The tentative United States-Mexico-Canada Agreement (USMCA) does not provide full satisfaction to the demands of any of the interested parties. This outcome, however, is a good sign. It suggests that all parties involved had to make some hard decisions and compromises on their bargaining positions. For Canada, there is much to like about the new agreement, and some reasons for concern. The concessions made to the United States on loosening access to Canada’s supply-managed industries − and, in particular, the dairy sector − are not one of the those.
The most important aspect of the USMCA for Canada is the stability the agreement brings and the expected impact this stability will have on business investment. Despite record-low unemployment rates and clear indications that businesses are operating at full capacity, business investment was so anemic last year that the productive capital stock was unchanged. Uncertainty regarding the renegotiation of the North American free-trade agreement was a key factor influencing the weakness in business spending.
The retention of the dispute-resolution mechanism is another clear win for Canada. This provision allows companies hurt by tariffs imposed by one country to appeal to a multinational panel. Given the continuance of tariffs on Canadian steel, aluminum and softwood lumber, this is clearly a valuable process. The terms of the deal are also expected to improve the attractiveness of both Canada and the United States, relative to Mexico, as destinations for auto-related investment.
Despite these clear benefits, the potential negative impact of the deal on Canada’s dairy industry is a commonly cited concern. However, the USMCA will not spell the end of supply management. Instead, this agreement continues a pattern of recent trade agreements, such as the Canada-EU Comprehensive Economic and Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which have gradually chipped away at Canada’s supply-management system. The USMCA will give U.S. dairy producers duty-free access to 3.6 per cent of the Canadian market and increase proportionately the access of Canadian producers to the U.S. market.
Farm-gate sales of milk in Canada were $6.6-billion in 2017. The proposed deal may cause the loss of, at worst, about $240-million in domestic sales for farmers. However, those losses may not occur if Canadian producers are able to increase their exports into the United States. The United States imported US$2.8 billion in dairy products in 2017, of which only US$309-million came from Canada.
More importantly, why did Canada fight so hard to keep most of its supply-management policies? The dairy supply-management system imposes clear costs on both consumers and producers. The size of the subsidy varies over time, but each Canadian household pays $200-$300 a year more for their dairy products than they should. According to Conference Board of Canada research, the supply-management policy adds up to more than $2-billion annually, with the costs being disproportionately borne by lower-income households.
Although producers benefit from this arrangement in terms of providing stable incomes, supply management cuts them off from global markets. Because the World Trade Organization considers supply management to be a subsidy, market access for Canadian producers is very limited. The end result is that Canadian dairy producers have not been able to benefit from surging global demand for dairy products. Global exports of dairy products totalled US$61-billion last year, with Canada accounting for less than 1 per cent of the total.
With the negotiations for the USMCA now concluded, Canada has overlooked yet another opportunity to make significant changes to its supply-management system. We continue to expend considerable political capital on the world stage to protect an inequitable system that benefits a few at significant cost to millions of Canadian households. It begs the question: What did we give up during the USMCA negotiations to maintain the status quo in dairy?
Michael Burt is executive director of economics at the Conference Board of Canada.