Senator SARBANES. Thank you very much, Mr. McElroy.

Could I ask you before we turn to Mr. Nafziger, you indicated that this legislation would reduce the return on the Trust Lands by $100 million a year?

Mr. MCELROY. That's correct.

Senator SARBANES. How do you arrive at that figure?

Mr. MCELROY. Well, there is a price differential of approximately $250 a thousand for timber prices bid on the stump for export versus domestic marketing. And that applied to the approximate amount that is exported from Washington State lands results in a figure of approximately $100 million per year.

Senator SARBANES. So you're assuming that this lumber will be purchased domestically rather than shipped abroad and the difference in the price between those two markets will account for $100 million.

Is that right?

Mr. MCELROY. That's correct.

Senator SARBANES. Out of how much?

Mr. MCELROY. Current income last year was approximately $200 million. It's about a 50 percent reduction.

Senator SARBANES. The difference in the price for those raw logs results in the doubling of your income from the State land? Mr. MCELROY. That's approximately so, Mr. Chairman. Senator SARBANES. What's the domestic price for those logs? Mr. MCELROY. Well, understand that we sell stumpage, and we don't sell the logs themselves. We sell timber stands standing in the forest.

Senator SARBANES. Right.

Mr. MCELROY. The price differential that we see between a domestic processor and an exporter bidding for those logs is approximately $250 a thousand.

It varies a little bit by species and so forth.

Senator SARBANES. So they pay you double for that stand if they're going to use it for export than if it's for domestic purpose? Mr. MCELROY. Let me explain a couple of things.

First of all, nearly 80 percent of our purchasers over the last 3 months also have domestic processing facilities. And they make the choice of where the individual log goes. Some logs are of export quality and move into the export market.

Other logs are of species or size or qualities that move to other markets. Our logs are free and open to the market. They move to their highest and best use, which presents us with the opportunity to sell timber at a much higher price than, for example, the Forest Service does; because our logs do move in the free market system. Senator SARBANES. Well, given that, how do you know that this legislation is going to result in cutting your return in half?

Mr. MCELROY. If S. 755 were passed and if then the Washington Legislature imposed a ban on the export of logs, we estimate, based upon the difference between export prices and domestic prices, that would reduce the amount of money that we would get for our timber.

That's the sole reason for imposing a ban, is to reduce the dollar amount paid for State timber.

Senator SARBANES. I'm having difficulty understanding how you come up with this estimate though.

I thought I understood it because I thought you sold certain standing timber for export and other standing timber for domestic use and said, well, there's a difference in the price we're receiving. And, therefore, we can easily calculate what's going to happen if we shift away from export to domestic use.

You then tell me no, we don't do it that way. We sell the stand of timber and it's used for multiple purposes.

And, therefore, I ask you again:

How is it then you're able to arrive at such a fairly precise calculation of what the loss will be, particularly when it's of such a magnitude?

Mr. MCELROY. We use published log export prices and published domestic log prices. And we can compare those prices. And those are established markets for both those prices.

We appraise our timber sales to the local domestic market. Those then are bid on by a mix of bidders. And we can, in fact, calculate that difference. That's not an arcane art at all. It's very clear. Senator SARBANES. Mr. Nafziger.


Mr. NAFZIGER. Thank you, Mr. Chairman. My name is Richard Nafziger, and I'm here representing Booth Gardner, Governor of the State of Washington.

I would also like to submit formal written testimony for the record.

I think what we are seeing emerge here is some substantial agreement in Washington State on this issue. Senator Gorton, Congresswoman Unsoeld, Congressman Swift are all offering reasonable targeted proposals which set aside timber for domestic processing without totally banning the export of raw logs.

All of these proposals provide for Federal administration and control of export policy. I think we're beginning to see some agreement and some gravitation towards the middle on this issue, which is very important.

Timber is a very important industry to us in terms of employment, but so is international trade. We're the most trade-dependent State on a per capita basis in the entire country. So it's very important to us.

And, obviously, the link between foreign products and trade is important to us, too.

Senator SARBANES. Do you have any figures that if Washington were a separate country, what-[Laughter.]

Senator SARBANES [continuing]. In being trade-dependent?

Mr. NAFZIGER. No, I don't.

Senator SARBANES. That's just a rhetorical question.


Senator SARBANES. Please go on.

Mr. NAFZIGER. All right. A lot of our efforts have gone into trying to promote the export of finished products from Washington

State in foreign trade. But, obviously, it's going to be difficult to sustain a value-added or finished product international trade policy and maintain employment and income from forest products if you don't have a supply of timber.

Over the past few years, conflict over land use in national forests has to some degree jeopardized that supply and Congress rose to the occasion several weeks ago passing an amendment to the Interior Appropriations budget which will guarantee a supply for the next 10 months.

But, beyond that point, supply is uncertain. And it's this supply issue which has caused us to review this issue. Somewhere between 50-70 percent of the timber harvested on State-owned lands was exported in 1989.

And a significant proportion of the timber exported from State lands is the same type of large diameter timber or old growth which has been set aside from Forest Service land for environmental reasons.

Many mills in Washington State that have been dependent on Federal timber are only able to process large diameter timber. These are the mills which face possible shut-downs if Federal supplies are cut off.

It seems logical that limiting the export of logs, particularly large diameter, could help alleviate the supply problems of those mills in the short term.

However, this is a difficult issue for us. Most of our efforts have been directed toward opening markets, not placing barriers on them.

Furthermore, as Mr. McElroy said, income from the sales of timber goes to our school construction fund.

I'd like to review the legislation we have before us and offer an alternative.

S. 754 would make the Federal log export restriction permanent. And I think, as everybody in this room agrees, we support that Federal export restriction.

S. 755 authorizes States to ban the export of logs from Stateowned lands. We're unable to▬▬

Senator SARBANES. Do you have any view on whether that export restriction should extend east of the 100th Meridian?

Mr. NAFZIGER. It seems logical. It's really not anything we've studied.

We haven't really looked at that.

The other bill, S. 755, authorizes States to ban the export of logs. We're unable to support that bill at this time. We believe that the measure could create inconsistencies in international trade policies and could create greater uncertainty and unpredictability for the industry.

Like Congressman Miller stated, the Governor believes it makes more sense to have the Federal Government determine their national trade policy, not each of the 50 States. You could end up with 50 commodities with temporary export bans and 50 different State policies. And we think that would be quite confusing.

We'd like to recommend taking another approach. And I'm not prepared to offer any details at this time, but we think it would make sense to temporarily set aside for domestic processing all

large diameter old growth logs from State lands. We might want to combine this with a flexible setaside for other types of logs as well. We think it should be federally administered. We support the broad concept offered by Senator Gorton and Congresswoman Unsoeld pointed it out earlier. These are concepts which move away from ideological extremes, of free trade and protectionism towards a workable problem-solving angle towards this whole issue.

We believe, if this program is administered by the Federal Government, then the people responsible for our nation's trade policy will be the same people running our log export policy.

This promotes trade consistency. Since this would only be a small portion of the State's log export supply, it would not likely be harmful to our State's log export infrastructure-trucking, shipping and loading industries.

As Senator Gorton stated earlier, we also believe that it would be a big mistake to see any type of export limitation as the entire solution to the timber supply problem.

Any proposal can only realistically be seen as part of the solution and, hence, part of the package. So we think it makes sense to begin working on the subject and begin moving towards consensus as we are with the Adams-Hatfield process in the Interior Subcommittee.

One of the primary arguments against legislation such as this is it ends up being a subsidy for segments of the industry. These segments will end up dependent upon the subsidy, fail to modernize and lose competitiveness.

We cannot agree with that argument in this case. The reduction in the supply of large diameter timber is the consequence of Federal policies which were imposed during the very short period of time.

Many mill owners were unable to make the adjustment overnight. This proposal simply attempts to buy them time. We would be, in fact, merely transferring part of the Federal Forest Service responsibility for community stability from Federal lands to State lands. This is nothing new.

We're attempting to replace potentially lost Forest Service timber with State timber. We think it makes good sense to temporarily combine this temporary export restriction with an industry modernization program.

That program should provide financing, technical marketing assistance to firms so they can meet the challenge of the future. We are currently working on such a program in our State.

In the past, Governor Gardner has strongly opposed any export restrictions of any type. However, recent restrictions on supply in Federal lands and the possibility of further reductions have prompted him to revisit the issue.

During the last legislative session, the Governor pursued setaside legislation similar to this proposal. Legislation was passed but it simply is unworkable given Federal restrictions on States' abilities to work in this area.

However, we are unable to find a way effectively to do the job and still be consistent with Federal law.

We are hoping you will address this issue directly during the upcoming year.

Thank you.

[The complete prepared statement of Richard Nafziger follows:]

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