Article: Canadian Dairy Industry and NAFTA

President Trump slammed Canada recently over a trade dispute under the North American Free Trade Agreement (NAFTA) which affects dairy farmers.  He called it a “disgrace” and added that he thinks NAFTA has been “A disaster for our country”.  Trump didn’t support his concerns with any details. 

Canadian Prime Minister Justin Trudeau responded by stating that he plans to be respectful and engage the United States with a fact-based approach to solving problems.  Trudeau also said that: “The way to do that is to make arguments in a respectful fashion, based on facts, and work constructively and collaboratively with our neighbors.”  

Furthermore, Trudeau pushed back against Trump’s comments, saying “dairy is protected for good reason. The U.S. has a $400 million dairy surplus with Canada so it’s not Canada that’s the challenge here,” he also said in an interview with Bloomberg. “Let’s not pretend we’re in a global free market when it comes to agriculture.” 

NAFTA is a trade agreement between Canada, Mexico and the United States that was signed into law in 1994 under President Bill Clinton. The framework of the deal was first drafted under President Ronald Reagan in 1987. NAFTA essentially eliminated almost all tariffs among the three nations, allowing for the seamless flow of goods and supplies across borders. Today, approximately $1.4 billion in goods cross the U.S.-Mexico border every day.  

As the two largest export markets of the US, Canada and Mexico buy more Made-in-America goods and services than any other countries in the world. Since NAFTA’s implementation, U.S. states like Illinois, Ohio, Michigan, and many others have seen a surge in exports across North American borders.  

Here is an overview of Canadian Dairy Industry:

According to Canadian Information Centre, the Canadian dairy sector operates under a supply management system based on planned domestic production, administered pricing and dairy product import controls. The dairy industry ranks third (based on farm cash receipts) in the Canadian agriculture sector following grains and oilseeds and red meats. 

In 2015, imports of dairy products totaled 198,503 tonnes ($899.4 million) and exports reached 82,476 tonnes ($211.1 million). This represented a sluggish in import value and 24.9 percent drop in export value from last year. As illustrated in figure 1 of Canadian dairy trade balance during the last decade, imports of dairy have been consistently higher than exports.

Volumes imported under the Import for Re-Export Program (IREP) increased in 2015 by 12 percent to 29,891 tonnes. Those imports accounted for 17 percent of total dairy imports (in volume). Dairy products imported under the IREP are mainly used to manufacture further processed food products for the export market. 

As illustrated in figures 2 and 3, the majority of Canadian imports of dairy products were from:

  • North America ($474.7 million), the European Union ($226.5 million) and Oceania ($93.3 million), together these regions accounted for 88.4% in value of total imports, a 1.6% drop from 2014. The United States ($474.6 million), New Zealand ($83.6 million), France ($62.3 million), Italy ($56.3 million), and Switzerland ($46.2 million) were the top country suppliers.

Major destinations of Canadian exports include:

  • North America ($114 million), Asia ($36.2 million) and Africa ($24.2 million), together represented almost 82.7 percent in value of total exports. The United States ($104.2 million), Egypt ($20.1 million), China (9.9 million), Mexico ($9.4 million) and Saudi Arabia ($7.3 million) were the top destination countries.

Canada is not a large exporter of dairy products. Canadian milk and dairy production is primarily to meet domestic requirements. Nevertheless, major Canadian dairy exports include cheese, whey products, skim milk powder, yogurt, whole milk powder and milk protein concentrates.  

Here are some facts:

Last year, Canada implemented a policy that created a new class of milk prices for ultra-filtered milk, a liquid, high-protein concentrate sometimes used to make products such as cheese and yogurt. Canada lowered the prices for this milk class, so as to incentivize domestic ultra-filtered milk and better compete with the US-produced imports. 

The American dairy industry did not take kindly to these developments, and argued that the policy violates NAFTA. The Canadian dairy industry has shot back that the milk reclassification policy did not change import rules nor did it impose any import taxes.

Canada’s ambassador to the US in a letter to the governors of New York and Wisconsin explained that:

  • Canada upholds the international trade obligations; and
  • Under the NAFTA, the US has duty-free and quota free access for milk protein substances, including ultra-filtered milk.  This duty free and quota-free access has not changed.

The ambassador also expressed that Canadian regulations are not the cause of the US dairy sector’s losses.  He further noted in his letter that the US-Canada trade balance “massively favours the US” by a five-to-one margin, and that global milk overproduction, not Canadian policies, are the problem. 

Isabella Bouchard, a spokeswoman for Ottawa-based Dairy Farmers of Canada, which represents 12,000 farms, said in an email that:  “No new tariffs have been created that would restrict USA access to the Canadian market. “The problem is not Canada’s dairy system, the problem is that there is too much milk produced in the USA, which is not Canada’s fault.”

Here are the findings of a paper on the subject of “The Canada-US Trade Disputes on Dairy and Poultry: A Good Example”, which reflect the realities:

  • The trade environment between Canada and the United States is changing. The United States is becoming more sensitive to the realities of using dispute settlement mechanisms and the wider perception that the United States cannot control the outcome of such efforts’. Canada is quietly becoming more confident in its role as a food exporter and this brings with it a different approach to trade matters; and
  • Our conclusion is that harmonization of the poultry and dairy industries on a NAFTA basis (Canada, United States, and Mexico) is well underway and will be achieved by market forces rather than by political leadership. Moreover, within North America, Canada can be a consistent exporter of both dairy and poultry products while maintaining a larger share of the Canadian market than most analysts have projected, providing that the necessary adjustment process in the production and processing sectors is given time to be completed. 

However, the real question is: Is it realistic to expect the dispute of this magnitude could possibly be resolved without any political interference? 

25 April 2017 

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