meters for Trentino. The Italian farmers union Coldiretti estimates that in North-Eastern Italy about 14 million trees have been uprooted or knocked down by the strong windblasts.

Figure 1 – Timber sector balance of trade (Export-Import) of the timber sector with European Union 28

Figure 1

Source: elaborations on data from ISTAT, Ateco AA022 (2018). Provisional figures for 2017.

To avoid the emergence and spreading of phytopathologies connected with the natural decay of the fallen trees, experts say it is imperative to dispose of the wood as quickly as possible. The recovery activities will likely last for many years and require dedicated workforce and money. House heating and building material supply for the local construction sector are certainly among the many local final uses of the collected wood. Another viable and profitable option could be selling the wood abroad. Austrian sawmills for instance have already showed interest for the available timber (www.ansa.it). The prevailing option will depend essentially on the evaluation of the opportunity costs of each alternative against the costs incurred for the collection and processing of the wood. The timber sector is relevant in a region where forests represent about 57,3 percent of the regional area and given the abundance, the same sector should play a role even in the regional foreign trade: one would expect a significant amount of timber’s export from the region. According to the classical theories of international trade in fact, economies will export those resources they possess in abundant amount relatively to other economies (Heckscher-Ohlin theorem). Along these lines, the region Trentino-Alto Adige/South Tyrol should be a net exporter of timber. Surprisingly however, the regional timber trade balance has been steadily negative by an average value of almost 20 million Euros over the considered 18 years, although the amount of deficit shows a decreasing trend, being about 5 million Euros in 2017.

Figure 2 – Terms of trade for products from agriculture, forestry and fishery with European Union 28

Figure 2

Source: elaborations on data from ISTAT (2018). Provisional figures for 2017.

At least two reasons can be accounted for the contradiction between what theory predicts and the reality of numbers. The most obvious is the presence of both export regulations and supply restrictions. Forestry is regulated by laws enforced at the European, national and local level the main aim of which is to preserve the natural endowment of capital while allowing economical activities in a sustainable way.

The less straightforward reason is operating at a different level. Wood can be regarded as a homogeneous commodity which can be used indifferently for example to heat houses or to build edifices. The timber sector is also characterized by economies of scale and the presence of a few operating sawmills and other processing facilities that can therefore exercise market power. Besides, the most part of the foreign trade in timber happens among countries (regions) which are similar in size or per capita income. Within the European Union 28, Veneto and Trentino-Alto Adige/South Tyrol import timber mostly from Austria, Germany, Slovenia, Croatia, Hungary, Romania, Belgium and France, while they export mainly to Austria, Germany, Slovenia, Croatia, Romania and United Kingdom. It is interesting to notice that the set of countries is almost the same for both trade flows, that most of them adopted the Euro as official currency, thereby eliminating the exchange rate effect on the terms of trade, and that most of them enjoy wide forest areas. The effect of the combined characteristics just discussed is an example of intra-industry trade or the simultaneous exchange of products, which are close or perfect substitutes in terms of production, consumption, or both. Locally sourced timber can be easily substituted in consumption with timber of many other different geographical origins and vice versa. Intra-industry trade is the likelier to observe, the more similar are the economies involved. Causes and consequences of this kind of exchanges are different from those studied in the case of the usual inter-industry trade in which different products are exchanged and to which the Heckscher-Ohlin theorem does hold true.

The evaluation of opportunity costs associated with the alternative uses of timber must surely consider also the prevailing prices of wood, both in the national and in the foreign markets. In the last case, a good approximation is provided by the terms of trade i.e. the ratio between the price of exports and the price of imports. In other words, this measure tells how much can be bought abroad (import) per unit of selling abroad (export). When direct measurement is not available, the terms of trade can be imperfectly approximated using the unit values of the items exchanged (nominal value in euros divided by the physical quantity exchanged).[2] This is the approximation adopted here, also using data available only for the agriculture, forestry and fishery sector of which timber is a subset.[3] The resulting plot is reproduced in figure 2. The approximated terms of trade (multiplied by one hundred) are constantly above 100, meaning that the approximated price of exported product is greater than the one of imported product. Starting from 2011, the terms of trade for the agricultural sector in the three areas considered start to improve again, after about twelve years of declining or stagnating dynamics for Veneto and the north-eastern part of Italy. The dynamics of this last area seems to mimic the one of Veneto. Not surprisingly, 60 percent of import and 40 percent of export are in fact linked to this region. The case of Trentino-Alto Adige/South Tyrol is apparently less stable. After a remarkable improvement of the terms of trade between 2000 and 2004, the trend goes downward until about 2012 and then recovers again. The region represents about 5 percent of the import and 26 percent of the export of the North-East. On average, for Trentino-Alto Adige/South Tyrol the terms of trade for the agricultural sector were such that for 1 Euro of agricultural products exported, about 2,2 Euros worth of the same products could be imported. Between 2012 and 2017 this ratio was such that for 1 Euro of products exported, 1,9 Euros of the same could be purchased abroad.

Despite the deterioration, the trade seems to be still favorable for the regional economy. Assuming that the terms of trade of the agricultural sector closely follow those of the timber sector, that the sudden increase in supply of timber from north-eastern Italy does not influence the prices on the European market, and that the trend in terms of trade will remain stable or increase over the long term likely needed for the disposal, trading the timber abroad should therefore not be discarded on the sole basis of autarkic principles

[1] Paraphrase of the philosophical thought experiment that questions observation and perception: “If a tree falls in a forest and no one is around to hear it, does it make a sound?”

[2] Unit values are biased estimators of the terms of trade. Bias is likely reduced by the fact that timber is a relatively homogeneous product. Cf. Silver, 2007. “Do unit value export, import, and terms of trade indices represent or misrepresent price indices?”. IMF Working paper n.121.

[3] No data are available for the timber sector only.