Given how puny the dairy industry is in the grander scheme of Canada-U.S. trade, the tempest-in-a-milk-jug over Canada’s dairy tariffs defies economic logic. Frankly, the political logic is messed up, too – on both sides of the border.
Suddenly, Canada’s system of quotas and tariffs on imports of U.S. dairy products has become the biggest public target of President Donald Trump’s hostility over the Canada-U.S. trade relationship. It is, by Mr. Trump’s own account, the reason he has slapped tariffs on Canadian steel and aluminum ($16-billion in exports to the United States last year). He keeps bringing it up while rattling his sabre about possible tariffs on the Canadian auto sector (more than $80-billion).
Indeed, based on the President’s level of vitriol, dairy now looms as a major obstacle to reaching a deal on a renegotiated NAFTA. The North American free-trade agreement defining a $900-billion-a-year trade partnership hangs in the balance.
And what portion of that is dairy trade? About $500-million. That’s million, with an M. Less than one-10th of 1 per cent of Canada-U.S. two-way trade.
Yes, obviously, it could be a lot bigger. Both are undeniably protectionist in their dairy industries, providing subsidies to farmers and restricting market access. Arguably, dairy farmers in both countries could benefit substantially from a NAFTA deal that loosens the border, even if only partly.
Still, it defies economic logic that this could become a pivotal issue in one of the world’s biggest trade relationships. Surely this shouldn’t be what we’re talking about, at this stage in the NAFTA negotiations, and in the current environment where big trade files such as autos and steel and aluminum and lumber are in dispute.
Yet, the political capital at play in the dairy dispute, on both sides, far outweighs the near-inconsequential economics involved.
For Mr. Trump, the dairy industry is large in states such as Wisconsin and Pennsylvania – states the President won by the thinnest of margins in the 2016 election, thanks to substantial support in rural areas. The President owes his victory in no small part to those swing states, and he can ill afford to lose their support.
But let’s remember just how small the dairy vote really is. In the United States, there are about 40,000 dairy farms, the vast majority of which are family-owned. Even when you include spouses and other adult family members, this is a remarkably tiny constituency of voters the President is loudly defending in international trade talks.
Is Mr. Trump really willing to lob a tariff grenade into, say, the auto sector – the most deeply integrated industry on the continent – for the sake of securing a minuscule victory that will play well to a modest segment of his party’s rural support base?
The answer, given the demonstrated unpredictability of this U.S. President, is “quite possibly.”
But what’s perhaps even harder to understand is how the Canadian leadership, the supposedly more rational side in this negotiation, has painted itself into a corner in the name of defending its own dairy constituency, which amounts to just 11,000 dairy farms.
Prime Minister Justin Trudeau promised in his 2015 election campaign to defend the dairy industry's supply-management system in trade negotiations – a system that both protects domestic pricing and restricts foreign competition for Canadian dairy farmers. He and his government have repeated that pledge numerous times since then, including in the past week, as it has come under Mr. Trump’s verbal assault. This despite the smallness of the industry and its role in Canada-U.S. trade, and the clearly protectionist nature of Canada’s existing dairy import rules.
It makes almost as little political and economic sense for Canada to go to the wall on defending its dairy system as it does for the United States to focus its attack on the sector.
Nevertheless, it’s pretty clear that Mr. Trudeau can’t back down on this issue now; to do so would be a public capitulation to Mr. Trump’s bully tactics. That would deal the Prime Minister a much bigger political blow than can be measured by the size of the dairy vote.
It’s hard to see now how Canada could ever accept a loosening of cross-border dairy trade barriers as part of a new NAFTA. Mr. Trump has made that a political non-starter by taking his frustrations public.
Maybe, if cooler heads prevail, there’s room for the two sides to agree to future bilateral talks on dairy, outside of a formal NAFTA pact. It is, after all, a reasonable goal for both countries to seek to expand markets for their dairy industries.
But before that can happen, the rhetoric has to come down to earth. The significance of the dairy file has to return to some sense of proportion.