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Dairy cows in Eastern Ontario on Wednesday, April 19, 2017. U.S. Donald Trump has sharply criticized Canada’s supply-managed dairy sector.

Sean Kilpatrick/The Canadian Press

The Trump administration is demanding that Canada end its system of supply management, which fixes prices for dairy, eggs and poultry by protecting Canadian producers from foreign competition.

The U.S. proposal, presented late on Sunday at the renegotiations of the North American free-trade agreement unfolding at a Washington-area hotel, would see all tariffs associated with supply management phased out over a 10-year period, which would flood the Canadian market with American imports and effectively end the current system, two sources briefed on the U.S. demand said.

In the interim, the sources said, Washington wants the right to start exporting up to 400,000 tonnes of milk and 175,000 tonnes of poultry to Canada annually, accounting for roughly 17 per cent of the market.

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Canadian negotiators flatly rejected the demand, said the sources, who spoke on condition of anonymity to reveal sensitive details of the confidential discussions.

The demand is a rare role reversal for Canada and the United States at NAFTA talks, with the Trump administration fighting for an open market and Ottawa fighting for protectionism. Canada has agreed to open its market slightly to foreign competition in previous trade pacts – including a 3.25-per-cent share of dairy in the Trans-Pacific Partnership in 2016. But Washington's demand goes far beyond that.

"Outrageous. It would be the end of supply management," Dairy Farmers of Canada president Pierre Lampron said in a statement. "We do not see supply management as being on the table. The Prime Minister and his cabinet have clearly expressed their support and willingness to defend the dairy industry and supply management."

The United States had previously also demanded that Ottawa reverse a decision this spring that squeezed American imports of ultrafiltered milk – an ingredient for making cheese – out of the Canadian market, and provide the United States with more data on the Canadian dairy system.

Supply management is a system of quotas and tariffs – some as high as 300 per cent – designed to guarantee a steady level of income to Canadian dairy and poultry farmers.

Critics of the system argue it is unfair to consumers to fix dairy and poultry prices rather than leaving it to the open market, including foreign imports.

One source said many senior officials in the Canadian government are privately ambivalent about supply management as a policy, but see it as a useful bargaining chip in NAFTA talks.

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Prime Minister Justin Trudeau has publicly vowed to defend it, arguing that all countries, including the United States, have some sort of protectionist system in place for agriculture, whether they be trade barriers or subsidies.

Unlike U.S. Donald Trump's more protectionist demands, opening up supply management is likely to find broad political support.

Last week, at a Capitol Hill meeting with Mr. Trudeau, the chairman of the U.S. House ways and means committee, which oversees trade policy, said he wanted to see more American dairy make its way north of the border.

"We need to make progress on issues such as customs barriers, border, intellectual-property protection and greater market access for U.S. dairy producers," Kevin Brady said.

Some Canadian politicians have also advocated opening up the system. Conservative MP Maxime Bernier promised to abolish supply management – as well as a similar cartel arrangement for maple syrup – in his party leadership campaign last year. And Saskatchewan Premier Brad Wall has publicly argued that the fixed prices are unnecessarily high, and particularly punitive to low-income people because they apply to staple foods.

The Montreal Economic Institute, a free-market think tank, pointed to the irony of the Canadian government trying to battle Mr. Trump's economic nationalism while defending walling off some sectors of its own economy.

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"We cannot on the one hand defend the maintenance of tariffs of up to 300% on supply managed products, and on the other accuse the American government of being protectionist," Alexandre Moreau, a policy analyst with the institute, said in a statement Monday.

Mr. Moreau argued that the Canadian government should do away with supply management if it can convince the U.S. to agree to end its own subsidies to dairy, and also compensate Canadian producers.

The demand is the final major U.S. proposal to hit the table. The United States is also pushing for rules forcing Canadian and Mexican auto makers to put 50-per-cent American content into cars and trucks, a hard limit on the amount of U.S. government procurement Canadian and Mexican companies can bid on, a sunset clause that would kill the deal in five years unless all three countries agree to extend it and a gutting of the pact's dispute-resolution systems.

Canada and Mexico have opposed nearly all of the United States' major demands, setting the stage for tense talks.

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