KANSAS CITY — While the United States and Mexico appear to have resolved issues to “modernize” their portion of the North American Free Trade Agreement, Canada is just returning to the negotiating table with two major stumbling blocks: dispute settlement and dairy.
The dispute settlement issue has to do with using domestic courts, which the United States prefers, or the NAFTA Free Trade Commission and bilateral panels, with decisions of the latter binding. Dispute settlement is addressed in Chapter 19 of the NAFTA pact and especially concerns anti-dumping and countervailing duties. Trade reports note that the dispute settlement issue far predates the Trump administration.
Dairy is complicated on several fronts. The overarching issue has to do with Canada’s supply management program, which is designed to protect the domestic dairy industry, both farmers and processors, by preventing an oversupply of milk and dairy products. The system utilizes domestic production quotas, price controls and tariff-rate import quotas. Tariffs on dairy imports range from zero to as high as 314%, with out-of-quota import tariffs averaging 218.5%, according to the World Trade Organization.
A recent Nanos Research poll indicated 75% of Canadians support the supply management system, about 66% think the government should strongly defend Canada’s dairy industry in NAFTA talks, and about 80% favor politicians who defend the dairy sector, making the issue highly political.
The Canadian dairy industry, including the Dairy Farmers of Canada and the Dairy Processors Association of Canada (DPAC), notes U.S. dairy product exports to Canada were double those of Canadian dairy exports to the United States in 2017 (about $227 million versus $114 million in U.S. dollars). The industry also said that it had increased foreign access to its dairy markets through the Trans-Pacific Partnership, from which President Donald Trump withdrew in 2017.
Under NAFTA, the U.S. International Dairy Foods Association (I.D.F.A.) notes that the United States moved from a net importer of dairy products to one of the world’s top exporters, largely due to a five-fold increase in exports to Mexico. Maintaining Mexico as the largest export market of U.S. dairy products was the top priority for the U.S. dairy industry in NAFTA talks. Improving trade terms with Canada was next on the industry’s list. Dairy trade with Canada was not significantly addressed in the original NAFTA because of Canada’s dairy supply management system.
U.S. dairy product trade with Canada was complicated in 2016 and 2017 when Canada created a special ingredient class (Class 7) for ultra-filtered milk, which did not exist when NAFTA was first signed, and created a pricing strategy that the U.S. dairy industry said subsidized Canadian dairy products for domestic users and discouraged imports (not just from the United States). The U.S. dairy industry saw the new class as a way for Canada to block imports of certain dairy products and dump skim milk powder on the global market below cost of production. The move shut off about $150 million in U.S. exports of ultra-filtered milk to Canada.
President Trump called Canada’s actions a “disgrace.”
The Canadian dairy industry blamed the U.S. dairy industry woes on U.S. overproduction, which, they noted, Canada’s supply management system prevents.
“The Trump administration’s demands are absurd and most certainly do now allow for meaningful engagement,” DPAC said in a letter to Canadian Prime Minister Justin Trudeau earlier this year.
Both leaders have vowed to “stand up” for their respective dairy industries.