Giv­ing in to Trump’s NAFTA de­mands not good

Sup­ply-man­age­ment bal­ance in dairy in­dus­try im­por­tant to Canada


S U.S. Pres­i­dent Don­ald Trump’s pos­tur­ing on trade is­sues and just about every­thing else reaches new lev­els of hys­te­ria, there’s a grow­ing fear in some cir­cles, and pres­sure in oth­ers, that Canada should just give him what he wants on the sup­ply-man­age­ment file.

The think­ing is, yield­ing on that front might set the tone for con­ces­sions on im­por­tant mat­ters such as au­to­mo­tive parts and dis­pute-set­tle­ment mech­a­nisms. Both have been tar­geted by the U.S. ad­min­is­tra­tion in the on­go­ing North Amer­ica Free Trade Agree­ment (NAFTA) rene­go­ti­a­tion talks.

Af­ter all, the ar­gu­ment goes, it’s a rel­a­tively small price to pay, af­fect­ing only a few well­heeled farm­ers who have had their way at the ex­pense of con­sumers for far too long.

Ex­cept that it’s not.

Aside from the fact that giv­ing in to a bully usu­ally re­sults in more bul­ly­ing rather than less, ca­pit­u­lat­ing on sup­ply man­age­ment would have long-last­ing reper­cus­sions, two economists with the Guelph-based Agri-Food Eco­nomic Sys­tems say in a new anal­y­sis.

“Con­ces­sions to the U.S. on dairy could be seen by some as an op­por­tu­nity to pro­vide Pres­i­dent Trump with a quick win,” Al Mus­sell and Dou­glas Hedley say in a re­search pa­per pub­lished ear­lier this month.

“How­ever plau­si­ble, this would be naive. The di­chotomy por­trayed be­tween a pro­tected dairy mar­ket with a cod­dled dairy in­dus­try ver­sus U.S. free traders south of the bor­der and else­where

Ais a false one, and would leave Canada ex­posed to com­pe­ti­tion with oth­ers who are any­thing but free traders.”

Much of the U.S. at­ten­tion has been fo­cused on the so-called Class 7 in the Cana­dian dairy-man­age­ment sys­tem. This is a spe­cial pool de­signed to mar­ket sur­plus skim milk in such a way that it is com­pet­i­tive with world prices and with im­ported milk in­gre­di­ents that aren’t sub­ject to the tar­iff’s lim­its when en­ter­ing the Cana­dian mar­ket. Un­til Class 7 came along in 2016, less-ex­pen­sive im­ported milk in­gre­di­ents used in pro­cess­ing were pour­ing in from the U.S. while Cana­di­an­pro­duced skim milk was be­ing poured down the drain or fed to live­stock.

Pro­duc­tion quo­tas set for dairy farm­ers are based on but­ter­fat, for which de­mand has grown as con­sumers have rekin­dled their love af­fair with high-fat dairy. That leads to ex­cess skim milk, the bulk of which Canada was pre­vi­ously un­able to ex­port due to trade rules that limit ex­ports of sub­si­dized dairy prod­ucts.

Un­der World Trade Or­ga­ni­za­tion rules, Canada will be en­tirely ex­cluded from the ex­port dairy mar­ket by 2020, ex­cept for prod­ucts such as the skim milk de­liv­ered into the Class 7 pric­ing pool, which isn’t con­sid­ered sub­si­dized.

Mus­sell and Hedley say Class 7 has now be­come a crit­i­cal com­po­nent of the Cana­dian sup­ply-man­age­ment sys­tem for dairy — and there is no go­ing back.

“At cur­rent lev­els of but­ter­fat de­mand, the re­moval of Class 7 would be­gin the process of se­quen­tial but­ter­fat quota re­duc­tions that could lead to col­lapse in the sys­tem.”

Cana­dian ne­go­tia­tors have al­ready pro­vided in­creased ac­cess to the Cana­dian dairy mar­ket un­der a new trade deal with the Euro­pean Union. And with the Trans-Pa­cific Part­ner­ship in place, con­tin­u­ing to erode the sys­tem due to U.S. pres­sure would be ir­re­spon­si­ble, they ar­gue.

“The world dairy mar­kets are some of the most dis­torted mar­kets in agri­cul­tural trade. All of the ma­jor dairy ex­porters have been suf­fer­ing from over pro­duc­tion, with stocks build­ing in the EU (pow­ders, cheese) and the U.S. (cheese),” they write.

“World prices of most dairy prod­ucts have lan­guished at rel­a­tively low lev­els since 2015.”

Ca­pit­u­lat­ing to Trump on dairy would not save NAFTA and it would re­sult in a Cana­dian dairy sys­tem that re­sem­bles the U.S. even more than it does to­day. It would need tax­payer sup­port to sur­vive, which in­creases the spec­tre of trade dis­putes as Cana­dian dairy ex­ports rose.

“With­out tak­ing on vastly greater fis­cal li­a­bil­ity and in­dus­try in­vest­ment losses, Canada has no good al­ter­na­tive to milk sup­ply man­age­ment — and this needs to be clearly un­der­stood,” their anal­y­sis says.

The dis­cus­sion shouldn’t be about sup­ply man­age­ment or not.

“Sup­ply man­age­ment is ro­bust and is ca­pa­ble of sig­nif­i­cant evo­lu­tion, needed to ad­dress the known, sober­ing chal­lenges it al­ready faces.”

Canada’s sup­ply-man­age­ment sys­tem for dairy prod­ucts should not be bartered away in NAFTA talks, ex­perts say.

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