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Dairy price gap leaves lots of room for tariff cutsJ.P. Moczulski/The Globe and Mail

The Dairy Farmers of Canada (DFC) has an informative Frequently Asked Questions section which seeks to bust a number of myths on the subject of supply management. One of the self-described myths

the DFC would like to bust is that there is a significant price difference between Canada and the United States for dairy products:

"Prices for Canadian dairy products are comparable to prices in countries that offer direct competition for Canadian dairy products. The USDA reports American cheddar cheese costs $12.54 per kilogram, and in Canada it is $13.70 — and in Canada, dairy farmers receive no government subsidies. The price of milk in stores varies from region to region and store to store. It cost between $4 [and] $6 for four litres in Canada, while in the U.S., consumers pay about $1 a litre…"

If this is true, it provides a significant opportunity for Canada's trade negotiators, as it gives us room to lower the 200 per cent to 300 per cent tariffs on imported dairy products without changing the domestic dairy market in any significant way.

The first step would be to have the DFC determine the price differential for dairy product categories between Canada and the least expensive developed country (likely the United States). Judging by the figures provided by the DFC, there is a 9.25 per cent difference in cheese prices between Canada and the U.S. Ron Versteeg of the DFC indicates that four litres of milk in Canada are currently retailing for $4.47, only 11.75 per cent more than in the U.S. The U.S.-Canada price ratios for other dairy products such as yogurt and butter would also need to be determined by the DFC.

To keep foreign products out of the Canadian market, we would need to put a tariff level for each product category slightly higher than the price gap, to make it more profitable for U.S .companies to sell in their domestic market than in Canada. Of course, keeping foreign products out of the Canadian market via tariffs does nothing for Canadian consumers, but we will set their welfare aside for the time being.

Setting a tariff rate of twice that of the U.S.-Canada price gap should be more than sufficient to price American products out of Canada. From the data above, this would be a massive reduction of the tariff rate. The milk tariff could be slashed from 241 per cent down to 23.5 per cent. Cheese tariffs would be similarly reduced from 245.5 per cent all the way down to 18.5 per cent. Our negotiators could use these tariff reductions as a negotiating chip in a number of free trade deals.

If the price differences are as small as the DFC claims, then high tariffs are completely unnecessary. No one, including the Dairy Farmers of Canada, should object to their reduction.

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University

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