USMCA pro­vides no rea­son to get sour about milk

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - MICHAEL BURT CHRISTINNE MUSCHI/REUTERS

Ex­ec­u­tive direc­tor of eco­nom­ics at the Con­fer­ence Board of Canada

The ten­ta­tive United StatesMex­ico-Canada Agree­ment (USMCA) does not pro­vide full sat­is­fac­tion to the de­mands of any of the in­ter­ested par­ties. This out­come, how­ever, is a good sign. It sug­gests that all par­ties in­volved had to make some hard de­ci­sions and com­pro­mises on their bar­gain­ing po­si­tions. For Canada, there is much to like about the new agree­ment, and some rea­sons for con­cern. The con­ces­sions made to the United States on loos­en­ing ac­cess to Canada’s sup­ply-man­aged in­dus­tries − and, in par­tic­u­lar, the dairy sec­tor − are not one of the those.

The most im­por­tant as­pect of the USMCA for Canada is the sta­bil­ity the agree­ment brings and the ex­pected im­pact this sta­bil­ity will have on busi­ness in­vest­ment. De­spite record-low unem­ploy­ment rates and clear in­di­ca­tions that busi­nesses are op­er­at­ing at full ca­pac­ity, busi­ness in­vest­ment was so ane­mic last year that the pro­duc­tive cap­i­tal stock was un­changed. Un­cer­tain- ty re­gard­ing the rene­go­ti­a­tion of the North Amer­i­can free-trade agree­ment was a key fac­tor in­flu­enc­ing the weak­ness in busi­ness spend­ing.

The re­ten­tion of the dis­put­eres­o­lu­tion mech­a­nism is an­other clear win for Canada. This pro­vi­sion al­lows com­pa­nies hurt by tar­iffs im­posed by one coun­try to ap­peal to a multi­na­tional panel. Given the con­tin­u­ance of tar­iffs on Cana­dian steel, alu­minum and soft­wood lum­ber, this is clearly a valu­able process. The terms of the deal are also ex­pected to im­prove the at­trac­tive­ness of both Canada and the United States, rel­a­tive to Mex­ico, as des­ti­na­tions for auto-re­lated in­vest­ment.

De­spite these clear ben­e­fits, the po­ten­tial neg­a­tive im­pact of the deal on Canada’s dairy in­dus­try is a com­monly cited con­cern. How­ever, the USMCA will not spell the end of sup­ply man­age­ment. In­stead, this agree­ment con­tin­ues a pat­tern of re­cent trade agree­ments, such as the Canada-EU Com­pre­hen­sive Eco­nomic and Trade Agree­ment and the Com­pre­hen­sive and Pro­gres­sive Agree­ment for Trans-Pa­cific Part­ner­ship, which have grad­u­ally chipped away at Canada’s sup­ply-man­age­ment sys­tem. The USMCA will give U.S. dairy pro­duc­ers duty-free ac­cess to 3.6 per cent of the Cana­dian mar­ket and in­crease pro­por­tion­ately the ac­cess of Cana­dian pro­duc­ers to the U.S. mar­ket.

Farm-gate sales of milk in Canada were $6.6-bil­lion in 2017. The pro­posed deal may cause the loss of, at worst, about $240-mil­lion in do­mes­tic sales for farm­ers. How­ever, those losses may not oc­cur if Cana­dian pro­duc­ers are able to in­crease their ex­ports into the United States. The United States im­ported US$2.8 bil­lion in dairy prod­ucts in 2017, of which only US$309-mil­lion came from Canada.

More im­por­tantly, why did Canada fight so hard to keep most of its sup­ply-man­age­ment poli­cies? The dairy sup­ply-man­age­ment sys­tem im­poses clear costs on both con­sumers and pro­duc­ers. The size of the sub­sidy varies over time, but each Cana­dian house­hold pays $200$300 a year more for their dairy prod­ucts than they should. Ac­cord­ing to Con­fer­ence Board of Canada re­search, the sup­ply­man­age­ment pol­icy adds up to more than $2-bil­lion an­nu­ally, with the costs be­ing dis­pro­por­tion­ately borne by lower-in­come house­holds.

Although pro­duc­ers ben­e­fit from this ar­range­ment in terms of pro­vid­ing sta­ble in­comes, sup­ply man­age­ment cuts them off from global mar­kets. Be­cause the World Trade Or­ga­ni­za­tion con­sid­ers sup­ply man­age­ment to be a sub­sidy, mar­ket ac­cess for Cana­dian pro­duc­ers is very limited. The end re­sult is that Cana­dian dairy pro­duc­ers have not been able to ben­e­fit from surg­ing global de­mand for dairy prod­ucts. Global ex­ports of dairy prod­ucts to­talled US$61-bil­lion last year, with Canada ac­count­ing for less than 1 per cent of the to­tal.

With the ne­go­ti­a­tions for the USMCA now con­cluded, Canada has over­looked yet an­other op­por­tu­nity to make sig­nif­i­cant changes to its sup­ply-man­age­ment sys­tem. We con­tinue to ex­pend con­sid­er­able po­lit­i­cal cap­i­tal on the world stage to pro­tect an in­equitable sys­tem that ben­e­fits a few at sig­nif­i­cant cost to mil­lions of Cana­dian house­holds. It begs the ques­tion: What did we give up dur­ing the USMCA ne­go­ti­a­tions to main­tain the sta­tus quo in dairy?

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