TPP and Canada: Wishful Thinking on Supply Management?

One of the many goals of multilateral trade agreements is to level the field so that companies, industries, and countries compete on the basis of market forces. This requires all participants to be willing to open their markets in protected sectors in exchange for better access to the markets of their trade partners. In order to get the benefits sought, each party to the negotiation has to give up something.

As Canada wraps up its Comprehensive Economic and Trade Agreement (CETA) with the EU, it remains deeply involved in another very ambitious multilateral negotiation: the Trans Pacific Partnership (TPP). Canada became an observer to the TPP negotiations in 2010, but did not become a full member until 2012 because New Zealand, one of the founders of the TPP negotiations, and the United States held up Canada’s request due to concerns about Canada’s supply management of dairy, poultry, and eggs, as well as the longstanding U.S. complaint about Canada’s lack of protection for intellectual property rights.

So when Canada and Mexico announced they would like to join the TPP negotiations, trade observers asked out loud if Canada would be willing to disband its supply management. Accession to the negotiations meant accepting the rules at the time of accession, and New Zealand, having liberalized its dairy industry over the last decade or so, was not about to give Canada a pass on supply management.

Unfortunately, although the Harper government dismantled the Canadian Wheat Board in 2012, there appears to be no movement to abandon supply management of dairy, poultry and eggs, which seems the only way Canada can sign on to a final TPP deal. A group of 140 Democratic and Republican Members of Congress wrote last month to President Obama, lumping Japan and Canada together regarding agricultural tariffs, saying that they were “troubled by Canada’s lack of ambition, which is threatening a robust outcome for U.S. farmers.”

Dairy prices in Canada are set by a national dairy commission, with a target price range based on costs of inputs, market conditions, and a “fair return” to the producer; it has nothing to do with general market conditions or how much the consumer is willing to pay. Canada, like the United States, varies the price of milk depending on its ultimate use— whether it is sold in liquid form for more immediate use (which nets a higher price) or if it is destined to long-term milk powder, whose lower price is more affected by world markets. Tariffs are particularly high on imported dairy products beyond very small import quotas.

Dairy productivity in Canada is low relative to the United States, Australia, and New Zealand. The number of dairy farms has decreased and the consumption of dairy products in Canada is now 18 percent less than it was 20 years ago. Although cheese production is increasing by 6 to 7 percent a year (mostly artisanal cheeses), Canada essentially exports no milk products; the price of raw milk in Canada is so much higher than international milk prices that it is completely uncompetitive on the world market.

Canada has free trade agreements with 10 countries in force and is negotiating or finalizing a dozen more, including the huge agreement with the EU, because its economy is dependent on trade. However, Canada’s supply management in dairy, poultry, and eggs makes it difficult to fully engage in proposed free trade agreements. It’s not only about the dairy industry; it’s about creating access to other industries as well.

Trade scholars, think tanks, and the OECD (which has said that supply management costs Canadians $2.4 billion per year) all oppose supply management. Consumer groups, food processors, and the restaurant industry have all decried the system since it raises costs (causing some pizza shops to smuggle in mozzarella cheese from the United States) and holds back potential trade to other industries.

Because of loud protests from the dairy industries, the difficulties of untangling federal and provincial jurisdictions, and fears of electoral losses, politicians have kept silent on the issue. They should be more courageous: analysts of supply management have acknowledged that getting rid of the system, particularly as Australia recently did, may not be as big a political problem as it might first appear.

While the supply management system does not cost the government a dime, it’s hard on consumers—and the economy would benefit from increased trade. Canada’s wine industry lost protection after the Canada-U.S. Free Trade Agreement, and in spite of fears that Canada could never compete, its wine industry has become much more productive and export-oriented, benefiting vintners, farmers, importers, and consumers.

A successful TPP would open growing Asian markets to Canadian dairy. Saputo, the largest dairy processor in Canada, is making its capital investments abroad—and not in Canada; it has used its cash to purchase operations in Australia, Argentina, and the United States. It can—and does—compete internationally when it can have access to milk at international, not artificially high, prices.

The U.S. system is by no means perfect and its dairy industry has sought market protection. Although parts of the U.S. milk industry have looked at Canada’s supply management system as an option for the United States, Congress has refused, and passed the Agricultural Act of 2014 to remove U.S. price supports and export subsidies, which had largely become irrelevant. There remain some forms of protection, but U.S. dairy farming is becoming more efficient.

The Asia-Pacific region accounts for roughly 40 per cent of the world’s population and near 50 per cent of world GDP, and the region is increasing its imports of dairy products. Canada stands to benefit from the Trans Pacific Partnership and to gain new export access for its industries, which is critical for innovation in a country so dependent on trade.

Carleton University professor Ian Lee has said that Europe represents Canada’s past, the United States represents Canada’s present, but Asia represents Canada’s future. Let’s hope that Canada can pull itself out of the supply management dilemma and move forward.

 David Biette is director of the Canada Institute at the Wilson Center. He was previously executive director of the Association for Canadian Studies in the United States, and a political-economic officer at the Canadian Consulate General in New York City.  He has degrees from the Johns Hopkins School of Advanced International Studies and Bowdoin College.