Decades-long trade tensions over America’s access to Canada’s dairy market are getting hashed out in the final rounds of the NAFTA talks. To clinch a deal, U.S. officials are demanding that Canada make major concessions.
President Donald Trump for months has criticized Canada’s system of controlling its milk supply as “not fair” and a “disgrace.” Last week, he again threatened to impose auto tariffs on Canada and leave the country out of a tentative deal with Mexico if it doesn’t accept more favorable terms for U.S. milk products. While Prime Minister Justin Trudeau has indicated some willingness to be flexible, he has staunchly defended Canada’s system.
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“I have no doubt that the Trump administration is serious,” said Craig Thorn, partner at DTB Associates, a Washington-based consulting firm specializing in trade and agriculture. “They have been so adamant that it would be hard for them to back down. But the Trump administration is asking for a lot, and not offering many attractive concessions in return.”
Both Trump and Trudeau have strong political motivations to stand firm on the dairy issue.
Trudeau’s Liberal party wants to maintain its allies in Ontario and Quebec where the powerful dairy industry is concentrated. Complicating matters politically, Quebec is close to a provincial election and its politicians are on the campaign stump cranking up the rhetoric against any hint of compromise by Trudeau.
The Trump administration, looking ahead to the November midterm elections, wants to bolster support among farmers and workers in the hard-hit dairy sector struggling with a global milk glut and depressed prices.
“This issue is incredibly politically sensitive in Canada,” said Darci Vetter, the former USTR chief agricultural negotiator during the Obama administration. Vetter, now Edelman’s general manager of public affairs, added that the dairy industry’s political significance in Canada outweighs its economic importance, which some would say also applies to certain products in America’s agricultural sector.
Canada’s $17 billion dairy industry operates under a so-called supply management system that limits production, restricts imports and sets floor prices — similar to American sugar policy. U.S. trade negotiators want Canada to expand import quotas that currently permit only a small amount of dairy products to enter the country tariff-free.
Any shipments above the set thresholds are hit with taxes of upward of 314 percent. Those controls have become the perfect talking point for Trump, who has seized on the tariffs as a punching bag in tweets and public comments. The U.S. also maintains import quotas for dairy products but imposes much lower tariffs on goods exceeding those limits.
The loudest complaints by the Trump administration, however, have been over Canada’s policy for a protein-rich milk ingredient used to make cheese and yogurt.
Agriculture Secretary Sonny Perdue and the U.S. dairy industry contend that when Canada increased milk production to meet consumer demand for butterfat, it resulted in a glut of the byproducts of the process. U.S. officials say that the pricing policy for so-called Class 7 milk — which was created in Canada in early 2017 — effectively dried up demand for U.S. milk protein and encouraged Canada to dump its excess on the world market in violation of international trade rules.
“Class 7 has got to go,” Perdue said during a recent interview on C-SPAN. “It can’t be renamed something. It can’t be called something else. If they want to manage supply, we’re simply saying manage it for your dairy industry and let’s be done with it.”
Trudeau maintains that the new classification and the nation’s milk pricing program abides by Canada’s obligations under the World Trade Organization and is a domestic policy that works for processors and dairy farmers.
Canada-U.S. trade lawyer Dan Ujczo said the issues around Class 7 involve highly technical, complex questions about how a country gathers data to make classification decisions. He says it would be difficult to resolve all these issues in a few days. Yet he believes a deal is still possible, even likely, by this week.
“The U.S. is driving a hard bargain on dairy,” he said. “The Americans are pushing for detailed data on how Canada makes its classification decisions.”
He said a likely deal would entail Canada opening its market by a few percentage points — leaving neither the status quo nor full liberalization — but middle-of-the-road access that doesn’t produce a huge political win for either country.
Another trade adviser and former U.S. negotiator told POLITICO that the Trump administration’s tough talk may be a way to gain leverage.
“I think this started out the way a lot of Trump administration policies do: with a tweet,” said the former negotiator, who requested anonymity to discuss confidential talks. “Trump was looking for a cudgel, and I think focusing on dairy in part has been a negotiating tactic. It’s a way of putting Canada on its back foot.”
Canada has been willing to budge on dairy in other trade pacts. It expanded import quotas for cheese in a recent trade deal with the European Union. In the Trans-Pacific Partnership — which Trump pulled out of shortly after taking office — Canada allowed access to an additional 3.25 percent of its dairy market. (In the TPP agreement negotiated by the Obama administration, the U.S. in exchange agreed to new access to its sugar market).
Canadian dairy farmers say they have offered enough concessions in those trade agreements, so giving additional market share to the U.S. would undercut their supply management system that shields them from the boom and bust cycles plaguing their American counterparts.
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“We’ve taken those hits for team Canada, and we are determined that there be no further concessions on dairy,” David Wiens, vice president of the Dairy Farmers of Canada, told the National Post of Toronto last week. “We have hit a wall on this where enough is enough.”
Canadian dairy officials have also argued that American dairy producers are supported by the government through floor prices, insurance subsidies and commodity purchases. Further, the U.S. has a nearly $650 million dairy surplus with Canada, though the U.S. industry contends this figure is much lower because Canada funnels many imports through its re-export programs.
Trade negotiators are pushing to wrap up a three-way NAFTA deal by the end of the month to hew to a timeline and submit an agreement to Congress that can be signed by all three countries before Nov. 30. Sticking points beyond the dairy sector remain, including systems for settling trade disputes and Canada’s cultural exemptions that block American companies from purchasing its cultural institutions like publishers and television stations.
Chris Sands, director of the Center for Canadian Studies at Johns Hopkins University, said in a statement to POLITICO that Canada may allow additional quota space for U.S. dairy imports similar to agreements with the EU and TPP members.
Trudeau’s government may have to compensate dairy farmers for losses as a result, as it did after the trade deal with the EU. That could be painful because the country is in fiscal deficit, Sands said. Still, it would keep its longstanding supply management system intact.
The U.S. and Canada also could take dairy off the table entirely and negotiate it outside of the NAFTA talks, as the two countries have done with softwood lumber, Sands added.
“My suspicion is the Trump administration would like use this leverage [on dairy] to force a deal, but I’m not sure it’s worth it for either country to let it blow up the entire deal,” Sands said.