New Zealand’s dairy dispute with Canada reveals the ongoing tensions within Canada’s trade agenda.

On May 12, New Zealand requested consultations with Canada over its administration of dairy tariff-rate quotas, known as TRQs.

TRQs are the reserved amounts of a good that are free from existing tariffs. Canada maintains high tariffs on dairy products to insulate its industry from foreign competition — but TRQs are exempt from these. These TRQs are broken down into different categories, like butter or milk powders.

Under the Comprehensive and Progressive Trans Pacific Partnership (CPTPP), Canada allows other countries to sell their dairy products at low tariffs for a set amount. The challenge is how to administer these amounts or TRQs. New Zealand maintains that Canada’s administrative methods are undercutting its CPTPP commitments to freer trade among signatories.

The problem for Canada is that New Zealand’s case is strong.

New Zealand’s trade dispute alleges that Canada’s TRQ administration is reducing its market value by underfilling its dairy TRQs. As a result, New Zealand is not getting enough of its dairy products to Canada, and the products Canada does import are of lower value. New Zealand attributes this to Canada’s exclusive “pooling” of TRQs to processors.

Since 1995, Canada has administered its TRQs in pools that are separated by their location in supply chains. For example, 85 per cent of Canada’s milk TRQs under the CPTPP are reserved for dairy processors that make products like cream and dairy powders.

Canada’s TRQ administration is skewed, given the vast majority of dairy products are allocated to processors instead of retailers. This means the countries that are a part of the CPTPP cannot get their products directly onto Canadian store shelves.

This is a major problem for a couple of reasons. First, Canada’s allocation of dairy TRQs makes it more difficult to maximize what the agreement allows for imports. In other words, it undermines efforts by countries like New Zealand to sell their products in Canada. Early signs seem to show this is the case.

Second, processors are more likely to buy cheaper products as inputs to more expensive goods. For example, an ice-cream sandwich is a product manufactured using other — usually cheaper — dairy products. This could mean lost profit for New Zealand producers.

Fortunately for New Zealand’s case, the CPTPP is more thorough than other agreements. It specifies that TRQs are to be “no more administratively burdensome than absolutely necessary.” The agreement adds that countries cannot “allocate any portion of the quota to a producer group” or “limit access to an allocation to processors.”

If Canada loses the panel decision on the matter, it wouldn’t be the first time. The United States successfully advanced a similar request for consultation under the Canada-United States-Mexico Agreement.

The American dispute also identified Canadian pooling as unfair and inequitable. Canada argued that a processor pool does not constitute an allocation under the agreement. Canada added that the Americans were aware of its TRQ administration and therefore tacitly accepted it.

These arguments failed to convince the panel and Canada has yet to comply with this ruling. It seems doubtful Canada would succeed under CPTPP either, as both agreements have similar TRQ stipulations.

The better question is why Canada put itself in this position in the first place.

Since Canada’s first trade agreement, there has been clear tension because even though Canadian policymakers want free trade, they also want some sectors to be exempt. Canada is not unique to agricultural exceptionalism, but it is among the world leaders of this practice.

While early trade agreements navigated this tension, recent agreements have struggled to do the same. Canada’s last three major trade agreements have each conceded more access to the Canadian market for foreign dairy producers. In return, Canada has offered direct compensation to dairy farmers and processors.

This shift in trade policy comes at a moment where free trade is under greater scrutiny. While trade partners like the United States are backing away from trade agreements, Canada is stepping forward.

This is part of Canada’s new trade strategy, the Inclusive Trade Agenda. This agenda aims to bring historically marginalized groups into trade. Women, Indigenous Peoples and the middle class are among these groups.

Global Affairs Canada adds that “communicating the benefits of trade and investment” is a key goal of the agenda, which seeks to curb “a perception of negative or divergent effects of trade and investment.” But this is more than a perception.

The Inclusive Trade Agenda is as much substantive trade policy reform as it is a rebranding effort. The agenda communicates Canada’s renewed commitment to free trade.

The problem is that Canada is selectively embracing economic liberalization. Canada wants free trade only for some aspects of its economy. Canada’s trade policy is torn between two pathways.

There is nothing inherently wrong with insulating the dairy industry from foreign competition. Good arguments can be made in favour of exempting it.

But Canada can no longer have it both ways. Canada cannot concede on dairy then backtrack on those commitments while advocating for rules-based agreements.

The contradictions in Canada’s trade agenda have never been more evident. New Zealand’s dispute is a reminder that Canada must make difficult choices.

Canada can either promote a restrained trade agenda with few concessions, or fully embrace liberalization. Trying to do both will accomplish neither.

– Noah Fry is a Comparative Public Policy PhD candidate at McMaster University.

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Canada must finally learn from this hallmark of American politics and calibrate its trade policy to have a stronger industrial focus.

Under the proposed bill, consumers of electric vehicles can receive US$12,500 in tax credits. But to receive the full rebate, the vehicle must be produced by American manufacturers.

The act, not yet approved by the Senate, serves as a response to both economic and environmental crises. It aims to restore the American auto industry while addressing climate change.

Canada’s international trade minister, Mary Ng, says in a letter to congressional leaders that the bill is discriminatory and will cause “irreparable harm” to both Canadian and American auto sectors. Prime Minister Justin Trudeau said he also expressed concern about the rebates and their impact on continental trade in his recent Oval Office meeting with Biden.

Despite their frustration, Canadian policy-makers shouldn’t be surprised. The proposed legislation is among a string of protectionist measures pushed by several administrations.

The Barack Obama administration supported ‘buy American’ provisions in the wake of the 2008 economic recession. Canadian policy-makers complained at the time that the provisions were discriminatory, and they were ultimately watered down.

The Trump administration was especially protectionist. It applied tariffs broadly, including on Canadian steel and aluminum twice. By 2019, the United States was leading the world with more sanctions than at any other period in its history.

Biden signalled his support for America-first provisions during his presidential campaign. The Democratic platform included references to restoring auto sector jobs and increasing electric vehicle sales.

In April 2021, the Biden administration opened a Made in America Office and directed agencies to increase the amount of American content in their purchases.

More broadly, Americans have long offered significant subsidies to their agricultural sector.

The trend line in American trade policy is clear. Protectionism is back on the table in significant ways.

Scholars have argued that crises demand exceptional state intervention to ensure a return to stability. The Biden administration must lead on the environment, the economy, health and social justice while staying politically viable. These pressures leave Biden with little choice.

Ng has already signalled Canada’s intention to fight the American EV rebates. Beyond the Canadian delegation’s recent lobbying visit to Washington, D.C., Ng has argued that the rebates are “inconsistent” with agreements like the Canada-United States-Mexico Agreement, known as CUSMA.

Setting aside the potential success of a challenge, Canada has other and better options.

The Canadian government has often been a driver of industry. Especially before the 1980s, Ottawa used federal subsidies, Crown corporations and strategic infrastructure developments to support industry.

Though these tools continue, new economic thinking has tended to push policy-makers away from their use. Instead, the preference has been to let the markets do the work.

But federal supports continue as a form of regional development. Aerospace, dairy, cod fishing, forestry and petroleum industries each have regional dynamics that help motivate government support.

While not all state inventions are the same as the consumer EV rebates in Biden’s Build Back Better legislation, their purposes are similar. Pro-industry policies help fuel economic growth and social cohesion and can assist governments in achieving other political goals, like net-zero emissions.

Canadian governments have the tools on hand to insulate domestic industries from significant market changes.

These tools are actively used in some areas. The government continues to defend dairy supply management, for example, as critical to our prosperity.

Canadian governments also use tax credits to promote consumption. Without limiting them to vehicles built in Canada, both federal and provincial governments offer electric vehicle subsidies. These subsidies have a similar dollar value to the current American proposal.

There may be reason to believe this is not a sustainable practice. But Canada has few other options.

It appears Canadian lawmakers are still hoping the Americans will exempt Canada from Build Back Better. Ontario’s Conservative government under Doug Ford is resisting electric vehicle rebates, while the Trudeau government continues to appeal to Washington to exclude Canada from the measures.

But even if Canada is successful in stopping the proposed EV rebates, American protectionism is here to stay.

While embracing protectionism is not to Canada’s advantage, holding out for exemptions isn’t good policy. Instead, Canada needs to accept the reality of global trading conditions.

Certainly, there are international responses for Canada. Canada should reflect on its inclusive trade agenda more. This review should include a reconsideration of the value of global trade deals over bilateral agreements.

But Canada should also look inward. Targeted supports to Canadian industries will be needed to weather this protectionist storm.

– Noah Fry is a PhD student in the department of political science at McMaster University.

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