Cornell professor of agricultural economics: US took advantage of 'loophole’ in dairy trade with Canada

The US v Canada dairy trade dispute centers around the US being able to continue its exports of ultra-filtered milk to Canada. ©iStock/shakzu

Multiple US dairy groups have blasted Canada recently saying that the country is blatantly violating terms of the NAFTA trade agreement and that US dairy processors are suffering due to lost Canadian purchases of ultrafiltered (UF) milk. 

Earlier this month, Grassland Dairy Products Inc. of Wisconsin, which produces and sells UF milk, announced that it will be cancelling 75 of its contracts with US dairy farms starting May 1 because “the Canadian government has put in place several regulations to prevent this trade from continuing.”

The preventative measures referred to by Grassland and other US dairy groups deal with Canada’s National Ingredients Strategy Class 7 pricing structure, which lowers the cost of Canadian-made dairy ingredients for processors in the country.

“Canada’s protectionist dairy policies are having precisely the effect Canada intended: cutting off US dairy exports of ultra-filtered milk to Canada despite long-standing contracts with American companies,” Jim Mulhern, president and CEO of NMPF, said.

Most recently, New York state governor Andrew Cuomo said that Canada’s trade actions could mean a $50m market loss for the state’s dairy industry.

“I urge the federal government to call on Canada to reconsider these harmful regulations and continue our courteous, mutually beneficial trade relations," Cuomo said.

Don’t blame Canada

President of the Dairy Farmers of Canada (DFC), Isabelle Bouchard, said that while “Canadian producers can certainly sympathize” with the plight some US dairy farms such as Grassland are facing, the basis of US dairy’s argument is “filled with falsehoods and half-truths.”

“We must nonetheless point out the reality that there have been no changes to Canadian regulations related to dairy imports, or changes to Canadian dairy tariffs, and we want to set the record straight,” Bouchard said.

Class 7 is a domestic policy and does not block imports or restrict American access to the Canadian market, according to Bouchard.

“Canadian businesses are still free to choose their own suppliers, just like American companies do,” she explained.

According to Bouchard, the real culprit is the oversupply of milk both in the US and globally, and because of this prices have crashed, leading to lower prices for dairy processors.

“By contrast, in Canada, supply management (literally matching supply with demand) avoids overproduction, and reduces the impact of devastating market fluctuations, such as those that the US is currently experiencing,” Bouchard added.

Taking advantage of a trade loophole

Professor of agricultural economics at Cornell University’s Dyson School of Applied Economics and Management, Andrew M. Novaković, PhD, explained that the issue is not as black and white as the US has stated.

The original trade agreement preceding NAFTA was drafted in 1987, when both countries had highly protectionist dairy policies.

“There’s no question that we [US] took advantage of a situation that neither the US or Canada anticipated when we drafted an agreement in the mid-1980s,” Novaković told DairyReporter.

“US manufacturers discovered that they could sell ultrafiltration, or UF milk to Canadian cheese makers through a loophole in our trade agreement. What definitely happened is we found ourselves really needing to find new places to move product.”

Canada responded by defending its border and dairy producers from this influx of US milk, and has adjusted its system to allow its dairy producers to purchase the same kind of product at a competitive price within Canada.

“Canada is correct in saying that we have excess supplies and this created pressures for us to find alternative markets, but what the US is trying to do is normal in a global context, what Canada is trying to do is almost singularly unique,” Novaković said.

Canada has been able to effectively close the door to certain imports but are trying to “play both sides” as they seek to ramp up exports as well.

“The other reality is there is just nothing that is going to somehow compel Canada to change.”

Trump softening NAFTA position?

US President Donald Trump publicly addressed the US and Canada dairy trade during a speech at a factory in Wisconsin this week calling it a “one-sided deal against the United States” that can be solved by getting ridding of NAFTA "once and for all." 

Trump pledged to seek fair trade deals with Canada to help struggling US dairy farms who are dealing with an oversupply of ultrafilterd (UF) milk due to Canada decreasing its dairy imports from the US.

"NAFTA has been very, very bad," Trump said during his speech in Wisconsin.

Trump added, "The fact is that NAFTA has been a disaster for the United States.

"We are going to stand up for our dairy farmers in Wisconsin... that demands really, immediately fair trade with all our trading partners, and that includes Canada. Because in Canada, some very unfair things have happened to our dairy farmers. And we're going to start working on that."

However, Novaković believes that Trump's NAFTA position has been shifting and will soften.

“At the end of day, President Trump is all about jobs and I don’t think he’s going to do anything that would reduce jobs,” Novaković said.

“I don’t think blowing up NAFTA would be pro-jobs.”

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