Dismantling the protective wall that shields Canada's dairy and poultry industries from foreign competition would cost jobs and production.
But those losses pale compared to what a more open Canada would gain by tapping into burgeoning food export markets in Asia and Europe, concludes a Conference Board of Canada report released Wednesday.
Unless Canada is willing put its supply management system on the table in ongoing trade negotiations, "free trade agreements with key Asian markets could be difficult to reach," says the report.
Canada is currently engaged in free-trade talks with Japan, India and South Korea, as well as the members of the Trans-Pacific Partnership. It's also pursuing deeper trade ties with fast-growing China.
The report likewise argues that supply management of dairy, egg and poultry production "limits the opportunities for Canadian food exporters in developed markets like the European Union."
Canada tightly regulates dairy, chicken and egg production, maintaining the closed system by imposing import tariffs of 150 to 300 per cent on those items.
Under World Trade Organization rules, those protections are deemed to be illegal subsidies when Canada exports those items.
Ottawa has steadfastly refused to dismantle the supply management system, created in the early 1970s to end boom-and-bust cycles and ensure stable prices for farmers.
The Conference Board report, written by Kristelle Audet, argues that Canada is already missing out on huge export opportunities in processed food, particularly as demand growth shifts to Asia.
Global trade in cheese and chicken, for example, more than doubled between 2000 and 2010 – in part because of new technologies that allows these products to be shipped over longer distances.
But Canada exports virtually none of them.
The reports makes the case that Canada should be "at the forefront of food trade liberalization," not a laggard.
"Canada is one of a handful of major net exporters of food," the report points out. "We have considerable resource and managerial capacity that can be used to meet the world's demand for food. Yet, as a matter of policy, Canada continues to maintain high tariff and non-tariff barriers to trade in food that limit our gains from trade."
Supply management also forces Canadian consumers to pay significantly above world prices for dairy and poultry products.
The report says those costs are compounded by significant barriers to food trade within Canada. Among those obstacles are differing federal and provincial meat inspection standards, plus a raft of rules that limit the movement of supply managed products between provinces.
Of course, Canada isn't alone is protecting its domestic food industry. Indeed, the country scores relatively well on the World Bank's "trade restrictiveness index," behind the U.S. and Chile but much better than European and many Asian countries.
But the Conference Board says that's somewhat misleading because the index is based on existing trade patterns – not where Canada would like its trade to be destined in the years ahead.