In trade war with Trump, Canada should stop defending the indefensible on dairy products

Donald Trump is a bare-knuckled, sharp-elbowed negotiator who instinctively goes for his opponent’s weakness. In Canada’s case, this weakness is our hypocritical and self-defeating defence of supply management, particularly in the dairy sector.

When Trump ignores Canada’s long-standing partnership with the United States but brings world attention to the nearly 300 per cent tariffs imposed on foreign dairy products, we know we have a problem.

For years Canada’s trade negotiators have had to enter discussions with a millstone around their necks. While seeking market opening opportunities for Canadian exports, they had to block any access to Canada’s supply-managed sectors (dairy, chicken and eggs).

While all three forms of supply management are economically and socially indefensible, it is the dairy industry that has attracted the most attention and presents the greatest degree of market distortion.

Supply management controls production by assigning quotas to specific products and allocating them to individual producers. If a producer has not acquired a quota, it cannot sell the product on the Canadian market.

High external tariffs are required to keep out competing foreign products that might undercut the artificial “made in Canada” price that domestic consumers have to pay.

The limits on production, and the cost of quota, keep prices artificially high — to the benefit of authorized producers and at the cost of everyone else. The system was introduced in the 1970s as a way of avoiding sudden price fluctuations, but this form of legalized cartels has outlived its usefulness and has been abandoned by most other countries.

Imposes costs

Repeated studies have shown supply management imposes considerable costs on the Canadian economy and, in particular, on Canadian consumers.

As a result of this system, each Canadian family is estimated to subsidize some 9,000 millionaire dairy farmers (and other supply-managed sectors) to the tune of $450 annually. This is a regressive tax on lower income Canadians.

A new study recently published by the University of Calgary titled NAFTA Negotiations: An Opportunity for Canadian Dairy? has convincingly argued that freeing the Canadian dairy industry from the shackles of supply management would introduce greater innovation and competitiveness into the sector and lead to significant economic benefits for both consumers and the industry, increasing consumption of dairy products and expanding production including exports.

Instead, the industry prefers to stay in the highly protected “walled garden” in which it has resided for the past 40 years.

Considerable influence

The power and influence of the dairy lobby on the Canadian political system should not be underestimated. Andrew Scheer may well smirk as he downs a carton of milk, tacitly acknowledging the role of the dairy lobby in defeating his main opponent for the leadership of the Conservative Party, Maxime Bernier.

Bernier is the only major political leader in Canada with the courage to take on this powerful interest group. None of the other leaders or parties are prepared to take the necessary decisions to bring this sector of the economy into the 21st century, requiring it to compete globally as do all the other industries, including such agri-food sectors as grains, pork and beef.

While the damage that supply management does to the broader economy and to the dairy industry itself is well documented (it is basically barred from developing export markets because of the closed Canadian market), what is becoming increasingly obvious is the damage that it is causing to overall Canadian trade interests by requiring our negotiators to defend the indefensible.

In having to fend off U.S. demands for access to the Canadian dairy market, our negotiators are foregoing other opportunities to deal with access barriers to the U.S. market.

A bee in Trump’s bonnet

Donald Trump may not be a details man, but when he latches on to a simple concept, he is like a dog with a bone. Wisconsin’s politically connected dairy farmers have got the message through to the White House that Canada imposes “unfair” barriers to the export of U.S. dairy products. No amount of recalling past warm friendships or shared economic interests is going to dislodge that particular bee in his bonnet.

If we are unlucky enough to retain full-fledged supply management in NAFTA, we will have to pay dearly, and other sectors will suffer. Already, we have conceded some market opening in dairy in the Canada-EU Agreement and the Comprehensive and Progressive Trans-Pacific Partnership, much to the very vocal chagrin of the dairy lobby, and it is time to use the leverage of opening our dairy market to obtain other concessions from the Americans.

In outlining the drawbacks of defending supply management in Canada, I am not blind to the fact that the U.S. likewise does not have “clean hands” in a number of agricultural sectors, including dairy, although its support systems are not as draconian as supply management.

Those U.S. barriers are a legitimate subject for negotiation, but as long as we insist on stonewalling and missing every possible opportunity to reform own supply management system, we cannot attack the barriers that limit our own exports.

The next time the dairy farmers drag their cows on to Parliament Hill, they should be ignored and taken for what they are — a self-interested lobby that is holding the Canadian consumer and the rest of the Canadian economy to ransom.