First softwood. Now milk. In the wake of a looming re-negotiation of NAFTA, the U.S. administration is now targeting Canada’s dairy industry.
Specifically, it doesn’t like a recent change to a Canadian domestic pricing policy—an agreement between producers and processors—concerning ultra-filtered milk, a high-protein milk formally known as Class 7.
Understanding Class 7
Mainly used in cheese, ultra-filtered milk is not covered under NAFTA, nor is it subject to high tariffs on imported dairy products, because it is classified as a protein and was developed after the agreement came into force in 1994.
The new classification system, introduced in early 2017, prices the protein-rich milk at “world prices” which has caused concerns for the U.S., who believe that the new pricing strategy contravenes Canada’s international trade obligations.
In April, New York Senators Kirsten Gillibrand and Chuck Schumer, along with Wisconsin Senator Tammy Baldwin, co-authored a letter asking the Trump administration to take action.
U.S. takes action
“Dairy farmers should not have their businesses ruined and lives upended as a result of this unfair trade practice,” the letter states. “Canada must be clearly and swiftly reminded in a concrete way that dependable trading conditions between our two countries are critically important as well.”
The issue received international attention when in the same month, Wisconsin-based Grassland Dairy Products notified 75 U.S. dairy farmers that they wouldn’t buy their milk products any longer.
This prompted U.S. President Donald Trump, in a speech in Wisconsin, to say that he was going to stand up for American dairy farmers.
“In Canada, some very unfair things have happened to our dairy farmers,” the U.S. President told a Wisconsin crowd in April. “What’s happened to you is very unfair. It’s another typical one-sided deal against the U.S. and it’s not going to be happening for long.”
A week later, the president tweeted, “Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!”
According to the Dairy Farmers of Canada, blaming Canada for the situation south of the border is in a word, wrong.
“At the root of the American dairy sector’s argument is the recent implementation of a new class of milk (Class 7) in Canada,” Isabelle Bouchard, DFC Director of Communications and Government Relations declared in an April 7 blog post. “Despite what has been said by the American dairy sector, Class 7 is a domestic policy, the sole purpose of which is to allow the Canadian dairy sector to be able to respond to a changing Canadian market environment. To be clear: the implementation of Class 7 does not block imports, or restrict American access to the Canadian market—Canadian businesses are still free to choose their own suppliers, just like American companies do.”
Dairy, NAFTA and supply management
“Let’s not pretend that we’re in a global free market when it comes to agriculture,” Prime Minister Justin Trudeau told Bloomberg News Editor In Chief John Micklethwait during a question and answer session in Toronto in April. “Every country protects for good reason its agricultural industries. We have a supply management system that works very well here in Canada. The Americans and other countries choose to subsidize to the tunes of hundreds of millions of dollars, if not billions of dollars, their agriculture industries, including their dairy.”
Supply management, a uniquely Canadian system introduced in the 1970s, is a way for farmers—more specifically, those who produce milk, chickens and eggs—to control, through a marketing system, the supply or quantity of their commercial products. In order to market their products, producers must hold a permit, commonly known as a quota, without which they would not be able to sell their products to a processing plant. Tariff rates on imports vary between 200 to 300 per cent.
Every country protects for good reason its agricultural industries. We have a supply management system that works very well here in Canada. The Americans and other countries choose to subsidize to the tunes of hundreds of millions of dollars, if not billions of dollars, their agriculture industries, including their dairy.
By contrast, the United States protects its agricultural industry through subsidies, which total approximately $4 billion each year.
It’s this structural difference in terms of dairy that has been an ongoing trade irritant between Canada and the U.S., says Canadian /American Trade Lawyer Mark Warner.
“Dairy has been a major complaint of every American administration and, frankly, all of our trading partners since before I was in law school,” Warner says. “In order to maintain supply management, there’s a cost to us, not just what we pay out of the treasury, but a cost diplomatically in our trade agreements.”
Dairy has been a major complaint of every American administration and, frankly, all of our trading partners since before I was in law school.
Bilateral trade stats
In terms of bilateral trade, according to the Canadian Dairy Commission and Canadian government statistics, Canada imported a total of almost $971 million in dairy products, and ran a total dairy trade deficit of almost $735 million in 2016. Two-thirds of Canada’s imports were from U.S. ($557 million), and the U.S. enjoyed a net trade surplus with Canada of almost half a billion dollars ($445 million).
But the bigger cost is being targeted by the U.S. in terms of NAFTA. In mid-June, the U.S. dairy industry submitted its “wish list” of demands for upcoming renegotiations, singling out a reversal of Canada’s recent move around Class 7 ultra-filtered milk, in addition to more access to the Canadian market than the 3.25 per cent that was agreed to in the original Trans-Pacific Partnership (TPP) trade deal.
“We see NAFTA modernization discussions as the last opportunity to address just that type of unfinished business in order to truly open up the North American market,” states the joint, 15-page letter, authored by the National Milk Producers Federation and the U.S. Dairy Export Council.
These demands will form the basis for negotiations for NAFTA negotiations, expected to start in August.
The U.S. lobby took its cause one step further in late June, creating a coalition of 10 international dairy organizations that called upon respective trade ministries to “pursue all avenues available to challenge these measures (specifically its Class 7 pricing policy) including WTO dispute and bilateral trade agreement relationships.”
Members of the coalition include three U.S.-based dairy organizations, in addition to the Australian Dairy Industry Council, European Dairy Association, European Whey Products Association, European Association of Dairy Trade, Dairy Companies of New Zealand, Mexican National Chamber of Industrial Milk and the Centre of the Argentine Dairy Processing Industry.
Canada will defend Canadian dairy industry
Federal Agricultural Minister Lawrence Macaulay said Canada will defend the interests of the Canadian dairy industry during a June 21 conference call with journalists after a trilateral meeting with his American and Mexican counterparts in Savannah, Georgia.
“We’re the government that put supply management in place and we’re the government that’s going to defend it,” he said.
Warner says that heading into the NAFTA negotiations, the U.S. point of view is that they accepted “half a loaf” from Canada on dairy during TPP negotiations.
We’re the government that put supply management in place and we’re the government that’s going to defend it.
“The Canadian position is that we gave up our first born in TPP and the Americans are saying that we got away with bloody murder because the clock was ticking for Obama to get a deal done,” he says. “Ultimately in trade negotiations, it comes down to what you are willing to put on the table. My feeling is that before NAFTA renegotiations are over, we will have to see some more concessions in supply management like what was done in TPP at the end of the day.”
Part 1 of 3 in series
Renegotiating NAFTA: The players, the process, and the playbook