Inclusion in the TPP May Come at a Cost for Canada


Contributors: Ed Farrell, Jerry Chapin

As President Obama signed Trade Promotion Authority into law he removed a major stumbling block to completion of the Trans-Pacific Partnership (TPP) trade negotiation when chief negotiators, and then Ministers, meet in Maui July 24-31.  However, a sticking point for many of the countries in the negotiation may be Canada’s reluctance to nix their protectionist supply management system for dairy and poultry.

With respect to dairy, the system dates back seventy years to when Canada faced significant surpluses following World War II, as the strong profits realized by Canadian dairy farmers from their trade with the U.K during the war evaporated with the normalization of trade within Europe after the war. In an attempt to align production with demand, Canada adopted a system that established floor prices for certain dairy products, which in turn supported on-farm milk prices. In further pursuit of price stabilization, the government established a supply control system that targeted specific dairy products.  These policies eventually gave way to Canada’s current supply management system.  While this system has propped up Canada’s milk producers, it could now exclude Canada from the largest trade deal since NAFTA.

The Canadian system is best understood as comprised of three parts: Price setting, control of supply, and protection from foreign competition. Prices are set by the Canadian Dairy Commission and ultimately result in significant income for dairy farmers. To avoid overproduction, farmers are allotted a production quota, which is a transferable asset currently valued at about $28,000.00 per dairy cow. Thus, an average Canadian dairy farm of around 70 cows has about $2,000,000 worth of quota. The final component to Canada’s supply management system is protection from foreign competition, which brings us to the TPP.

Canada’s ability to regulate their market is dependent on keeping competitively priced imports out, and to this end Canada has very restrictive tariff rate quotas on dairy products, with over quota tariffs ranging from 246% for cheese to 300% for butter. The result of these supply management policies is that Canadians are currently paying just over C$7.87 for a gallon of milk, or nearly twice as much as the average U.S. consumer.

There is no question that as negotiators meet in Maui, all eyes will be on Canada, which is under pressure to open their dairy market to imports from TPP countries such as Japan, Australia and New Zealand, as well as the U.S. Some believe this pressure will be enough to bring the nation out of its protectionist mind set. However, Canada has long stood behind their supply management program and is not showing much indication that they plan on bending to foreign pressure, regardless of whether the pressure is coming from powerhouse neighbors such as the U.S. or allies half way around the world. As recently as last month, a spokesman for Canadian Trade Minister Ed Fast said Canada would defend dairy supply management in its negotiations.

Faced with elections in October, will the Harper administration de-regulate the dairy and poultry industry as they did their wheat industry in 2011, or will they hold firm in support of their unique and dated regulatory system? And if they hold firm on dairy and poultry, will the US and others take a hard line and exclude Canada altogether? Or will some middle ground be found? Whether preserving Canada’s regulatory system for dairy and poultry is worth losing inclusion in the TPP — a deal that will ultimately benefit Canada in a wide range of sectors — may ultimately be a decision the Harper administration has to make.