Regime Change in Canadian Dairy Policy: A Cautionary Tale

The Issue

2018 is turning out to be a time of tension, and potentially high drama in Canadian trade policy.
There has been a rapid escalation of tensions into what may prove to be a trade war between the US and
Canada (and between the US and others) over the US use of Section 232 tariffs, while Canada is in
negotiations with the US and Mexico on renewal of NAFTA (since July 2017). Consistent with the
Mexican presidential elections and US Congressional mid-term elections, NAFTA renewal negotiations
appear to have fallen back into stock taking and planning. However, this has not impacted the
rhetoric, and the US continues to threaten further escalation under Section 232 tariffs, or otherwise.
While mostly directed at China, further escalation may be seen as a tool through which to leverage
NAFTA renegotiation with Canada.

In this regard, the US has particularly directed its comments at Canadian dairy. US President Trump
has decried 270 percent tariffs he says that Canada charges on dairy imports from the US. More recently,
US Undersecretary for Agricultural Trade Ted McKinney was quoted as saying
“You [Canada]… decided to dump dried milk powder on the world market at half to two-thirds of world
price … Not fair. Not fair”1

This could present the motivation for Canada to accommodate US demands for major changes in
Canadian dairy policy. Reportedly, the US has requested the removal of milk Class 7, along with a
phase out of supply management over 10 years. The Government of Canada has expressed its commitment
to defend supply management; yet, it cannot ignore the high stakes to other segments in the event of an
impasse over Canadian dairy policy. Moreover, the need to placate and constantly defend dairy policy in
foreign relations is an obligation for the federal government; the 11th hour short strokes toward a
renegotiated NAFTA agreement could provide just the crisis that could release the government from this
burden. Concessions to the US on dairy could be seen by some as an opportunity to provide President
Trump with a quick win.

However plausible, this would be naïve. The dichotomy portrayed between a protected dairy
market with a coddled dairy industry versus US free traders south of the border and elsewhere is a false
one, and would leave Canada exposed to competition with others who are anything but free traders. The
real question then is what Canada’s fallback position is if it were to make major concessions that weakened
or somehow eliminated supply management.

The purpose of this policy note is to consider the context and implications of Canada making major
changes in its dairy policy as an element in concluding a new NAFTA agreement.

What the US Wants

Media outlets reported on requests that the US had made of Canada with respect to dairy under NAFTA
renegotiation round in mid-October 2017. The requests made of Canada reported at that time were
the following:

 >Increased transparency regarding the operation of milk supply management
 >Elimination of milk Class 3(d), Class 5, and Class 7
 >US prior agreement to any changes in milk supply management
 >A phase-out of supply management through elimination of supply control/quotas in dairy,
  poultry, and eggs within 10 years
 >Increased dairy market access of 5% per yearleading to open access for the US within 10
  years
 >Apparently more specific US requests regarding Canadian dairy market access, to be
  clarified. One media outlet reported that the US had requested access for 400,000 tonnes of
  fluid milk (vs. 55,000 tonnes agreed to in the original TPP agreement).

These requests from the US should be interpreted with some caution, as they were made prior to the
Senate confirmation of the lead US agricultural trade negotiator; some requests were rejected out of hand
by Canada as unworkable. However, with Greg Doud now confirmed as US lead agricultural trade
negotiator it can be anticipated that the US will now press its demands further, and press for a Canadian
response.