57

Donald Trump has been making a lot of noise the past few days about Canada's protection of its dairy industry, and cites that practice as the justification for the steel and aluminum tariffs he has levied on Canada (along with other nations).

These seem to be legitimate points.

I haven't found any good arguments from Canada's side as to why they have been putting such high tariffs on US dairy and why they feel this is justified and within the spirit of free trade.

Can anyone provide the Canadian arguments in favor of their dairy tariffs?

  • 12
    I thought that justification for the metals tariffs was "national security". "On February 16th, 2018 the Department of Commerce concluded that under section 232 of the Trade Expansion Act of 1962 (19 U.S.C. 1862(b)(1)(A)) that steel and aluminum imports constituted a national security threat, and on March 8th, the President imposed trade sanctions," - [econofact.org/…... otherwise good question – BobE Jun 11 '18 at 2:16
  • 8
    It should be noted that Canada imports far more US milk than it exports Canadian milk to the US. – liftarn Jun 11 '18 at 7:17
  • 16
    Canadian Dairy farmers work under a system that requires and helps them to make money from selling milk. US and EU farmers work under a system where they make money from subsidies while selling milk at a loss. fullfact.org/economy/farming-subsidies-uk – Jontia Jun 11 '18 at 8:58
  • 9
    @BobE That's the "official" story, because congress has to approve tariffs, except in the case of national security. That is the only way the president can unilaterally impose a tariff. However, after the G7 summit, he tweeted his feelings on Trudeau and called out that this tariff is retaliatory, and not about national security: Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy! – Darrick Herwehe Jun 11 '18 at 12:32
  • 9
    @DarrickHerwehe Could that tweet be used in a court of law as evidence that the metal tariffs were not for national security but were a tit-for-tat? – Gabriel Fair Jun 11 '18 at 17:59
97

It seems that Canada and the US use two different systems to protect their respective domestic dairy producers.

In Canada "Under a system called supply management, the Canadian government controls how much milk dairy farmers produce and how much it sells for" thereby guaranteeing sustained dairy milk farming.

In the US, milk dairy farmers are supported by government subsidies. In 2015 the American government doled out approximately $22.2 billion dollars in direct and indirect subsidies to the U.S dairy sector.

So the Canadian system tends to keep milk cost high, while the US system tends to keep milk cost low.

Everything is OK domestically, the problem is created when a milk processor in Canada wants to import less expensive milk from the US and in the process adversely impact the Canadian dairy milk farmer.

“U.S. politicians have been quick to demonize Canada for its different system. Fair trade is in the eye of the beholder. For example, some 41 countries, including the U.S., has WTO approved tariff-rate quotas. The U.S. challenged Canada’s rights to use their quotas within NAFTA over 20 years ago. The U.S. lost (that challenge)

discussion of dairy milk US subsidies

Canadian protection of their dairy milk farmers

  • 55
    I think the TL:DR is the US is equally protectionist, it just protects its farmers by paying them directly so they can sell their milk at a loss. – Jontia Jun 11 '18 at 8:53
  • 24
    @Jontia Does this mean that the US is more communist than Canada? :) – Miguel Jun 11 '18 at 8:54
  • 21
    @Miguel - neither one is a free-market approach, bit neither one is purely communist (the industry is privately owned) - though Canada's case (centrally managing output) is more socialist than US case. – user4012 Jun 11 '18 at 13:55
  • 29
    @user4012 I'd almost say the opposite. In Canada, the supply management system, although a totally socialist establishment, does pass on the cost of milk production to milk consumers only. In the US/EU structure, where the farmers are supported by subsidy, everyone pays, through taxation, to lower the cost of dairy, regardless of whether they consume those products or not. I'd say the latter is rather more socialist (everyone pays vs. consumers pay). – J... Jun 11 '18 at 14:29
  • 4
    It's worth noting that Canada's quota system (which applies to poultry and eggs in addition to diary) also protects existing farmers from having to compete against new Canadian farmers. The only way to get a quota is by buying it from someone else. A dairy farm in New Brunswick was recently listed at $2.5M (included the livestock and farm equipment), $1M of it was for the quota. – cimmanon Jun 11 '18 at 19:10
30

The simplest explanation is that the two systems are not compatible so Canada protects their side via a large tariff wall.

Canada uses Supply Management boards to control the price of dairy (among other things). These boards issue quotas to producers. For instance, a dairy farmer may own a quota of, say 50 kg of milk fat. Thus he could produce milk until the total amount of fat contained in that milk reaches 50kg. At that point, any extra milk cannot be sold. The quota can be bought and sold. I think the current price is something like $24K per kg in Ontario.

The total amount of quota is closely matched to the actual demand of the Canadian domestic market. This ensures a stable price for dairy since there is neither over nor under production. The dairy farmers are assured of a known price for their product and consumers are assured of a stable supply.

In contrast, the USA uses a more open system with no controls. This tends to lead to boom and bust cycles since production is not matched to demand. Instead, the profit motive drives farmers to produce as much as possible. This can lead to lower prices for consumers, but an unstable supply. During bust periods, many dairy farmers are driven to bankruptcy or have to sell off their herds. To help with this, the US, like many countries, uses subsidies, both direct and indirect, to help keep the farmer solvent. While admirable in intent, it also tends to extend the bust cycle since it keeps more cows in production and lowers the milk price.

Because the Canadian system produces milk at a fixed, relatively high price compared to subsidized US milk, the US product would quickly flood the Canadian market. So large tariff walls are used to keep US dairy out (more later).

This is the basic explanation of why Canada charges 270% duty on dairy. Now, a bit more detail.

When NAFTA was negotiated, the US was angry about the trade walls. As a concession, the Canadian government agreed to allow up to 10% of domestic demand into the country duty free. Only after that would the 270% tariff rate apply. In contrast, the US allows up to 3% of dairy into the US and puts up high tariffs after that. The rates are not as high as the Canadian rates, but they don't have to be because the Canadian product, being unsubsidized, starts at a higher cost. Because of this, the US runs a large surplus in the dairy trade with Canada.

As stated, Canadian dairy is unsubsidized. Estimates of US subsidies vary but the most common I've seen is around $22B per year which is about 73% of the market. So in Canada, the consumer pays for the system directly through higher prices while in the USA, the consumer pays lower direct prices, but must also pay the bulk of the cost indirectly through taxes.

Aside from tariff walls, there are other barriers. For instance, Canada does not use growth hormones on its dairy cattle. With stable pricing, there is no need to. The US farmers, anxious to increase production, do use hormones (not necessarily everywhere). Thus Canada has banned milk products containing hormones.

The USA is not alone in their anger with the Canadian supply management boards. Europe also heavily subsidizes their farmers and wants access to the Canadian market. In a concession to get access to the EU, Canada has recently agreed to allow cheese in duty free. Thus Canada, while anxious to protect their industry, is willing to negotiate if it can get something in return.

Finally, regarding tariff rates in general, the USA has higher rates than Canada. The 2016 weighted average for Canada was 0.8% while the US was 1.6%. This is because, although we have high tariffs for dairy, the US has high tariffs for things like tobacco or peanuts. Some tobacco products have tariffs as high as 350%.

So in order to drop Canadian Supply management and the associated tariffs, the industry would have to be subsidized to the levels of the US and Europe. Once that happens, the US would still have trouble selling in Canada. I rather suspect they would sell less since it would also render the 10% duty free exemption valueless. In addition, our milk prices would be so low that we in turn could invade the US market! So what Trump is demanding would hurt the Canadian dairy industry AND the US industry.

  • How did you calculate "73% of the market." Do you mean that $30 (22/30 = 0.73) bn of dairy is sold? Wholesale? Retail? I would understand 73% to mean that $8 bn of dairy is sold in addition to the $22 bn of subsidies (22/(22+8) = 0.73). – Aleksandr Dubinsky Jun 12 '18 at 14:37
  • 3
    @Aleksander Dubinsky "The report estimates that in 2015, the support granted to U.S dairy producers represented approximately C$35.02/hectolitre – the equivalent of 73% of the farmers’ marketplace revenue. USDA data also reveals that US dairy farmers operate at a loss, and have a cost of production that is higher than what they earn from the marketplace. [thebullvine.com/news/… – BobE Jun 12 '18 at 15:25
  • 1
    "This ensures a stable price for dairy since there is neither over nor under production. The dairy farmers are assured of a known price for their product and consumers are assured of a stable supply." "This tends to lead to boom and bust cycles since production is not matched to demand. Instead, the profit motive drives farmers to produce as much as possible." These two quotes make no economic sense. – Acccumulation Jun 12 '18 at 23:48
  • 2
    Replace "we" and "our" with "Canada('s)". Your answer shouldn't be dependant on knowing that you're Canadian. – CJ Dennis Jun 13 '18 at 0:36
  • The US system has tons of controls. The USDA generally, and dairy rules in particular, are right of 1940s Soviet Union. I mean that quite literally, as FDR administration staff visited the USSR and lifted their playbook for running the dairy industry. – K Dog Jun 15 '18 at 16:35
0

Canada has a much smaller population than the U.S. There are more dairy farms in Wisconsin than the whole country of Canada. American farmers overproduce milk and end up dumping unused supplies. If Canada lowers its tariff, cheaper American milk will flood the market and kill Canada's dairy industry.

All countries have some high tariffs to protect their interests. America has a 350% tariff on tobacco to protect their farmers. What Trump doesn't mention is that Canada's average tariff is 0.85% – one of the lowest.

  • This seems reasonable, but we generally expect that answers here are based in fact, not something that just sounds reasonable. Typically this means that answers should be backed up. Is there some source showing that this is the correct, factual reason why Canada has these tariffs? – indigochild Jul 6 '18 at 21:45

You must log in to answer this question.

protected by Community Jul 6 '18 at 21:24

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged .