The first formal trade dispute under the U.S.-Mexico-Canada Agreement (USMCA), the renegotiated version of the North American Free Trade Agreement (NAFTA), is moving to a new phase, with a legally-binding panel decision against Canada’s allocation of dairy Tariff Rate Quotas (TRQs) published last month, and the details of actual changes emerging soon, perhaps even today. Maybe you’ll yawn, or your eyes glaze over at what seems like a lot of jargon, acronyms and legalese. Still, the obscurity of the acronyms doesn’t lessen the seriousness of the decision, especially for farmers and workers in the three countries. While trade disputes involve countries, they are often driven by specific business interests, not farmers or workers. Yet, people’s livelihoods are at stake.
Winding back a bit to the USMCA negotiations, former President Trump called on U.S. negotiators to eliminate Canada’s restrictions on dairy imports. Using his then preferred method of policy dissemination, he tweeted, “Canada charges the U.S. a 270% tariff on Dairy Products! They didn’t tell you that, did they? Not fair to our farmers!” But is that true?
While the original NAFTA liberalized nearly all agricultural trade among the three countries, there were a few notable exceptions. Canada maintained tariffs on dairy goods ranging from 241% for liquid milk to 298% for butter. The trade protection is an essential element of its national program to establish fair dairy prices and manage supplies. Regional milk marketing boards establish fixed prices for set volumes of production, which are allocated to farmers through a system of quotas. While there are some exports of residual amounts, especially when the market calculations are slightly off, the system doesn’t depend on export markets. Similarly, those calculations won’t work if there is a flood of cheaper imports from the United States or other countries. This hadn’t stopped all trade: In 2018 (before the negotiations were completed) U.S. companies exported five times more dairy products ($792 million) to Canada than they imported.
This was a hotly disputed issue during the USMCA negotiation. In addition to maintaining the tariff protections, Canada had changed certain dairy pricing categories on permitted imports in order to rebalance supplies. As head of the U.S. Dairy Export Council at the time, current USDA Secretary Tom Vilsack pushed hard to open the Canadian market, asserting that “Otherwise, Canada's new policies will chip away not only at the current trade with Canada but also at our trade surpluses to other markets that import milk powder as well.”
Dairy farmers and workers, whose interests don’t necessarily coincide with exporters, said not so fast. The Wisconsin Farmers Union, National Family Farm Coalition, Teamsters and United Food and Commercial Workers union, among others (including IATP), pointed out that dismantling Canada’s dairy supply management system was no solution for the ruinously low prices and oversupply of milk confronting U.S. farmers. Wisconsin alone produces more milk than is consumed in all of Canada. The California Farmers Union cited studies showing that increased dairy market access would have a minimal impact on prices received by U.S. farmers. Instead, the Dairy Together Network, which includes farmers from across the U.S., invited Canadian farmers to the U.S. for meetings, speaking tours and congressional briefings to learn whether a version of the Canadian program might work in the U.S.
Under USMCA, Canada agreed to eliminate tariffs on dairy imports up to a set volume, called a Tariff Rate Quota (TRQ), covering an amount equivalent to 3.6% of the Canadian market. Imports that exceed that total would revert to the existing tariffs. The provisions in USMCA added to concessions made on the dairy program in other trade deals. On top of the opening under USMCA, there were concessions equivalent to 3.25% of the dairy market granted under Canada’s entry into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and additional market access for 17,500 tons of European cheese under CETA (the Canada-European Union trade deal). Taken together, these new compromises could amount to nearly 9% of the Canadian dairy market.
The current USMCA dispute is over how the Canadian government distributes the TRQ among different kinds of companies. Canada has allocated 85-100% of the quotas to Canadian dairy processors, which purchase milk for dairy products or other foods that use dairy. The U.S. argued that the terms of USMCA prohibit allocating the quota only to processors or any specific producer group. In a decision publicly released on January 4, the dispute panel found that, “The current Canadian system, which sets aside significant TRQ volumes only for processors, does not pass muster under the Treaty.” Bennett Jones LLC reports on the potential practical implications of the decision:
Canada's practice of restricting materially all of the quota for Canadian processors means that goods imported under the TRQs are almost all lower-value input products, such as industrial-sized blocks of cheese, rather than finished consumer products. This supports value-added economic activity in Canada, instead of in the United States, in processing these inputs into finished goods… Canada maintained that reserving allocations for Canadian processors is necessary to ensure predictability and stability of imports. It permits accurate forecasting and matching of supply with demand under Canada's dairy supply management system.
Canada had until February 3 to reach agreements with the U.S. on allocations process or face additional trade sanctions. It was striking that both sides claimed victory from the initial panel decision, with Canadian Trade Minister Ng and Agriculture Minister Bibeau asserting that, “the panel expressly recognizes the legitimacy of Canada’s supply management system. The panel also confirms that Canada has the discretion to manage its TRQ allocation policies under CUSMA in a manner that supports Canada’s supply management system.” USTR Katherine Tai also claimed victory, stating, “This historic win will help eliminate unjustified trade restrictions on American dairy products, and will ensure that the U.S. dairy industry and its workers get the full benefit of the USMCA to market and sell U.S. products to Canadian consumers.”
So, while the actual trade concessions are still unfolding, in essence, the USMCA panel decision affirms Canada’s right to maintain its supply management program but could undermine Canadian farmers and food processing workers’ ability to benefit economically from local milk and value-added food products.
Regardless of the outcome, U.S. farmers and workers continue to learn from the Canadian experience and to build the groundwork for similar programs that make sense in the U.S. context. Late last year, the National Family Farm Coalition released a proposal for the Milk from Family Dairies Act, endorsed by more than 90 organizations, to establish:
Price floors allowing family-scale dairy farmers to cover their costs of operation;
Production management mechanisms balancing U.S. dairy supply with demand;
Managed imports and exports supporting farmer incomes and worker rights;
Measures restoring competition to the sector; and
Investment and incentives rebuilding regional dairy infrastructures.
The proposal would include TRQs on imports (as possible under existing trade agreements), similar to those in the Canadian program, as well as incentives to progressively reduce reliance on exports, with a goal that exports would no longer be included in U.S. estimates of demand after five years.
This reduction in overproduction could have important climate benefits, as well. Under Canada’s program, dairy herds are much smaller than in the U.S. and greenhouse gas emissions are lower (both because of improvements in production and because of the lower overall volume and herd size). Clearly, this kind of change would only work if farmers could be assured a fair price for a reduced volume of production. And that can only happen if trade rules allow for more stable markets geared to satisfy local demand.
So, we cycle back from the acronym soup of trade disputes to the conditions needed to enable more sensible levels and forms of production. A “win” by the U.S. government that opens up the Canadian market to more exports will likely do little to nothing for U.S. dairy farmers. To the extent that it drives continued growth in big dairies in the U.S. (a source of rising methane emissions), it could also undermine climate goals. On the other hand, a commitment to constructive engagement on these issues that accepts the Canadian supply management program could contribute to alternatives that help farmers, workers and the planet. Getting the trade rules right matters.