by Sally Colby

A panel of dairy experts gathered recently to discuss ongoing issues regarding U.S.- Canadian dairy trade. Mark Stephenson, director of the Center for Dairy Profitability at University of Wisconsin-Madison; Gregg Doud, Aimpoint Research; and Al Mussell, Agri-Food Economic Systems in Canada, examined frustrations with the formal trade agreement dispute filed by the Office of the U.S. Trade Representative.

In providing background for the current situation, Stephenson pointed out that up until World War I, world trade was free and unrestricted. “Over the next 30 years, after WWI, it became increasingly restrictive as countries began to adopt some protectionist policies,” he said. “After WWII was settled, it was thought we needed to address the world trade issue, and in 1947, the first round of what became known as the General Agreement on Tariffs and Trade (GATT) was concluded between 23 countries. That gap back in 1947 was actually the first multilateral trade agreement of the modern day.”

When NAFTA was negotiated, dairy trade for Canada was not included but Mexico was. “Subsequently, Mexico had become the largest trading partner we have for dairy products and that has grown a great deal,” Stephenson said. “Canada opted out because of the threat it imposed to their quota-based system – perfectly understandable from their perspective – and irritation for U.S. dairy that was growing and saw them as a potential customer.”

The Trump Administration wanted to renegotiate NAFTA, and the new deal, USMCA, was implemented July 1, 2020. The agreement included dairy trade between Canada and the U.S.

Stephenson said when governments negotiate trade agreements, they have to consider the whole, not just the part. “For example, dairy interests don’t get to stand on their own to negotiate the terms of trade,” he said. “Governments have to consider the greatest benefit to their countries, even if it means some segments may not quite as well off.” For instance, Canada doesn’t want to provide access to dairy markets because it would threaten the quota system. However, Canada’s lumber industry wants to sell plywood to the U.S. It might be for the greater good to have the U.S. give up some potential for lumber prices by importing from Canada, and Canada may be better off by accepting some dairy products from the U.S.

The U.S. currently exports between 15% and 18% of milk production, primarily as skim milk solids but also butter or cheese products. The U.S. imports between 3% and 4% of milk production, mostly cheeses, but is producing more specialty cheeses domestically.

“In the trade negotiations early on,” said Stephenson, “when the world started to have trade restrictions, they were quantity based – you can’t import any more than so many kilograms of product X. Then we began to move toward tariff rate quotas.” He pointed out that creative people began to consider non-tariff barriers to trade, which can include things like geographic indicators. The rules then become complicated and require an adjudication process to solve the issues.

Stephenson said if there’s a restriction, whether by edict or quota, or restriction by resources available and a country wants more of a given product, they would try to source as either finished products or as ingredients if needed by processors.

Doud said the U.S. knew the NAFTA dispute mechanism didn’t work and couldn’t be used to solve issues. “That was the big push with USMCA,” he said. “Let’s create a mechanism for when we have a situation where we have a disagreement that we can work this out in short order and come to a conclusion in a different fashion than we do with the WTO or with NAFTA. More important is whether the dispute mechanism will work, and this will be an interesting and important test. Hopefully we can figure out a mechanism to sort this out and deal with it.”

He added that the frustration is that the U.S. is trying to work out TRQs (tariff rate quotas) with Canada, but those can’t be allocated to an entity who knowingly won’t use it.

Mussell, a Canadian citizen, said it’s unfortunate that this matter has been elevated to a formal dispute, and that it isn’t ideal to begin trade policy in this manner with the new U.S. administration. “As Canadians, we struggle to understand exactly what the U.S. objects to in this dispute,” he said. “The U.S. Trade Representative website tells us that the U.S. is challenging Canada’s allocation of dairy TRQs specifically to set aside a percentage of each dairy TRQ exclusively for Canadian processors. These measures deny the ability of U.S. dairy farmers, workers and exporters to use the TRQ to realize the full benefit of USMCA.”

Mussell explained how TRQs work. “The allocation of Canadian import permits is to Canadian residents,” he said. “The allocation of TRQs is to importers of record, typically dairy processors. There’s nothing in the USMCA to suggest that Canada was required to change those arrangements.”

According to Mussell, farm milk prices are lower in the U.S. than they are in Canada. Dairy processing technology is the same in both countries, so on a cost basis, product should move from the U.S. to Canada with TRQs built based on markets. “For example, for the trade agreement between Canada and the EU, 96% of the cheese TRQ was filled,” he said. “We also have a portion of the global tariff rate quota that’s open to all countries that’s designated to the EU, and in that part of it, 98% is filled. However, it took time to get to that level of trading relationship with the EU, even though the EU is an established supplier of cheese imports to Canada.”

Ultimately, it takes time and effort to get each TRQ arrangement to work. Supply and demand in importing countries is also an important consideration. Mussell said some of the TRQ fill rates for 2020 were quite high. “For cheese of all types the fill rate was 93%; the cream fill rate was 85%,” he said. “Some others are lower: industrial cheese, butter and cream powder, yogurt and buttermilk. Milk powder is also significantly lower.”

Mussell said the supply and demand situation in Canada is significant in terms of influencing trade, with the extremes represented by cheese and skim milk powder. The Canadian market for cheese is growing rapidly, possibly faster than domestic production can maintain. Skim milk powder is not demanded, and like other countries, Canada struggles with surpluses. “The demand for dairy imports within TRQ permit levels is influenced by the demands of Canadian processors,” he said. “That’s an outcome of market organization in Canada. Dairy processing has become highly concentrated and processors have expanded aggressively and have become the dominant importers of record.”