How to out-Trump Trump in dairy negotiations

Tirtha Dhar is associate professor and chair, Department of Marketing and Consumer Studies, College of Business and Economics, University of Guelph.

It is time to out-disrupt the disrupter and be more Trumpian than Donald Trump.

The U.S. President has been complaining about high tariffs on dairy products and the inaccessibility of Canada’s market for U.S. dairy producers. Our opening position should be to propose a fully competitive market without any tariff and government regulations (i.e. remove supply management in Canada). This may seem like an impractical starting point, but this position would change the underlying narratives within the United States and, more importantly, among Mr. Trump’s supporters. Here’s why:

The global dairy industry is highly regulated. In almost all cases, these regulations evolved long before global trade liberalization, which started with the Uruguay round of trade negotiations in the late 1980s. Regulations are mainly driven by unique supply and demand relationships, rather than by the desire to protect domestic markets. In the dairy industry, supply takes a long time to respond to changes in demand. If left to market forces, milk markets tended to fluctuate between gluts or shortages. As a result, governments across the world have been using regulations to steady the supply of milk for consumers. Both Canadian and U.S. dairy markets are highly regulated – albeit using very different tools.

In Canada, we use supply management, while the United States uses an administered price set by the U.S. Department of Agriculture – Federal Milk Marketing Orders (FMMOs). FMMOs set the price of fluid milk after considering regional cost differences. The entire FMMO system can also be thought of as a type of cartel. By establishing the relationship between minimum prices across regions, the FMMO system creates a certain distribution of producer benefits across regions. These administered regional pricing differences help the United States maintain viable dairy farming across the country. To manage excess demand or supply in the U.S. market, the government also intervenes through subsidized production insurance and purchases of dairy products. Canada, under supply management, regulates both prices and the volumes to be produced.

Now, if we insist on removing all government regulations as a bargaining position, then certainly Canadian dairy farmers will be adversely affected – but so too would U.S. dairy farmers. Milk production in the United States would move from high-cost states to low-cost states in the south and west of the country. Wisconsin dairy farmers certainly do not like tariff and non-tariff barriers imposed at Canada’s border, but they would hate the idea of losing the protection of FMMOs.

Globally, the U.S. dairy sector is not as competitive as the Trump administration would have us believe. Currently, both countries allow for dairy product imports up to predetermined amounts under low-tariff quotas (TRQs). Anything above the quota limits faces prohibitive tariffs. As such, both economies have significant trade barriers to foreign dairy products. So, a proposal to abolish tariffs will hurt both sides and change the political support among dairy farmers for the U.S. proposal. In fact, if we add the remaining Group of Seven countries, European Union dairy farmers will be the key beneficiaries under dairy trade liberalization. Reciprocity in tariffs and removal of trade barriers may not be as beneficial as Mr. Trump thinks − and, in many cases, will adversely affect the President’s voter base.

It is possible that a counter argument from the U.S. side would be that Canada should dismantle its supply-management system and adopt the U.S.’s seemingly market-driven administered-pricing system. But we can also suggest the U.S. dairy sector will do better with a supply-managed system. Given current hardships and gluts in the market, it is likely Wisconsin dairy farmers, for example, would overwhelmingly support such a move.

It is difficult to predict exactly where we will end up, but being aggressive with our initial negotiating position will challenge the current Trump narrative that the U.S. dairy industry is an open and competitive sector. In his view, allies such as Canada take advantage of this openness and dump products to hurt U.S. dairy farmers. And at the same time, we put up trade barriers to deny access to our market. Most U.S. farmers almost certainly prefer more government regulation going beyond FMMOs. On the other hand, our highly inefficient supply-management system needs to change, otherwise the dairy sector will always be the weakest link in our future trade negotiations.

If both sides can harmonize regulations then we can in fact create an environment for what Mr. Trump trumpets as “fair trade”. On both sides of the border, dairy sectors need optimum regulations, and not complete and unconditional dismantling of regulations.