Going back to the 1960’s, Canada has employed a protectionist approach for its dairy supply management system, imposing hefty tariffs on any over-quota milk production and foreign imports. For years, Canada maintained tariffs on dairy goods ranging from 241% for liquid milk to 298% for butter.
With its passage, the United States-Mexico-Canada agreement, or USMCA, was lauded, in part, for provisions that alleviated tariffs and opened Canadian dairy markets for American producers. Prior to 2018, American producers exported five times the amount of dairy products as they imported from Canada, or about $792 million annually, a number that looked only to climb with the new deal.
In theory, at least. While the rhetoric is there, Canada has proven less than cooperative with its side of the USMCA agreement, said Mark Stephenson, a dairy market analyst and director of the UW-Madison Dairy Profitability Center. The USMCA, coupled with other Canadian trade agreements with the Trans-Pacific Partnership or the European Union, means dairy producers north of the border are in a state of flux.
“They’re definitely dragging their feet on this,” Stephenson said. “The simple fact is that, without these protectionist policies, many Canadian dairy farmers would be selling at a loss. It isn’t just the new deal with the U.S., Canada has been making new trade agreements with different countries across the globe, so for Canadian farmers, it feels like death by a thousand cuts.”
The main sticking point between Canada and the United States is how Canada has handled its allocation of Tariff Rate Quotes, or TRQs. Under the USMCA, Canada agreed to eliminate TRQs equal to 3.6% of the Canadian dairy market.
“We know this is a sensitive market, but we saw (the USMCA) as a victory,” said Cassandra Kuball, a public policy expert at Michael Torey Associates in Washington, D.C., and Dairy Edge Cooperative.
“When you have a TRQ, it’s complex. You have an allocation — which depends on markets and products — which are allocated at certain times. Watching how they allocate TRQs, targeting only certain products for processors in Canada, that was concerning.”
In practice, Canadian officials have structured their TRQs in a way that favors homegrown Canadian companies. This approach largely permits lower-value products from abroad, while still curbing the import of finished consumer products from the United States. The United States has argued this isn’t in keeping with the USMCA.
In response, the United States has imposed trade sanctions on Canada while the issue is arbitrated. Stephenson noted that dairy is only one part of an enormous USMCA trade agreement, with a host of different industries and different interests at play.
For example, he added, Canada and the United State’s working relationship with a different industry — such as, say, auto parts — could be used as a leverage point in this dispute as the two partners hash it out.
“Trade deals are huge agreements that tie economies and entire industries together. There’s a lot of moving parts, there’s a lot going on,” Stephenson said. “We’ll have to see how it’s resolved. It could be something that they kick back and forth for years, or it could be resolved very quickly. It’s hard to say.”
Kuball noted that dragging other industries into the dairy dispute, or vice-versa, is an escalation everyone involved would like to avoid.
“You don’t want your issue married up to another issue,” Kuball said. “You want it separate. You want your issue dealt with and resolved on its own, but often what happens is trading — trading on threats, trading on resolutions for issues. I don’t think we’re there yet.”
It’s worth noting that increased market share for American companies in Canadian markets does not necessarily benefit American farmers and workers. For example, overproduction and low pricing remains an issue, as Wisconsin alone annually produces more milk than Canadians consume.
Studies by Charles Nicholson, a former Cornell University ag economist now employed by UW-Madison, indicate that the benefits of expansion are minimal, with an increase of only $0.10 cwt per 1% in increased product exports.