NAFTA Renegotiations: An opportunity for Canadian Dairy?
Creators: name: Beaulieu, Eugene
name: Venkatachalam, Ven Balaji
name: Rasmussen, Philip
Publisher: name: The School of Public Policy Publications
Year: 2018

description: Canadian dairy producers have been protected domestically through supply management and internationally through import restricting border controls for over forty years. This combination of domestic and foreign policies keeps Canadian dairy prices artificially high, and allows producers to profit from the market while hitting dairy consumers in the pocket book. These policies are extremely costly for Canadian consumers and benefit a declining number of protected dairy producers. Canadian international trade policies result in 200 per cent tariffs on imports of many dairy products and almost 300 per cent tariffs on over quota imports of cheese. The OECD estimates that from 2010 to 2014, the Canadian trade policy with respect to dairy and the ‘Supply Management System’ annually transfers USD 2.5 billion from Canadian consumers and taxpayers to milk producers. This is an extremely high price to pay for dairy products and it is understandable why our trade partners have focused on these exorbitant tariffs. We argue that it is not only consumers that are hurt by the status quo, but that the industry itself can benefit from increased competition as we have witnessed in other sectors facing increased competition through liberalized trade. Moreover, we argue that the massive economic rents earned by dairy producers in the essentially closed Canadian dairy sector means there is little competition in the industry, which has stifled growth and innovation in the sector.

It has also become clear that our trading partners have become impatient with our protectionist trade policies with respect to dairy, and multinational organizations such as the WTO have highlighted the problems that these policies pose. Eliminating trade restrictions in the supply management sector would go a long way toward appeasing our trade partners and fulfilling our international commitments. Supply management policies are in violation of the spirit and, arguably, the letter of law in international trade agreements. Canada is getting pressure to reform the system from trading partners who are hurt by supply management policies. In the recent Trans-Pacific Partnership (TPP) negotiations, Canada agreed to increase foreign access to its dairy market over a period of time by an estimated 3.25 per cent of its yearly milk production. This was a step in the right direction toward more competition in the sector. However, now that TPP has been rejected by the United States, Canada should continue to push for reform in the dairy sector along the lines agreed to under TPP – but push even harder in the pending renegotiation of North American Free Trade Agreement (NAFTA).

Unfortunately, Canadian politicians of all stripes have found that fixing supply management is a nonstarter politically with the powerful supply management lobby as an effective lobby group. The TPP agreement provided the right opportunity to open the dairy industry. This is obviously good for Canadian consumers, but will hurt some Canadian dairy producers. The negative impact on the politically sensitive dairy producers, primarily in southern Ontario and Quebec, has left the untenable level of protection in the industry untouched for decades.

We argue that although some dairy producers will be hurt by opening the sector, the industry overall will thrive and become globally competitive. As demonstrated in the empirical literature of trade reform, and as we have observed in other Canadian industries that liberalized under the Canada-US Trade Agreement (CUSTA) and the NAFTA, inefficient producers will close shop, but more productive producers will expand and prosper. Although it is possible that TPP will be revived with the 11 signatory countries, excluding the United States, this is far from a likely outcome. However, renegotiating NAFTA is very much in play, and we see that the dairy trade liberalisation that Canada agreed to under TPP as the beginning, and NAFTA renegotiations as an opportunity for Canada to step up and do the right thing with respect to international trade in dairy.

The prospect of eliminating supply management in Canada has become a daunting political challenge and no political party in Canada has been able to move forward with this agenda even though Canadian consumers would benefit from such a policy change. We made some progress in the TPP agreement and it is possible that the TPP-11 will emerge to a successful conclusion. In addition, renegotiating NAFTA is a tremendous opportunity to reduce trade barriers in the industry and to give the Americans something they want in the negotiations. At the same time, it is an opportunity to weaken supply management and move toward dismantling it altogether.
description: The School of Public Policy Publications, Vol 11 (2018)