There may yet be scene-chewing
Donald Trump scored a major political victory by getting the Mexicans to agree to raise wages in the auto industry — a win that will play well in important car-producing political battlegrounds like Ohio and Michigan.
He now wants to repeat that triumph in Wisconsin and upstate New York by forcing Canada to make concessions on the system that protects its dairy industry.
People sitting around the negotiating table say a modernized trade agreement with the Americans is possible this week. Its success or failure has come down to Trump’s demands on dairy versus the Canadian insistence on including the Chapter 19 dispute resolution mechanism and carve-outs for cultural industries that allow Canadian content requirements on television, radio and film. The Canadian side is also seeking reassurance that the review mechanism agreed to in the Mexican deal — a review every six years, with a 16-year expiry period — does not constitute a “hard” sunset that might discourage investment.
Justin Trudeau said again Wednesday he will not buckle in his support for supply management, the command economy system that controls production as a means of setting prices for dairy, chicken and eggs.
To retain his popularity in Quebec, Trudeau needs to be able to say supply management remains in place. But it is increasingly hard to see how he can get a deal with Trump and be able to make that claim with any credibility. Whatever he agrees to is likely to hollow out a system that only survives by artificially blocking foreign competition.
Discussions in Washington have crystallized around “Class 7,” the classification of milk designated by the Canadian Dairy Commission that is used to make cheese and yogurt. (It is officially “milk protein concentrate” — liquid milk with the water drained out — that is easier to transport than the bulkier liquid product.) Wisconsin pioneered MPCs, which circumvented the 200 per cent plus tariffs on imported milk until Canadian regulations were changed to freeze the Americans out of the market. Now they want back in.
Canada has offered to increase tariff quota rates — the amount of product that can be imported duty free, as it did in the recent trade agreement with Europe. Critics point out that the Europeans were done up like freshly wrapped fish under this agreement — the increased quota was given to Canadian producers like Saputo and Agropur as compensation. It’s not in their interests to bring in European cheese to compete with their own products, with the result that only one-third of the quota for imported cheese has been filled this year. The fantasy of Canadian foodies that the stores would be flooded with cheaper Camembert and gouda has proven a mirage.
The Americans are not likely to fall for such transparent bad-faith bargaining, particularly given Trump’s vocal criticism of Canada’s 300 per cent tariff on butter.
“The Americans know it’s not designed to work,” said James McIlroy, a former adviser to Canadian trade ministers and now a consultant at McIlroy and McIlroy. He believes that to get a broader deal, Canada will have to kill Class 7 and get rid of its tariffs over a period of years. If that happens, the system is likely to implode, he said.
If that’s the deal on offer, Trudeau should grab it. The system is pernicious, costing each Canadian consumer $276 a year, according to the Conference Board of Canada. The very idea that any Canadian government is risking a 25 per cent tariff on autos, an industry that directly employs 140,000 people, to protect 16,000 dairy farmers, is not only idiotic, it’s irresponsible.
McIlroy is critical of the Trudeau government’s approach during the long months of negotiation, constantly playing defence to protect supply management, while passing up the opportunity to attack the Americans in areas like government procurement where they are vulnerable to criticism.
“Bobby Orr used to say the best defence is a strong offence. Government procurement was a tremendous offensive hand to play,” he said.
He said he is also mystified why the Canadian government is so insistent on retaining Chapter 19 dispute resolution panels, which he used to sit on in the 1990s. “I sat on panels that did Chapter 19 cases and the (U.S.) Department of Commerce would just ignore them. There was no enforcement mechanism,” he said.
One fallacy that has been exposed by the U.S.-Mexico deal is that the discussions were simply about “bilateral issues,” as Foreign Affairs Minister Chrystia Freeland maintained.
To Canada’s benefit, the Mexicans agreed to higher North American content and wages in auto production. To its detriment, the two countries agreed to extend patent protection for pharmaceuticals to 10 years from eight. Privately, Canadian officials concede that agreement is likely to stand in any trilateral deal, to the chagrin of generic drug producers and provincial governments that have to purchase the drugs.
Jim Keon, president of the Canadian Generic Pharmaceutical Association, said he was “gravelly concerned” about the agreement in principle between the U.S. and Mexico, pointing out that the mandate letter for Health Minister Ginette Petitpas Taylor included improving access to prescription drugs and reducing their cost. Neither is likely to come to pass if exclusivity is extended.
“There is a growing school of thought that this government is unable to navigate in international waters,” said McIlroy.
There may yet be some scenery-chewing to be squeezed from this melodrama — a Canadian walkout, for example. It might not be a bad tactic, given Trump and his trade representative, Robert Lighthizer, are delighted with the concessions that have been wrung from the Mexicans and are more likely to get them through Congress as part of a trilateral deal that includes Canada.
But Trump will have his Wisconsin win eventually. Trudeau’s task is to save the furniture, if not the contents of the fridge.