Canada's protected dairy and poultry industries are in the crosshairs of the United States and other farm export powers as momentum builds toward a massive Pacific Rim trade deal.
Negotiations on the Trans-Pacific Partnership (TPP) are expected to resume shortly, with a deal possible as early as August.
The breakthrough came Wednesday when the U.S. Senate voted 60-38 to give President Barack Obama unfettered power to negotiate new trade deals.
Japan, Canada and other countries have resisted making final concessions in politically touchy areas, such as agriculture, until Congress gave Mr. Obama those trade negotiating powers.
The price of entry for Canada – one of 12 countries in the TPP talks – is expected to be a surge of duty-free dairy and chicken imports from countries such as the U.S., Australia and New Zealand.
Nonetheless, Prime Minister Stephen Harper is resolved to sign the agreement, which would transform Canada's trade relationships with Asian and Pacific countries and possibly destabilize the complex supply management regime that governs how dairy products and poultry are sold, according to senior government officials speaking on condition of anonymity. Conservative insiders acknowledge the decision is likely to cost the party seats in rural Ontario in the next election.
"This couldn't be worse political timing for the government, particularly if supply management is part of the final outcome," said John Manley, president of the Canadian Council of Chief Executives. "It is politically difficult. There is also a risk that there is a sharp division among political parties if the government decides to proceed."
The dairy industry is heavily concentrated in Quebec and Ontario, which together produce about 70 per cent of the country's milk. Quebec alone is home to half the country's almost 12,000 dairy farms. But the industry's political clout isn't what it once was. In the 1970s, when the supply management regime was created, there were more than 100,000 dairy farms. There are now just 13 federal ridings with more than 300 dairy farms, and eight of those are in Quebec, where the Conservatives have just five seats.
Experts warn that a flood of new imports could easily destabilize Canada's carefully calibrated supply management system, which tightly regulates the price and production of milk, chicken and eggs – industries worth $10-billion a year.
"You don't have to be a rocket scientist to figure out what's going to happen when you've got increased penetration of imports into your market and exports are capped," said Al Mussell, lead researcher at Agri-Food Economic Systems of Guelph, Ont., an independent research organization. "This is not a sustainable situation. We're sitting ducks."
Canada's dairy exports are severely limited because the World Trade Organization deems fixed domestic milk prices a subsidy. Canada, in turn, limits imports with tariffs of as much as 300 per cent on dairy and poultry products.
Canada has become an open door due to surging imports of concentrated milk protein, which now enter the country duty-free from the U.S. As such, Canada's trade deficit in dairy products has more than doubled since 2006.
Publicly, at least, Ottawa continues to staunchly defend supply management.
"Our government will continue to promote Canadian trade interests across all sectors of our economy, including those subject to supply management," said Rick Roth, a spokesman for Trade Minister Ed Fast.
The government won't discuss what it's prepared to give in the TPP talks. But Mr. Roth pointed out that the government's commitment to supply management hasn't blocked it from reaching other "ambitious" free-trade agreements, including deals with the European Union and South Korea.
The government is facing a fierce lobbying and public relations push from dairy and poultry farmers, who want Ottawa to resist making any concessions in the TPP talks.
A deal may well allow the U.S., Japan and others to continue protecting their own "sensitive" sectors, creating cover for Canada to do the same for supply management, said Yves Leduc, director of international trade for the Dairy Farmers of Canada.
"If some countries are able to shelter certain sectors from the agreement," Mr. Leduc said, "then that surely opens the door to Canada doing the same."
On the other hand, farmers will demand compensation if they lose any income as a result of a TPP deal. "No doubt about that," he said.
Supporters of the TPP in the business community say Canada can't afford to walk away from the agreement. Mr. Manley, a former senior minister in Jean Chrétien's Liberal government, said Canada would "quickly" lose export market share in Japan and elsewhere and investments at home.
"The risk to Canada of not being in the TPP is probably greater than the benefits of being in it," Mr. Manley explained. "The damage to Canada would be real and substantial. Even from a defensive point of view, we have to be part of this."