Ending supply management would be a win-win-win
The importance of the North American Free Trade Agreement to our economy is staggering. Each day, $2.4 billion worth of goods and services cross the Canada/U.S. border. Some 78 per cent of Canada’s merchandise exports are destined for NAFTA partners.
The prime minister’s vow to “stand up to the U.S.” has been lauded by provincial premiers, trade union leaders and media commentators. Public opinion surveys show a majority of Canadians want Justin Trudeau to play the brave gladiator in the face of Donald Trump’s bullying. That may seem like good politics with the next election little more than a year away. But while the biblical David may have managed to defeat Goliath, a direct frontal attack on a foe who is 10-times more powerful is neither smart, nor effective.
Over decades spent as a CEO, I have presided over many negotiations. My counterparts each exhibited their own unique traits and tactics. None were as unpredictable as Donald Trump. Nevertheless, Trudeau would have fared better by following three universally applicable negotiating principles.
First, carefully assess the personality of your adversary and develop a smart strategy for dealing with them. Trump is narcissistic and ego-driven, with a thought process that categorizes everyone as either friend or foe. That our prime minister is no longer in the friend category was confirmed by Trump’s characterization of him as “dishonest and weak” after his ill-considered post-G7 comment. Rather than outsmarting Trump, Trudeau fell into the trap of trying to match Trump’s strongman tactics to bolster his domestic popularity.
Second, be realistic about your negotiating position. Engaging in tit-for-tat escalations with an adversary who is able to hurt you much more than you are able to hurt them will leave you economically bloodied and beaten. The American economy is 10 times bigger, so the “one for one” tariffs action is likely to hurt Canadians 10 times more.
Third, find something you can give up that the other side really wants. In this case, that something is Canada’s dairy supply management system. President Trump has been obsessed with ending supply management from the outset of the NAFTA negotiations. On June 9, he threw down the gauntlet: “It’s very unfair to our farmers. It’s going to stop or we’ll stop trading.” Oblivious to all three negotiating principles, Trudeau’s response was to make the hole he had dug even deeper: “I’ve told him many times; No, we won’t touch our supply management system.”
Why is Trudeau willing to risk economic Armageddon over a sector that constitutes less than one per cent of GDP? And what if ending supply management would actually be good for Canadian dairy producers and consumers?
Supply management is an outdated relic of government intervention in free markets, akin to the Canadian Wheat Board’s longtime grain monopoly. When the Harper government announced plans to dissolve the wheat board in 2015, we heard the same frantic concerns now being raised about the dairy sector. But ending the wheat board’s monopoly gave farmers the freedom to raise whatever crops yielded the best returns. The formerly mono-culture Prairies became a checkerboard of yellow canola, lime-green peas, and a diverse variety of cereal grains. Command and control farming has morphed into high-productivity entrepreneurship.
Australia has already demonstrated how ending dairy supply management can benefit both producers and consumers. Prior to 2000, Australia employed a dairy-control system similar to Canada’s. A just-published Fraser Institute report presents a compelling picture for dairy deregulation: “Consumers have benefited from lower prices for fresh milk. Farmers have received consistently rising farm-gate prices. The national milk supply has been maintained. The Australian dairy industry now exports almost half its output, making dairy the third most important agricultural export after beef and wheat.”
But how did Australia manage the move to free markets without the wrenching pain that producers fear? It accomplished that through transition measures that cushioned the lower prices received by producers.
Just as limiting the number of taxi cabs in New York City drove the market value of a single cab “medallion” to more than a million U.S. dollars, supply management has driven the value of a single cow dairy quota to around $30,000, or $3 million for a typical 100cow herd. This makes dairy owners multimillionaires on paper, but presents a dilemma as to how they can cash out as retirement age approaches. It also presents an insurmountable barrier for the young farmers needed to renew the industry.
Government intervention created this dilemma, so government must help unwind it. It would be patently unfair to end supply management without compensation. Doing it right would allow dairy owners wishing to exit the business a means of realizing fair compensation, while also cushioning price drops for continuing farmers. The Canada West Foundation has published a thoughtful report on how these measures could be structured. The benefit to consumers would be significant, saving the average Canadian household with children $600 per year.
Let’s take stock of Canada’s position. Within Trump’s friend-or-foe mindset, our prime minister has been moved to the foe position. Our forest products, aluminum and steel industries are struggling under punishing tariffs. Our crucially important auto industry is threatened with a debilitating 25-per-cent tariff. The president has made it absolutely clear that exemption from these tariffs depends on a satisfactory outcome to the negotiations. And that requires an end to dairy supply management. This presents the best negotiating opportunity I’ve ever seen to “give up something the other side really wants” by changing something that’s also in the best interests of Canadians.
SUPPLY MANAGEMENT IS AN OUTDATED RELIC OF GOVERNMENT INTERVENTION.