The Impact of Supply and Demand Shocks on Chinese Wood Market

Abstract

China’s timber market is very complex and heterogeneous, and is experiencing the impact of the construction of national reserve forests and the downturn in the real estate sector. By setting up a partial equilibrium model which reflects the heterogeneity of China’s wood market, not only difference among domestic timber groups can be identified, but the dissimilarity of imported timber can also be differentiated from the aspects of species and sources. This model is capable of capturing the effects of macroeconomic conditions, forestry sector policies, and trade cost variations on China’s timber market structure. According to simulations of supply shocks, China’s large-diameter log capacity enhancement will have a noticeable crowding-out effect on imported timber, suggesting the diameter of logs is an important factor for market entities to make trade-offs between domestic and imported timber. Amidst both supply and demand shocks, the equilibrium quantity changes in China’s domestic small-diameter logs and imported timber are dominated by demand shocks, whereas the equilibrium quantity change in China’s domestic large-diameter logs is dominated by supply shocks; moreover, only domestic large-diameter logs realize quantity increase in double shocks; this improves China’s domestic timber supply structure, and is a good example of “opportunities in crisis” in the face of negative demand shocks.

1. Introduction

China is a major player in the global economy, particularly in terms production and consumption of forest products. The country’s trade model, which involves the import of substantial quantities of raw materials and the export of a significant volume of manufactured goods, serves as a prime example of the global value chain paradigm [1,2]. This paradigm is characterized by substantial intermediate inputs, trade, and cross-border production sharing. Nevertheless, compared with developed countries, China’s forestry industry continues to encounter challenges characterized by inadequate forest resources, low efficiency, and diminished core competitiveness [3]. The ongoing decline in fertility rates and the accelerated aging of the population have led to indications of a labor shortage in China, which poses a considerable challenge to the labor-intensive forestry industry. The global economic slowdown has resulted in persistent trade frictions, the process of economic globalization has encountered heightened resistance, and China is no longer experiencing robust external demand. The expansion momentum of global value chains has been observed to weaken in the context of the intertwined influences of trade protectionism, the global epidemic, and geo-political conflicts. Furthermore, China’s economic transition towards high-quality development implies that the potential for economic growth through large-scale infrastructure construction has diminished. Consequently, the demand for bulk raw materials, driven by this shift, is expected to reach a steady state over time. The past linear growth trend has come to an end, and the breathtaking expansion of China’s imported timber market is over [4]. In light of the challenges posed by inadequate domestic timber resources, substandard timber quality, and structural deficiencies, China’s forestry management authority has demonstrated a resolute commitment to enhancing timber supply capacity and efficiency. This commitment is evidenced by the establishment of national reserve forests, the reform of collective forest rights, the precise improvement of forest quality, and the optimization of harvesting management in commercial forests [5,6]. Since 2012, China has established over 61.8 million acres of national reserve forests, yielding a cumulative timber yield of approximately 150 million m³. During the 14th Five-Year Plan period, China intends to complete the construction of an additional 24.5 million acres of national reserve forests, which is expected to increase the reserve forest stock by 70 million m³ [7]. Nevertheless, it is not feasible to depend exclusively on the anticipated yield of national reserve forests to ascertain that domestic timber exerts an equivalent crowding-out effect on imported timber. This is due to the fact that trading behavior is spontaneous in the market, and price, quality, and quantity are all salient influencing factors that link supply and demand.

China’s timber supply and demand have been the subjects of ongoing research, particularly with regard to the stability of timber imports, and the substitution of foreign timber with domestic timber [8,9]. These issues continue to be a focal point within the academic community. China’s reliance on foreign timber is contingent upon its stage of economic development and the dearth of domestic forest resources [10]. The ongoing increase in China’s timber imports is primarily driven by the country’s expanding demand for timber in infrastructure projects [11]. Under the influence of the improvement of forest management and the reform of collective forest tenure rights, China’s forest area and stock have continued to grow. While the timber supply capacity has shown steady improvement, a prevailing concern pertains to the substantial presence of young and middle-aged forests, which has led to a disproportionate focus on the supply of smaller-diameter timber. This has consequently resulted in an under-supply of large-diameter timber, and the market demand for timber may be met after a long period of recuperation of forest resources. Concurrently, China’s substantial bamboo resources possess the capacity to substitute for timber in significant amounts [12]. The patterns and characteristics of China’s timber imports and their impact on trading partners have generated significant academic interest on the international stage. In consequence of their comparative advantage, certain timber-producing countries have undergone a shift in their export patterns, favoring rough, processed products [13]. This development has led to an improvement in economic benefits for timber exporters. However, China, leveraging its position within the global value chain, possesses the capacity to exert a positive influence on forest governance practices in upstream timber-producing countries [14]. A comparison of China’s radiata pine (Pinus radiata) imports with those of Japan and Korea reveals distinct market characteristics. China’s imports exhibit a lower price elasticity and a higher output elasticity. The primary applications of radiata pine imports in China are for building formwork and scaffolding. However, the reuse rate remains low [15,16]. An analysis of China’s timber imports reveals that the country’s expenditure on imported softwood is less elastic than its expenditure on imported tropical timber. Furthermore, softwood and tropical timber are substitutes for each other. There is also a strong substitution between logs and sawn timber of the same species. The price elasticity of China’s sawn timber import demand is high; however, sawn timber exporters possess greater bargaining power compared to log exporters. China’s demand for Canadian sawn timber exhibits a high elasticity, and Canadian and Russian sawn timber are substitutes for each other [17].

The market pattern of China’s substantial imports of timber is unlikely to undergo a swift transformation in the near future. The enhancement of the quality and efficiency of the domestic timber supply is a gradual process. The decision to engage in import substitution is ultimately determined by market forces, and the feasibility of such actions is contingent on the comparative quality and cost of domestic and imported timber. In the event that domestic wood producers offer large-diameter timber of equivalent quality to that of imported timber, price will become the primary consideration for market participants. Consequently, as the price of the commodity decreases, demand will increase. Conversely, if the quality of timber provided by domestic wood producers significantly deviates from that of imported timber, market participants will continue to favor the importation of timber. In the context of complex supply shocks (e.g., national reserve forest policy) and demand shocks (e.g., housing market downturns), examining the potential responses of China’s timber market is advantageous for policymakers and the business community to discern risks and opportunities, which is of practical significance. The Global Forest Products Model (GFPM) is a widely used tool to assess global forest policy issues [18]. In essence, it is based on spatial equilibrium frameworks for commodity trade [19]. That is, GFPM maximizes the global sum of the consumer and producer surpluses minus trade margins to obtain market equilibrium solutions. However, one of its key assumptions is product homogeneity, which means products from different sources are perfect substitutes. But this may not hold true for the Chinese wood market [20].

The primary contribution of this paper is its incorporation of a modeling feature that facilitates the reflection of differences between domestic timber and imported timber, as well as between imported logs and lumber. This approach offers a multifaceted, comprehensive perspective, facilitating analysis of the dynamics within China’s wood market from diverse vantage points and at varied levels of granularity. In the context of the modeling efforts aimed at enhancing the capture of the characteristics inherent to the Chinese wood market, this study endeavors to provide an answer to the following question: What if the Chinese forestry sector were to augment its domestic timber supply in the face of adjustments within the housing sector? This question is of paramount importance, as it pertains to critical policy implications that necessitate rigorous academic scrutiny.

2. Materials and Methods

2.1. Model

For referencing convenience in the article, we will call the partial equilibrium model “Chinese Wood Market Model”, and use “CWMM” for abbreviation. As shown in Figure 1, CWMM is composed of three parts—China’s domestic wood module, China’s imported coniferous wood module, and China’s imported non-coniferous wood module—which fully reflect the characteristics of China’s timber market. The sources of imported wood modules will be detailed in the data section. According to China’s timber trade association, imported logs and lumber from the same source are substitutes in China’s market, which is best reflected by the substitution of Russian coniferous lumber for coniferous logs after its log export restrictions. The imports modules have the same mathematical structure, and the difference is merely in the form of notations. To save space, the ensuing text will focus exclusively on the domestic wood module and the imported coniferous wood module. The equations of China’s imported non-coniferous wood module are provided in Appendix A.

2.1.1. China’s Domestic Wood Module

Based on Chinese wood market mechanism, the domestic timber supply and demand module comprises five sets of equations: domestic timber supply, domestic timber demand, domestic wood composite demand, domestic wood composite price, and domestic timber price. Domestic timber is principally derived from fast-growing plantation forests. The distinction in quality and application is minimal, with the primary variation being the diameter class. Unless otherwise specified, capitalized terms in equations represent endogenous variables. The subscript $i$ is the category of domestic timber, which includes small-diameter timber and large-diameter timber. Let $P_i$ be the price of domestic timber, $b_i$ the price elasticity of supply, and $a_i$ the shifting parameter representing the change in domestic timber supply capacity. Domestic timber supply, denoted by $S_i$, can thus be expressed as

$$S_i=a_i{P_i}^{b_i}.$$

(1)

Supposing $D_i$ is the demand for domestic timber, then the price of domestic timber depends on the equilibrium conditions of supply and demand:

$$D_i=S_i.$$

(2)

Let $z$ be the shift parameter, $w_i$ the weigh parameter of product $i$, and $\sigma$ the elasticity of substitution between domestic timber, then the composite demand of domestic timber $DA$ can be expressed as a Constant Elasticity of Substitution (CES) function:

$$DA=z{\left({\sum }_i{w}_i{D_i}^{{\displaystyle \frac{\sigma -1}{\sigma }}}\right)}^{{\displaystyle \frac{\sigma }{\sigma -1}}}.$$

(3)

Let $PA$ be the composite price of domestic wood, $CPMA$ the composite price of imported coniferous wood, $NCPMA$ the composite price of imported non-coniferous wood, $-dd$ the own price elasticity of domestic wood demand,$edm$ the cross price elasticity of domestic wood demand with respect to imported coniferous wood, $nedm$ the cross price elasticity of domestic wood demand with respect to imported non-coniferous wood, and c the shift parameter that reflects the change in the overall demand scale of domestic wood, then the determining equation of composite demand for domestic timber is

$$DA=c{\left(PA\right)}^{-dd}{\left(CPMA\right)}^{edm}{\left(NCPMA\right)}^{ nedm}.$$

(4)

According to the principle of consumer spending minimization, the equation for determining the demand for domestic timber is as follows:

$$P_i=\left(PA\right)z{\left({\sum }_i{w}_i{D_i}^{{\displaystyle \frac{\sigma -1}{\sigma }}}\right)}^{{\displaystyle \frac{1}{\sigma -1}}}{w}_i{D_i}^{-{\displaystyle \frac{1}{\sigma }}}.$$

(5)

2.1.2. China’s Imported Coniferous Wood Module

The supply and demand module for imported coniferous wood comprises seven sets of equations, including the supply of imported coniferous wood, the demand for imported coniferous wood, the composite demand for imported coniferous wood by source, the overall demand for imported coniferous wood, the overall price of imported coniferous wood, the composite price by source, and the import price. The subscript $r$ denotes the source of imports, the subscript $j$ indicates logs or sawn timber, $f_{r,j}$ signifies the shift parameter, and $e_{r,j}$ denotes the elasticity of supply. Make ${PM}_{r,j}$ the price of imported coniferous wood, then the supply of imported coniferous wood ${MS}_{r,j}$ can be expressed as

$${MS}_{r,j}=f_{r,j}{\left({PM}_{r,j}\right)}^{e_{r,j}}.$$

(6)

Let ${MD}_{r,j}$be the demand for imported coniferous wood, with the price of coniferous wood established by the equilibrium of supply and demand:

$${MD}_{r,j}={MS}_{r,j}.$$

(7)

Let ${az}_r$ be the shift parameter, ${mw}_{r,j}$ the weight parameter of the imported softwood demand, and ${m\sigma }_r$ the substitution elasticity between logs and sawn timber; then the source-specific composite demand ${MDA}_r$ can be expressed as

$${MDA}_r={{az}_r\left({\sum }_j{mw}_{r,j}{{MD}_{r,j}}^{{\displaystyle \frac{{m\sigma }_r-1}{{m\sigma }_r}}}\right)}^{{\displaystyle \frac{{m\sigma }_r}{{m\sigma }_r-1}}}.$$

(8)

Let $caz$ be the shift parameter, ${cmw}_r$ the weight parameter of importing sources, and $cm\sigma$ the substitution elasticity among importing sources, then the overall demand for coniferous timber $CMDA$ can be written as a CES function:

$$CMDA=caz{\left({\sum }_{r}c{mw}_r{{MDA}_r}^{{\displaystyle \frac{cm\sigma -1}{cm\sigma }}}\right)}^{{\displaystyle \frac{cm\sigma }{cm\sigma -1}}}.$$

(9)

Let $g$ be the shift parameter representing the change in the scale of overall coniferous wood demand, $-cdm$ the price elasticity of the composite demand for imported coniferous wood, $emd$ the cross-price elasticity of the composite demand for imported coniferous wood with respect to domestic wood, and $ecn$ the cross-price elasticity of the composite demand for imported coniferous wood with respect to non-coniferous wood; then the equation of overall demand for imported coniferous wood is:

$$CMDA=g{\left(CPMA\right)}^{-cdm}\left({PA)}^{emd}\right(N{CPMA)}^{ecn}.$$

(10)

The composite demand for coniferous wood from each importing region is determined as follows:

$${PMA}_r=caz\left(CPMA\right){\left({\sum }_{r}c{mw}_r{{MDA}_r}^{{\displaystyle \frac{cm\sigma -1}{cm\sigma }}}\right)}^{{\displaystyle \frac{1}{cm\sigma -1}}}{{c{mw}_{r}MDA}_r}^{-{\displaystyle \frac{1}{cm\sigma }}}.$$

(11)

Finally, the source-specific demand for imported coniferous log or lumber is determined by the following equation:

$${PM}_{r,j}={az}_r{PMA}_r{\left({\sum }_j{mw}_{r,j}{{MD}_{r,j}}^{{\displaystyle \frac{{m\sigma }_r-1}{{m\sigma }_r}}}\right)}^{{\displaystyle \frac{1}{{m\sigma }_r-1}}}{mw}_{r,j}{{MD}_{r,j}}^{-{\displaystyle \frac{1}{{m\sigma }_r}}}.$$

(12)

This model is essentially a constrained non-linear system with equal numbers of endogenous variables and equations. We solve this system using the General Algebraic Modeling System (GAMS48.4.0) software [21]. The complete list of endogenous variables is provided in Appendix B.

2.2. Data

The supply and price of domestic timber are derived from the China Forestry and Grassland Statistical Yearbook and the China Forest Resources Report [22,23]. The unit of measurement for domestic timber supply is cubic meter, and the unit of price is RMB per cubic meter. The vast majority of domestic timber is derived from plantation forests, with a limited number of timber species. The primary distinguishing characteristics of commercial timber are diameter classes. Since detailed domestic timber sales data are not publicly available, domestic timber is divided into two categories: small-diameter timber and large-diameter timber. Based on China’s forest inventory report, we define small-diameter timber as logs with a DBH of less than 14 cm and large-diameter timber as logs with a DBH greater than 14 cm. The data of imported timber in 2022 was obtained from China Customs and include three dimensions: timber species, region, and product. The classification of timber species typically divides wood into coniferous and non-coniferous. The geographical distribution of wood-sourcing regions generally categorizes them into North America, South America, Europe (excluding Russia), Asia (excluding China), Oceania, Africa, and Russia, in accordance with the usual practice of China’s timber trade association. The products are further categorized into logs and sawn timber. The unit of import volume is cubic meter, the unit of import value is US dollars, and the import price is the ratio of import value to import volume. The USD price is converted into the local price through the utilization of the official exchange rate. The values of parameters such as elasticity of supply, elasticity of demand, and elasticity of substitution are primarily derived from econometric studies [9,10,11,15,17].

When the model structure, initial values of variables, and exogenous parameters are known, it is necessary to extrapolate the other components of the model to complete the model calibration, so that the initial data happens to be the solution of the model. The main parts that need to be calibrated are shift parameters, weight parameters, and composite variables. The R4.4.3 software is utilized for the purposes of data preparation, processing, and post-simulation analysis [24].

In 2022, China’s total domestic log production amounted to 105.86 million m³, with the output of small-diameter logs and large-diameter logs estimated at 74.1 million m³ and 31.76 million m³, respectively. These estimates are derived from the diameter class structure of forest harvesting and forest resource inventory. Concurrently, China imported 31.16 million m³ of coniferous logs, 17.33 million m³ of coniferous sawn timber, 12.53 million m³ of non-coniferous logs, and 9.33 million m³ of non-coniferous sawn timber. To facilitate comparisons, the volume of domestic and imported wood in China’s market is further illustrated in Figure 2. For the sake of elucidation, only China’s domestic logs are grouped into small logs and large logs. This classification is based on China’s forest inventory information. According to the Harmonized System (HS) nomenclature, imported logs are classified under the heading of 4403, and imported lumber is classified under the heading of 4407. The detailed tariff line classification of imported logs and lumber by China’s Customs is provided in Supplementary Materials.

The intricate structure of China’s timber imports is illustrated in Figure 3. The vertical axis labels represent the imported timber products, the horizontal axis labels represent the importing sources, and the numeric labels on the bars are source-specific shares by products. Among the sources of imported coniferous logs, Oceania and Europe accounted for 56.7% and 29.3%, respectively, accounting for 86% in total. The Oceania coniferous logs are primarily sourced from New Zealand, while the European coniferous logs are predominantly obtained from Germany and Central and Eastern European countries. Among sources of the imported coniferous sawn timber, Russia and Europe accounted for 68.6% and 18.4%, respectively, accounting for a total of 87%. Sweden and Finland are primary sources of coniferous sawn timber in Europe. The import sources of non-coniferous logs in China are dispersed, with Oceania, Africa, Russia, Europe and South America accounting for 30.8%, 17%, 16.9%, 15.4% and 10.3%, respectively. Collectively, these regions account for approximately 90% of the total importation of non-coniferous logs into China. The primary sources of Oceania non-coniferous logs are Papua New Guinea and Solomon. The main sources of African non-coniferous logs are the Republic of Congo, Cameroon, and Equatorial Guinea. The primary sources of European non-coniferous logs are France, Germany, and Latvia. South American non-coniferous logs are predominantly sourced from Brazil and Suriname. An analysis of the imported non-coniferous sawn timber sources reveals that Asia, Russia, North America, and Africa accounted for 54.4%, 12.8%, 11.7% and 10.6%, respectively. Collectively, these regions constitute approximately 90% of China’s total imports of non-coniferous sawn timber. Asian non-coniferous sawn timber is predominantly sourced from Thailand. North American non-coniferous sawn timber is primary sourced from the United States. African non-coniferous sawn timber is primarily sourced from Gabon and Cameroon. Detailed classifications of China’s imported tree species by the China’s Customs are provided in Supplementary Materials.

3. Results

Four scenarios were considered in this study and classified into three categories: supply shocks, demand shocks, and supply–demand shocks. The supply shock comprises two scenarios: the enhancement of the supply capacity of domestic small-diameter timber (S1) and the enhancement of the supply capacity of domestic large-diameter timber (S2). The demand shock is defined as a scenario in which the demand from the downstream sector of timber decreases (S3). The superimposed impact of supply and demand shocks is the enhancement in the domestic timber supply capacity and a concurrent decline in the demand for timber from the downstream industry (S4). It should be noted that a change in supply capacity does not constitute a direct and equal change in the supply of wood. Rather, it pertains to the shift in the supply curve of wood. This is due to the fact that the supply of wood is an endogenous variable that necessitates resolution within the model. Similarly, a change in demand of the downstream sector does not refer to a direct and equal change in timber demand. Instead, it refers to a shift in the timber demand curve. Timber demand, as an endogenous variable, must be solved within the model.

Table 1. Four scenarios of supply and demand shocks.

Supply and Demand Shocks	S1	S2	S3	S4
Supply capacity of domestic small-diameter timber increases by 10%	√			√
Supply capacity of domestic large-diameter timber increases by 10%		√		√
Demand of the downstream industry for wood products decreases by 10%			√	√

Note: magnitudes of shocks reflect recent forest sector plans and downstream market trends.

presents the specific meanings of four scenarios, and the percentage of the impact reflects the planning targets of the national reserve forest project and the trend of China’s real estate sector. The potential annual timber yield of national reserve forest is estimated to be 10 million m³, which is about 10% of China’s annual timber production in recent years. China’s timber import volume in 2022 is about 81 million m³ (roundwood equivalency), and it is estimated to be no more than 74 million m³ in 2025 due to sluggish housing market, coupled with the weak external demand for China’s manufactured forest products; a 10% drop in downstream sector’s demand for timber is highly possible. For the sake of brevity, we will make a detailed analysis of the changes in the equilibrium quantity in following subsections, and the changes in the equilibrium price are provided in Appendix C.

3.1. Improvements of the Supply Capacity of China’s Domestic Timber

The first two scenarios are analyzed in this subsection. To begin with, the impact of a 10% increase in the supply capacity of domestic small-diameter timber on China’s timber market pattern is analyzed according to scenario 1. The simulation results indicate that under the new equilibrium state, the demand for domestic small-diameter timber exhibited an increase of 6.6% compared with the initial status, while the demand for domestic large-diameter timber decreased by 0.7%, and the total demand for domestic timber increased by 4.4%. As shown in

Table 2. The impact of a 10% increase in the supply capacity of domestic small-diameter timber on China’s demand for imported timber.

Sources	Coniferous Logs	Coniferous Lumber	Non-Coniferous Logs	Non-Coniferous Lumber
North America	−0.5%	−0.5%	−0.5%	−0.6%
South America	−0.2%	−0.3%	−0.6%	−0.1%
Europe	−1.1%	−0.8%	−0.7%	−0.4%
Asia	−0.3%	0.0%	0.0%	−1.2%
Oceania	−1.4%	0.0%	−1%	−0.1%
Africa	−0.1%	0.0%	−0.8%	−0.5%
Russia	0.0%	−1.4%	−0.8%	−0.6%

Data source: authors’ calculations based on simulations.

, the impact on imported timber is further illustrated. The demand for all imported timber has declined due to the increased supply of domestic timber. This has led to a depression in the price of domestically produced timber, which has resulted in a shift in demand from imported timber to domestically produced timber.

Specifically, among China’s import sources for coniferous logs, Oceania and Europe exhibit a substantial change, with a decline of 1.4% and 1.1%, respectively. In the context of China’s import demand for coniferous sawn timber, Russian lumber experience a 1.4% decline, a figure that stands in stark contrast to the reductions observed in other sources. Within China’s import demand for non-coniferous logs, excluding Asia, there is a notable decrease in quantities from other regions, particularly Oceania, which witnesses a 1% reduction. Notably, Asia emerges as the primary driver of the substantial shift in China’s non-coniferous sawn timber import demand, with a 1.2% decline. The percentage change in imports by species can be calculated by determining the weighted average of the percentage change by source, using the share of each source as its weight. Consequently, China’s total imports of coniferous logs and sawn timber experience a 1.1% and 1.2% decline, respectively, while total imports of non-coniferous logs and sawn timber decrease by 0.8% and 0.9%, respectively. When sawn timber is converted to log equivalent at a factor of 1.42, a customary practice among China’s timber trade association [25], the total amount of imported timber declines by 1.1%. When the changes in the volume of domestic and imported timber are considered, the total demand for timber in the Chinese market increases by 2%.

Furthermore, the impact of a 10% increase in the supply capacity of domestic large-diameter timber under scenario 2 is examined. Given the fundamental characteristics of China’s domestic timber supply, namely its inadequate total quantity and structural shortage, especially the paucity of large-diameter timber, enhancing the domestic supply capacity of large-diameter timber would serve to alleviate the structural imbalances of China’s timber market to a certain extent. From the perspective of the market performance of domestic timber, the demand for domestic large-diameter timber exhibits an 8.5% increase, while the demand for domestic small-diameter timber demonstrates a 1.8% decrease. Consequently, the total demand for domestic timber experiences a 1.3% increase. A comparison of the enhancement in the supply capacity of small logs with the market performance of large-diameter timber under scenario 2 reveals that the latter is more noteworthy. The extrusion effect on domestic small-diameter timber is more pronounced, which also reflects the inelasticity of domestic large-diameter timber supply. The initial supply of large-diameter timber is constrained, resulting in a change in domestic timber supply that is smaller than in scenario 1. However, the optimization of the domestic timber supply structure is evident.

As illustrated in

Table 3. The impact of a 10% increase in the supply capacity of domestic large-diameter timber on China’s demand for imported timber.

Sources	Coniferous Logs	Coniferous Lumber	Non-Coniferous Logs	Non-Coniferous Lumber
North America	−0.5%	−0.6%	−0.6%	−0.7%
South America	−0.2%	−0.3%	−0.7%	−0.1%
Europe	−1.3%	−1.0%	−0.9%	−0.5%
Asia	−0.3%	0.0%	−0.1%	−1.4%
Oceania	−1.6%	−0.1%	−1.2%	−0.1%
Africa	−0.1%	0.0%	−0.9%	−0.6%
Russia	0.0%	−1.6%	−0.9%	−0.7%

Data source: authors’ calculations based on simulations.

, the specific changes in the importation of timber under scenario 2 are evident. The augmentation in the availability of domestic large-diameter timber prompts a shift in market demand, with a transition from imported timber to domestic timber. The substitution effect of domestic timber on imported timber is more pronounced in this scenario compared to scenario 1, signifying that diameter class is a pivotal factor for market buyers when deliberating between domestic timber and imported timber. Specifically, China’s import demand for coniferous wood witnesses a 1.6% decrease in logs from Oceania and a 1.3% decrease in logs from Europe. These declines are more significant than those observed for other sources. In the import demand for coniferous sawn timber, Russian and European lumber decrease by 1.6% and 1%, respectively. The Oceania region experiences a 1.2% decrease in the import demand for non-coniferous logs, while logs from Europe, Africa, and Russia also exhibit significant declines. Notably, China’s non-coniferous sawn timber import demand demonstrates the most significant decrease, reaching 1.4%. On the basis of the breakdown data, the importation of coniferous logs, coniferous lumber, non-coniferous logs, and non-coniferous sawn timber demonstrate respective decreases of 1.3%, 1.4%, 0.9%, and 1.1%. The quantity of all imported timber in terms of log equivalency decreases by 1.2%. Combined with the changes in domestic timber demand, it is concluded that the total timber demand in the Chinese market increases by 0.2%. When considered in conjunction with shifts in domestic timber demand, it is determined that the aggregate timber demand within the Chinese market experiences an increase of 0.2%. Given that the base level of domestic large-diameter timber is considerably lower than that of small-diameter timber, enhancing domestic large-diameter timber supply capacity exerts a greater extrusion effect on the market demand for domestic small-diameter timber and imported timber, particularly the former.

3.2. The Impact of Declining Demand for Timber in Downstream Sectors

In Scenario 3, the impact of a 10% decline in downstream timber demand on China’s timber market is examined. It is important to note that our model has the capacity to differentiate between the impact of heterogeneous changes in the downstream demand for domestic and imported timber. However, in order to simplify the explanations, we have set the same demand shocks for both domestic and imported timber. The simulation results indicate a decline in demand for domestic small-diameter timber of 6%, a decrease in demand for domestic large-diameter timber of 2.6%, and a total decrease in domestic timber demand of 5%.

Table 4. The impact of a 10% decline in demand from downstream industries on the quantity of imported timber.

Sources	Coniferous Logs	Coniferous Lumber	Non-Coniferous Logs	Non-Coniferous Lumber
North America	−4.4%	−5.1%	−5.3%	−6.7%
South America	−2.0%	−2.8%	−6.3%	−1.3%
Europe	−10.3%	−7.8%	−7.9%	−4.9%
Asia	−2.7%	−0.3%	−0.5%	−12.9%
Oceania	−12.4%	−0.4%	−10.7%	−0.5%
Africa	−0.6%	−0.1%	−8.3%	−5.9%
Russia	−0.2%	−12.9%	−8.3%	−6.8%

Data source: authors’ calculations based on simulations.

shows the impact of demand shocks on timber imports. Specifically, imports of coniferous logs from Oceania and Europe have decreased by 12.4% and 10.3%, respectively. In the context of China’s demand for coniferous sawn timber, imports from Russia and Europe experience a decline of 12.9% and 7.8%, respectively. This decline is notably more substantial than that observed for other sources. In the context of China’s demand for non-coniferous logs, with the exception of Asia, there has been a substantial decline in the volume from all sources, particularly Oceania, which has experienced a decrease of 10.7%. For China’s non-coniferous sawn timber imports, Asia experiences the most substantial shift among all import sources, with a decline of 12.9%. Based on weighted averages, the respective decreases in imported coniferous logs, coniferous sawn timber, non-coniferous logs, and non-coniferous sawn timber are 10.5%, 10.8%, 8.4%, and 9.7%. The total log-equivalent quantity of imported timber decreases by 10.1%. Combined with the change in the amount of domestic timber, the aggregate demand for timber in the Chinese market experiences a 7.2% decline. It can be found that compared with domestic timber, imported timber demand is more sensitive to China’s macroeconomic condition, and its response to changes in downstream demand is stronger.

3.3. The Impact of Superimposed Supply and Demand Shocks

So far, we have shown the separate effects of supply and demand shocks on China’s timber market. Next, the combined effects of the superposition of supply and demand shocks will be analyzed. Whether it is the improvement of domestic timber supply capacity or the decline in downstream demand for timber, it is a negative impact on imported timber. Consequently, it is anticipated that the demand for imported timber will decrease. However, the direction of changes in the demand for domestic timber is contingent upon the extent of the increase in supply capacity and the decline in downstream demand. This could be elucidated through numerical simulations. Under the superimposed impact of supply and demand shocks, the demand for domestic small-diameter timber declines by 1.5%, while the demand for domestic large-diameter timber increases by 5%. The total demand for domestic timber increases by 0.4%.

Table 5. The impact of superimposed supply and demand shocks on imported timber demand.

Sources	Coniferous Logs	Coniferous Lumber	Non-Coniferous Logs	Non-Coniferous Lumber
North America	−5.4%	−6.1%	−6.3%	−7.9%
South America	−2.4%	−3.4%	−7.5%	−1.5%
Europe	−12.4%	−9.4%	−9.4%	−5.8%
Asia	−3.3%	−0.4%	−0.6%	−15.1%
Oceania	−14.9%	−0.5%	−12.6%	−0.6%
Africa	−0.7%	−0.1%	−9.8%	−7%
Russia	−0.2%	−15.5%	−9.8%	−8%

Data source: authors’ calculations based on simulations.

presents the specific changes in demand for imported wood. China’s demand for imported coniferous logs from Oceania and Europe decreases by 14.9% and 12.4%, respectively. In China’s demand for imported coniferous sawn timber, the volume of Russian sawn timber decreases by 15.5%, marking the most substantial decline among all sources of imports. This is followed by Europe, where the imports volume has experienced a 9.4% reduction. China’s demand for imported non-coniferous logs has experienced a notable decline, with major import sources, including Oceania, Africa, Russia, and Europe, recording a decrease of 12.6%, 9.8%, 9.8%, and 9.4%, respectively. China’s primary importing sources for non-coniferous sawn timber, including Asia, Russia, North America, and Africa, have experienced a decline of 15.1%, 8%, 7.9%, and 7%, respectively. The following changes have been observed in the imports of each timber product: a 12.6% decrease in the import of coniferous logs, a 13% decrease in the import of coniferous sawn timber, a 10% decrease in the import of non-coniferous logs, and a 11.4% decrease in the import of non-coniferous sawn timber. In terms of log equivalency, the total quantity of imported timber decreases by 12.1%, and when combined with the changes in domestic timber, the total timber demand in the Chinese market decreases by 5%.

4. Discussion

4.1. Mechanism of Supply and Demand Shocks on China’s Wood Market Equilibrium

In this study, a model of China’s timber market is constructed to reflect product heterogeneity, and the impact of the improvement of domestic forest supply capacity and the weakening downstream demand on timber market equilibrium is systematically analyzed. This analysis is conducted against the background of national reserve forest policy and downturn of real estate market. The augmentation of domestic timber production capacity has led to an increase in the supply of domestic timber, concomitantly depressing the price of domestic timber. This has engendered a shift in market demand from imported timber to domestic timber. A comparison of the impact of the increase in the production capacity of small-diameter timber reveals that the increase in the production capacity of domestic large-diameter timber exerts a significant extrusion effect on domestic small-diameter timber, as well as a pronounced substitution effect on imported timber. This underscores the significance of the diameter class as a pivotal factor for market participants in their decision-making process regarding trade-offs between domestic timber and imported timber. In comparison with domestic timber, imported timber exhibits a stronger correlation with downstream demand, and its response to changes in downstream demand is more pronounced.

A primary objective of the national reserve forest policy is to enhance the supply capacity of domestic large-diameter timber and precious timber, optimize the supply structure of domestic timber, and reduce excessive reliance on timber importation. Our simulation analysis demonstrates that the effective implementation of forestry policies within a market economy is inseparable from the role of market mechanisms. According to the principles of consumer theory, a decline in the price of a product exerts a dual influence on consumer behavior, inducing a substitution effect and an income effect, which is also referred to as an expenditure effect. As illustrated in Figure 4, the policy-induced augmentation of domestic timber production capacity exerts a significant influence on the demand for domestic and imported timber. Assuming that the initial optimum of the market is A, and the new optimal combination is located at point C. The enhancement of domestic timber supply capacity will lead to a decrease in the price of domestic timber, which will result in an increase in the real income of the downstream industry. This is evidenced by the outward shift in the initial budget line to the new budget line, and the increased amount of domestic timber that can be procured with the same expenditure. The substitution effect on imported timber is the horizontal distance from A to B, which represents the reduction in the demand for imported timber while maintaining the same utility I₁. The increase in the real income of the downstream industry is manifested by the outward movement of the yellow dotted line passing through B to the blue budget line through C, and the resulting income effect is the horizontal distance from B to C. Although the decline in the price of domestic timber under the substitution effect will inevitably lead to a decline in the demand for imported timber, the demand for imported timber has increased in the context of the income effect. Therefore, the final change in the demand for imported timber is the horizontal distance from A to C, which is significantly smaller than the situation where only the substitution effect is considered. And that is one of the reasons why the improvement of domestic timber supply capacity has not caused a significant decline in the demand for imported timber.

Following Evergrande’s official default in 2021, China’s real estate market has undergone a period of profound adjustment, with repercussions that extend from the corporate debt crisis to a nationwide downturn in the sector and a waning of market confidence [26]. The development of the timber market is profoundly influenced by the trends in the housing sector from the demand side. Nevertheless, the national reserve forest policy will optimize the supply structure of China’s domestic timber. Consequently, it will serve as an excellent embodiment of opportunities in the face of negative demand shocks.

4.2. Why Product Heterogeneity Matters in Analyzing China’s Wood Market

Based on the Law of One Price (LOP), Spatial Price Equilibrium Model (SPE) becomes the standard tool to numerically study the supply and demand of commodity markets. This modeling framework operates under the assumption that, in the absence of trade costs (e.g., transportation expenses, tariffs) among regions, the price of a commodity should remain uniform across all regions [27]. The utilization of SPE facilitates the investigation of important timber market issues, including the U.S.–Canada softwood timber dispute, Russia’s log export tax, and New Zealand’s log supply capacity constraints [28,29,30]. However, a fundamental supposition inherent to spatial price equilibrium models is the homogeneity of products. This implies that there is no difference between products produced and consumed in different regions, thereby products from different origins can be completely substituted [31,32]. This is a significant rationale behind the predominance of SPE models’ restriction of the product to coniferous wood [33]. Despite the specificity of the product labels for coniferous wood, this degree of segmentation still does not guarantee that the products sourced from different regions are perfect substitutes. A further issue pertains to the process of model calibration, which frequently fails to guarantee that the observed trade flows will be actualized on the basis of pertinent information such as transportation costs and tariffs. Consequently, it is imperative to calculate the shadow price of trade flows using the positive mathematical programming (PMP) method and subsequently adjust trade costs accordingly [34,35]. However, when the assumption of homogeneous products is invalidated, LOP is not supported, and the adjusted trade cost based on the PMP is merely a numerical result rather than an economic fact.

If we use the SPE model to analyze the impact of China’s national reserve forest policy, we can find that the augmentation of domestic timber production nearly equates to the diminution of imported timber. The domestic timber exhibits a complete crowding out effect on imported timber, which stands in stark contrast to the prevailing rigid demand for imported timber within China’s timber market. It is possible to incorporate multiple products into the SPE and establish the aggregated social welfare objective function and associated constraints for an optimization problem. However, the model still necessitates homogeneity for each product. This may result in a scenario where the increase in the supply of European logs in the Chinese market is equivalent to the decrease in New Zealand logs, and the increase in the supply of Russian sawn timber is equivalent to the decrease in Canadian sawn timber. The SPE model typically necessitates substantial data requirements, precluding the direct utilization of the original bilateral trade flows from FAOSTAT or UN Comtrade for the construction of the trade matrix. A prerequisite for this analysis is the transformation of original trade flows into net imports or net exports, followed by the adjustment of transportation costs according to the shadow price. Conversely, CWMM does not necessitate substantial alterations to the input data. China is a major importer of timber, sourcing this material from over 100 countries worldwide. However, when assessing the supply and demand dynamics of China’s timber market from a homogeneous perspective, the inherent differences and diversity of this market are overlooked. The partial equilibrium model developed in this study possesses the capacity to differentiate the characteristics of various domestic timber species. Additionally, it is capable of accentuating the heterogeneity of imported timber, a phenomenon attributable to the interweaving of multiple dimensions, including timber species and sources. This model offers a valuable framework for investigating the impact of macroeconomic environment changes, adjustments in timber industry policy, and fluctuations in timber trade costs on China’s timber market.

4.3. Limitations

It is imperative to acknowledge that, despite the fact that the import module of CWMM encompasses a substantial array of import sources, it does not constitute a spatial model. Rather, it is a partial equilibrium model that integrates diverse categories of timber products into a unified market. Additionally, the CWMM model is static and does not incorporate the temporal dynamics of timber supply and demand. A recursive dynamic version of the model would be a promising subject for future research. For the sensitivity analysis, we have doubled or halved the behavioral parameters, including the supply elasticity, the demand elasticity, and the substitution elasticity [36]. However, the results presented in Appendix D exhibit minimal deviations from the benchmark results, thereby suggesting that the model structure remains stable under these conditions.

Although CWMM reflects the heterogeneity of products to a large extent, the current classification method can still be further refined. For instance, Douglas fir (Pseudotsuga menziesii) and western hemlock (Tsuga heterophylla) could be distinguished from the coniferous logs sourced from North America. Despite the fact that this splitting increases the variability of imported timber, it also makes the model structure more intricate. The applicability of this extension is not significantly improved from the perspective of academic research.

China is one of the hubs of global value chains, and its timber product supply chain is intricate, both in terms of meeting domestic demand and reaching the international markets. The final destination of domestic and imported timber embedded in manufactured products is often difficult to trace. Consequently, the model does not explicitly delineate the ultimate destination of the timber, characterizing it instead as “downstream demand.” And it is incapable of differentiating between domestic and foreign demand shocks. For instance, the European Union, a prominent global trade partner of China, has introduced a zero-deforestation law [37]. This dynamic is poised to exert an influence on external demand for Chinese timber products. However, it is imperative to note that this impact is distinct from the fluctuations witnessed in China’s domestic real estate market. At present, our model lacks the capacity to differentiate between the impact of domestic and external demand shocks. Furthermore, the CWMM model focuses on China, and the economic effect of supply and demand shocks is mainly reflected in China’s timber market dynamics. It cannot analyze the spillover effects on the global timber market equilibrium, which is a disadvantage compared with the SPE model. Future research endeavors should combine the local characteristics of CWMM with the global perspective of SPE, and incorporate the heterogeneity of the local market into a global model.

5. Conclusions

In consideration of the heterogeneity and diversity inherent in the Chinese timber market, a partial equilibrium model has been constructed. This model exhibits structural stability and flexibility, allowing for the integration and combination of imported sources, imported timber products, and additional domestic timber categories without altering its fundamental structure. It facilitates the examination of diverse issues concerning China’s wood market. As an application, this paper simulates the structural changes in China’s timber market brought about by the increase in the supply capacity of domestic timber and the decline in the downstream demand. The results indicate that enhancing the supply capacity of domestic large-diameter timber in the face of negative demand shocks presents a favorable opportunity for China to promote timber import substitution.

With the implementation of enhanced forest management practices, China has witnessed a consistent increase in its domestic timber supply, particularly with eucalyptus (Eucalyptus) and poplar (Populus). Concurrently, there has been a decline in the utilization of imported timber for the production of wood-based panels. However, due to the short growth cycle of domestic timber and the prevalence of small- and medium-sized logs, the end uses are quite limited. The imported timber is primarily composed of large-diameter and precious timber, which find extensive application in the construction industry and the production of high-value-added wood furniture and flooring. It has played an important role in the development of China’s infrastructure construction and wood processing industries, effectively addressing the existing deficiencies of domestic timber in terms of quantity and quality. Prior to achieving sufficient domestic timber availability, stability in pricing, and a high level of quality, imported timber will continue to play a significant role in China’s timber demand. However, the international economic and trade order, with globalization at its core, is undergoing an unprecedented test. On the one hand, the localization of production and consumption has increased in strength compared to previous trends. In addition, international trade frictions have increased significantly, which will inevitably affect the stability and sustainability of China’s imported timber supply. Conversely, China’s economic development model has undergone a gradual transition from a focus on high-speed growth to one that emphasizes high-quality development. The paradigm shift in industrial development has also occurred, with the emphasis shifting from external growth to internal maturity. These adjustments and changes in commodity consumption patterns are anticipated to have a significant impact on the timber market. In the face of complex risks and challenges, China’s forest management authority must adhere to long-term strategic plans to optimize the supply structure of domestic timber and ensure a harmonious interaction between domestic market and forests.