DONALD TRUMP is cheesed off. Canada will be left out of a renegotiated North American Free Trade Agreement (NAFTA), he said, unless it does something about its “tremendous trade barriers”, including an eye-catching tariff of “almost 300%” on dairy. Why would a country that embraces free trade erect protectionist walls around this sector?
Canada once had free trade in dairy products, but the market was plagued by boom-and-bust cycles, in which processing firms named their prices and small-scale farmers bore all the risk. Provinces argued about flooding each other’s markets with milk. The milky white flag of peace flew in 1972 when Canada instituted a “supply-management” system, which set prices for dairy products, and later poultry and eggs. Farmers were allocated quotas. Imports were strictly controlled, with high tariffs on imports over a set amount. Government subsidies were modest; consumers paid for the system through extortionate prices.
Supply management was not unusual when it was created. But countries such as Australia, South Korea and Britain have dismantled similar systems, and Uncle Sam has pressed Canada to follow suit. Canada protests that the United States has a surplus in bilateral dairy trade (about $418m in 2017) and that it subsidises its farmers. But the real reason the ruling Liberal government does not want to act is that eliminating the system would be politically sensitive and require the approval of the provinces. Of the 10,951 dairy farms that sold milk last year, 5,368 were in Quebec, where all political parties support supply management. Farmers would demand huge handouts if it ended. Many would go bankrupt without their dairy quotas, now worth some C$32bn ($24bn).
That might be a price worth paying. A recent poll by the Angus Reid Institute found that without compensating farmers, Canadians support “standing firm” on the system by a 45%-31% margin—even if it means losing NAFTA. With compensation, they would prefer to strike a deal. Support for keeping it is strongest in Quebec and lowest in western provinces, where non-dairy farmers do not have the same protection. Still, the political timing is tricky. The next general election is due in 2019 and the Liberals do not want to alienate Quebec, which accounts for 23% of seats in the House of Commons.
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