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Abandoning the dairy supply-management system would create more problems than solutions

Economist Armine Yalnizyan is Atkinson Fellow on the Future of Workers. You can follow her on Twitter @ArmineYalnizyan.

When U.S. President Donald Trump peers into the box that is Canada-U.S. trade, he claims to see all sorts of disturbing sights: auto parts that pose national security threats, tariffs higher than one of his hotels, even scuffed and apparently smuggled footwear. As he’s tried to game out a trade-deal “win” for Americans, Mr. Trump has turned Canada’s dairy supply-management system into a massive deal-breaker.

Plenty of Canadians agree that we should abandon dairy supply management. Economists have been most unified against it, emphasizing that costs are higher than they need to be in a pure market system and underscoring how it hits the poorest households hardest.

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But there are three critical, but rarely discussed, reasons why full liberalization will create more problems than solutions:

  • It doesn’t guarantee lower prices, based on New Zealand and Australia’s experiences;
  • It guarantees fewer Canadian dairy farmers, and more reliance on American ones;
  • It ignores how the United States subsidizes its dairy industry.

Let’s start with the facts: Americans export close to 150 million kilos of dairy products into Canada, worth $471-million.

Problem is, there is a supply glut in the United States, particularly in Wisconsin, where Mr. Trump narrowly won in 2016. Wisconsin produces as much milk as the whole dairy industry in Canada. Excess U.S. capacity surged when dairy exports to Canada fell in 2017. Last year, the U.S. dairy industry dumped 100 million gallons of milk it couldn’t sell. Milk prices have fallen in each of the past four years. The only way for the United States to reduce waste and boost sales is to increase exports.

Canada’s system is designed to insure Canadian production meets Canadian demand. If American dairy farmers are to export more here, our system has to go. So Mr. Trump raised the heat by claiming Canada slaps a 270 per cent tariff on U.S. dairy products. Do we?

Imports of milk sold above a fixed import quota pay a 241 per cent tariff. But the rate only kicks in after American exporters exceed caps, which vary by product. Canadians import more than three times as much dairy from the United States ($471-million worth in 2017) as we export to them ($150-million in 2017). Most U.S. imports face low or no tariffs. The steep rates are meant to prevent American product from being dumped in our markets and driving out our own producers.

If we dropped all tariffs, would prices paid by Canadians fall? Ask New Zealanders. Their government abandoned supply management in the 1980s. New Zealand has become a dairy-export juggernaut. But New Zealand’s average retail dairy prices are higher than Canada’s. In Australia, which also deregulated, farmgate prices for milk have been falling for years, but consumer prices have not. Indeed, consumer milk prices rose steadily from 1980 to 2009.

Put simply, deregulation offers no guarantee that consumers pay less.

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What is guaranteed: Deregulation would change who supplies our milk. Expect more big dairy farms and fewer smaller ones. Eliminating supply management may encourage a handful of new “artisanal” dairy farms, but the trend toward bigger scale will accelerate. New Zealand now has 30 per cent fewer dairy farms than Canada, but five times the number of dairy cattle. As in New Zealand and Australia, corporate concentration is rising in the United States because of price deflation.

Farmers struggle with price and cost volatility. The U.S. government provides billions in aid to farmers every year. Trump’s 2018 budget added US$1-billion in subsidies to dairy farmers despite introducing US$49-billion in cuts to other farm subsidies. In the United States, dairy is in trouble.

Why should Canada end a system that, unlike the United States, does not encourage overproduction and price deflation? We use quotas to try to match supply to demand so we don’t wildly over- or under-produce. That stabilizes prices for dairy farmers, which stabilizes the number of suppliers. That’s the raison d’être for supply management: ensure domestic supply of a basic food, because access to foreign supply is subject to changeable trade rules, as we’re now witnessing.

In New Zealand (because of geography) and the United States (because of scale), consumers don’t question where their milk comes from. It’s produced at home. But 90 per cent of Canada’s population lives within 100 km of the U.S. border. Food sovereignty is an issue here.

If more milk comes from large-scale American producers, average Canadian prices still may not fall. Fewer local dairies and higher transportation costs could further jack up prices for small and northern communities, which already pay higher prices for milk.

Permitting larger milk exports from the United States to Canada would also raise questions about product quality. U.S. dairy farms have bigger herds pumped with bovine growth hormones (BGH), which helps produce more milk at a lower cost. The effects of ingesting BGH are unclear, but Europe banned milk imports from the United States because of its use. Canada didn’t ban it, but Health Canada didn’t approve it either. But more U.S. imports means we’d get more BGH through the back door.

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Economists say ending supply management is good public policy because it helps the poor. But, based on the evidence, that argument is more definitive in theory than practice. Empirically, supply management neither seems outdated nor defies economic logic. Canadians would be unlikely to see meaningfully lower prices, but we would become more dependent on the United States. And that could be the beginning, not the end, of our trade woes.

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