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A new report says Canada might have to put a little water in its wine – or, rather, its milk – if its agricultural producers want to reap the rewards of Asia's growing appetite for food products.

The Canadian Council of Chief Executives says there are enormous trade opportunities for Canadian agricultural producers, but trade restrictions around dairy and poultry products could hurt Canada.

Supply management, the system that controls milk and egg prices and sets prohibitively high tariffs on imports, has been identified as an obstacle to Canada's entry into the attractive Trans-Pacific Partnership (TPP). The free-trade zone would include countries in this hemisphere, as well as those on the other side of the Pacific.

The report's author Michael Gifford was Canada's chief agricultural trade negotiator around the Canada-U.S. Free Trade Agreement and NAFTA. He predicts that international negotiations over agricultural market access will be difficult.

"Having said that, there would likely be serious consequences for the rest of the economy – not to mention the 80 per cent of Canadian agriculture that is tied to world prices – if Canada were to be prevented from joining the TPP because of a reluctance to open up the dairy and poultry sectors," Mr. Gifford writes.

"The consequences for Canadian agriculture would be especially adverse if the outcome of the TPP negotiations was an agreement that included Japan but not Canada."

Mr. Gifford outlines how rapidly developing Asian countries are switching from consuming basic staples such as rice and legumes, and increasingly diversifying their diets. The demand among the growing middle classes for meats, fats, oils and fruits is booming.

Many of those Asian countries have high agricultural tariffs, but should those be waived for certain countries in a free-trade zone, the involved parties would reap substantial rewards.

"For example, although China's negotiations with Australia are currently deadlocked, it is clear that if Australia eventually succeeds in winning preferential access to China for agricultural products, those gains will come at the expense of competing grain, oilseed and meat exporters, including Canada," Mr. Gifford writes.

He says that the TPP would cause Canada the most grief if it found itself on the outside. Current negotiations include Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and the U.S. Japan is also vying for a spot at the table.

"If Japan signed on to the TPP agreement, but Canada did not, Canada would undoubtedly lose market share in Japan and could well see its exports decline in absolute terms."

The report suggests that Canada and other countries that have agricultural protections will have to at least partially liberalize their systems in order to come to an agreement on these free-trade agreements. While Canada has its supply management system, Japan protects its rice, and the United States its sugar and dairy sectors.

Prime Minister Stephen Harper has long committed to upholding the supply management system, but his governmen's language has been softening on the subject as it talks more about the broader Canadian interest.

"Each time we participate in a negotiation, we promote and protect all our sectors and that will be our approach on the TPP, and I'm encouraged by the support we have from the majority of the members of the TPP for our participation in the negotiations," Prime Minister Harper told reporters during a trip to Chile last week.

The United States has been the main opponent of Canada's entry into negotiations because of the supply management issue.

Council president John Manley, a former Liberal cabinet minister, says he knows full well the political sensitivities of supply management. Support for supply management is high in Quebec, and both the NDP and the Liberals oppose touching the system.

But Mr. Manley says its time for the broader Canadian interest to be taken into account.

"If you're on the left of the political spectrum, why would you want to favour 13,000 dairy farmers over low-income Canadians that need milk, butter, eggs and cheese and chicken to feed their families? Explain that me," Mr. Manley said in an interview.

"That's a political calculation that nobody's done because nobody's made the effort to communicate to Canadians what the benefit is."

Mr. Manley notes that New Zealand liberalized its dairy sector, and has been reaping the rewards of expanded trade. He compares it to what happened to the Canadian wine industry after NAFTA and other agreements were signed.

"What New Zealand demonstrated was that with a short but meaningful transition period, you can turn domestic suppliers into international exporters," said Mr. Manley.

"In a lot of these emerging markets, the middle class is looking for new sources of protein and there's no reason why Canadian dairy producers can't compete with that. But to get into those markets, we have to open up our own."

The Dairy Farmers of Canada have tried to address some of the buzz over the TPP, putting out a fact sheet on their website earlier this year. They point out that supply management did not keep Canada from negotiating a number of free-trade deals over the years. The farmers also emphasize that many other countries protect certain agricultural sectors, and that the European Union and United States in particular provide farm subsidies.

The Canadian Press

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