Trade Agreements Are Good For Canada

Agreements to liberalize trade between countries are always good for consumers because they get more choice. They are good for some producers, but others feel threatened and are noisy about their opposition.

Negotiations are nearing completion for the Trans-Pacific Partnership (TPP), a huge undertaking involving twelve countries including the United States (but not China). Among other things, the TPP seeks to lower trade barriers such as tariffs, establish a common framework for intellectual property, enforce standards for labour law and environmental law, and establish an investor-state dispute settlement mechanism.

Clauses addressing these issues are found in other agreements such as the North American Free Trade Agreement (NAFTA). They are complex, which causes negotiations to drag on.

It is no surprise that the politically effective supply management industries, led by dairy, have raised their voices in concern. The dairy industry argues that it produces a high quality product, and supports jobs while providing good animal care and environmental stewardship. They say it is all at risk.

There are close to 12,000 dairy farms in Canada, 82% of them in Ontario and Quebec, and just 225 in Nova Scotia. The average farm has 80 cows. Farmers are not allowed to expand unless they buy quota, and some provinces restrict how big they can get.

Quota, originally assigned for free, is now expensive. Based on how much milk is produced, it amounts to about $30,000 per cow in eastern Canada where a price cap is enforced, and much more out west where prices are not regulated. That doesn’t buy the cow—just the right to have one.

So, the average dairy farmer has $2.4 million or more tied up in quota. Prices at the farm gate are also regulated, so a farmer cannot compete for market share by becoming more efficient and offering a lower price. The result is expensive milk.

Comparisons between countries are tricky because there are considerable variations across Canada, and between states south of the border. (Curiously, US prices seem to be lowest in locations close to the Canadian border.) As a generality, when the Canadian dollar was at par with the United States, it was typical for milk prices to be double what Americans paid. At today’s exchange rates, Canadians pay about 50% more.

The high price of milk has follow-on consequences for butter and cheese. In spite of stiff tariff barriers, Canadian imports of dairy products are more than triple our exports.

New Zealand abandoned supply management in the eighties, and Australia, ten years ago. The transitions were not without pain, but today both countries have booming industries. New Zealand’s exports—especially to China—have been growing rapidly, reaching C$13 billion in 2014.

When Canada signed the NAFTA agreement, there was concern that American imports would overwhelm the domestic industry. More than 20 years after NAFTA came online, Canadian wineries are thriving and have made significant inroads into U.S. markets. Much of that growth occurred while the Canadian dollar was at par.

Meanwhile, many larger sectors of the economy have a lot riding on Canada’s participation in the TPP. Exports of wheat, barley, and canola, as well as pork and beef, can all be enhanced by reductions in tariffs by other nations. More importantly, if Canada is left out, those producers will be disadvantaged compared to American competitors.
For Nova Scotia, it will mean improved access for exports such as lobsters and crab, frozen blueberries, furs, and precision instruments.

Being part of the group matters. In the late stages of the TPP negotiations, Japan sought an exclusion to allow auto-parts from outside the twelve countries that would have hurt Canadian auto-parts makers. Canada (together with Mexico) was able to push back, but only because we were at the table.

Negotiations on TPP are likely to conclude before voting day. If an agreement is reached without Canada—which could happen if we make no movement on supply management—enormous existing and potential export opportunities will be lost.

Suppose, instead, an agreement is signed that includes a long phase-out of our supply management system. That would include payments to dairy farmers as the value of quota diminishes, particularly for quota purchased within the last decade.

The consequence would be reductions in prices for milk and butter, especially helpful to families with young children. Our excellent cheese makers would have lower input costs.

Farmers would be able to expand without having to pay for expensive quota. The most efficient ones could have attractive export opportunities to the United States. Wisconsin’s climate is not much different than that for Ontario and Quebec dairy farmers. It has more than 10,000 dairy farms. With our currency worth $0.77 USD, we should be able to compete very well.

There are great benefits for the many other sectors where we are already competitive, but would suffer if left out of the deal.

So, what do the politicians have to say about this? “We will fight tooth and nail to preserve supply management,” says Tom Mulcair. “I’ve asked the Conservatives to protect our farmers and to take the system off the negotiating table, and they have refused. That’s completely irresponsible on their part.” He appears to be saying he would walk away from the table rather than budging on this issue.

Trudeau inaccurately claims that the system has “worked for years. We’ve managed to sign large trade deals in the past, from NAFTA to Canada-Europe and others without having to put supply management into the bargain.”

The Conservatives have frequently expressed support for the existing system. But, contrary to Trudeau’s comment, the agreement it signed with Europe doubled the tariff-free quota for cheese imports. The Conservatives have been more silent while TPP negotiations continue.

All three parties seem to tacitly accept the dairy farmers’ narrative that any change which would lower prices for customers and increase opportunities for a more robust industry somehow represents a defeat for Canada.

The Trans-Pacific Partnership represents a major opportunity for Canada’s economy to reduce its dependence on oil and other commodities. It will be most disappointing if the lack of political leadership prevents our participation.


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