Canada needs a different tact in international trade

Instead of defending supply management it needs to attack competitors’ subsidies

Supply management polarizes opinions: defend the status quo or dismantle the system.

Unfortunately, this masks important strategic choices with implications for the dairy industry and, by extension, Canada’s agri-food sector as a whole.

Canada’s internal debate keeps the country on a defensive footing. It is time to get offensive by focusing on other countries’ agricultural subsidies — which are to date, largely out of sight, out of mind and entirely detrimental to our long-term competitiveness.

All eyes are now focused on the timelines to conclude the Trans-Pacific Partnership (TPP). But, we need to look at the long game and the evolution of Canada’s trade agenda.

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Whither Canadian dairy?

Canada’s dairy sector is being seriously squeezed and faces a growing trade deficit. We’re importing large volumes of various milk proteins (known as concentrates and isolates) and our dairy exports are restricted. This is hardly a growth formula for one of Canada’s largest agri-food sectors but more importantly is a significant threat to the current system.

Imports from the U.S. of such proteins are up some 300 per cent since 2010. This import pressure is likely to continue once the Canada-EU trade deal (CETA) comes into force and possibly also under the TPP.

This trend prompts the commentators from Agri-Food Economic Systems to state: “in the face of growing imports, increasing exports will be necessary in order to avoid shrinkage in the Canadian dairy industry.”

Dairy proteins are important to food processors in order to develop innovative and healthy products, such as yogurts and high-protein beverages.

Canada’s supply management system keeps the price of milk products above “the world price.” This makes lower-cost imports very attractive to food processors.

Lower-priced and uncontrolled imports of protein concentrates and isolates displace Canada’s skim milk powder which results in growing surpluses domestically, some of which are diverted into lower-value animal feed.

Simply labelling supply management as “protectionist” (and thus deserving dismantlement) misses a critical point.

Export conundrum

Canada can’t unilaterally expand its dairy exports. Proponents of change largely ignore how we can actually export more dairy products, even if that is desired within the sector.

Under Canada’s free trade agreement with the U.S., milk protein concentrates and isolate imports are allowed into Canada “tariff free” (and it’s reciprocal). The problem is that Canada’s export potential is restricted based on Canada’s 1995 World Trade Organization (WTO) commitment. The export limits were confirmed in the results of the challenge by New Zealand and the U.S., on skim milk powder, cheese and other products.

Technically speaking, Canada can export milk products under supply management provided that there is no subsidy on dairy product exports. However, the current structure of our production and pricing arrangements was found to create an export subsidy on dairy products. Canada can only export dairy products up to the limits allowed for in Canada’s WTO commitments.

While we debate the need for reform within our dairy sector, our competitors’ tactics are designed to keep us on our heels by critiquing the milk supply management system. This is distracting us from assessing just what it would take to export.

Competitor subsidies

Meanwhile, our competitors produce and export milk products by utilizing a complex array of direct and indirect subsidies. We argue that the so-called world price for milk is, therefore, not a true reflection of the real cost of producing these products — and our competitors are taking full advantage of it.

Foreign subsidies are immediately relevant to the dairy issue. But, we need to bring to light the destructive effect of agricultural subsidies particularly in the U.S. and Europe as a whole.

Legitimate support is given to agriculture here and abroad, such as to compensate for crop failures and for research. However, widespread use of subsidies in certain countries creates unfair competition.

Subsidies can encourage deleterious behaviour. Dairy production in the American southwest is successful in part because it draws down on the region’s aquifers — a “natural capital” benefit that is not factored into the price.

Such practices create a hidden market failure and it’s a global phenomenon. They can encourage (at little cost) a broad array of environmental impacts from polluting surface and groundwater, such as what has befallen many European Union (EU) rivers, to degrading soils and putting biodiversity at risk.

For its part, Canada’s dairy supply management has not created significant surpluses at the expense of ecosystems. Our country’s wealth of water and land confers certain comparative advantages (if we manage them correctly).

The other issue is about understanding how international subsidies constantly place Canada’s agri-food sector at a disadvantage.

Opening a new front

We need to consider the merits of opening up a new front — on environmental and resource sustainability — as a basis to help take the offensive.

Extended drought is reshaping the U.S. and Australian dairy industries. Soil quality and availability for expansion of the dairy industry in New Zealand may limit future growth there.

Canada’s water and soil resources are not facing similar pressures, although there are some pressures in certain regions of ours.

Improving sustainable production is not going unnoticed. Global supply chains are now procuring many products, such as palm oil, fish and coffee, only from sustainable sources.

But, is there a role for Canada’s agri-food sector as a whole to better leverage the sustainability card?

Becoming a global advocate for the elimination of foreign government-subsidized agricultural practices (including their environmental impacts), may be in our national interest. This would be a big step beyond driving down tariffs or increasing market access.

Doing away with subsidized production and raising the environmental bar even slightly for our competitors would be a calculated strategic move. It may eliminate some highly inefficient competitors and those requiring massive investment to meet even the most minimal sustainable requirement. However, prices would better reflect real costs which would bode well for our agri-food trade.

Traceability

Taking a proactive stance on sustainability requires, in part, putting more sophisticated information systems in place to track and trace the origin of food and the impacts of its production steps.

While Canada is a food safety leader, its performance on farm-to-fork traceability is uneven. We would need to be a leader in traceability to demonstrate our sustainability footprint on a comparative basis.

Our next trade agenda could assume a three-pronged approach. Unravelling these indirect subsidies and demonstrating Canada’s comparative advantages on sustainability performance could become key planks in our future global trade strategy, benefiting the agri-food sector as a whole.

And, with the clock ticking for our dairy sector in mind, taking concerted action on dairy export rules may allow Canada to be more competitive on dairy than is commonly appreciated.

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