NAFTA Talks Move to Canada

Focus Not on Ag, But Canada's Supply Management Remains an Issue

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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As NAFTA talks continue this week in Canada, a major question for U.S. agriculture is whether the dairy, poultry and egg sectors will see more market access. Dairy remains the major focus.

OMAHA (DTN) -- As the third round of renegotiation talks for the North American Free Trade Agreement start Saturday in Ottawa, Canada, it's unclear how much trade negotiators have delved into the battle over Canada's supply management system for dairy, poultry and eggs.

Canadian officials appear focused on issues such as labor mobility within the three countries, which appears to be a non-starter with U.S. negotiators. Meanwhile, the White House on Friday sent out a column by Commerce Secretary Wilbur Ross about how rules of origin are used to build automobiles. Ross stated without changes to the way auto parts are factored, then "negotiations will fail to meaningfully shift the trade imbalance."

Reports from Canada state the U.S. has not offered any draft proposals when it comes to agriculture, so far. Still, when it comes to issues of market access and agriculture, Canada's supply management strategy used for its 11,600 or so dairy farms is the major topic on the table.

"That is because we already have duty free access for everything else," said Darci Vetter, the former U.S. agricultural negotiator under the Obama administration. "Even when we were doing TPP (the Trans-Pacific Partnership), we were already operating under NAFTA so the only unfinished sort of market access issue was trying to get more access for dairy, poultry and eggs -- their supply-managed products."

Canada's system to protect domestic dairy production translates into high tariffs and limited import quotas. Supply management has been a politically difficult issue for Canada and it still exists because Canadian officials have been willing to make it a priority. Still, it affects Canada's domestic consumers, who pay higher prices for milk or cheese than U.S. consumers. Canadians might pay the equivalent of $5.70 for a gallon of milk, compared to roughly $3.50 a gallon for U.S. consumers.

Canada does have a WTO quota for fluid milk -- 64,500 metric tons, or roughly 17 million gallons. Canada states the quota is filled by shoppers crossing the U.S. border, for instance to box stores in Bellingham, Wash., to buy milk and other dairy products that are half the cost of what they pay across the border.

Vetter argues Canada could compete in a broader basis on the world market. "Canada is a country with open spaces, cheap grain and ample supplies of grass. If they decided to be a competitive dairy-producing country, they could," Vetter said.

Canadian farmers, however, point to challenges they face compared to the U.S. Jeff Nonay, who has a diversified farm and milks 170 cows near Edmonton, Alberta, told DTN his feed costs are competitive with the U.S, but he faced higher taxes, including a carbon tax. Canadian provinces are moving to minimum wages of $15 CAN as well. Still, he recognizes the criticisms against Canada's limits on dairy production.

"We know the initial stance and nobody's been surprised so far in terms of what has come out against supply management and our counter-points," Nonay said.

Canada has about 959,000 milking cows, compared to 1.28 million just in the state of Wisconsin. That makes it hard for Canada to keep giving up market share in trade talks, Nonay said.

"Over the years we've given up a lot in Canada. In every trade deal we give up a little more access to the dairy marketplace domestically and it has never really been replaced with any opportunity for us to export. If we give up too much access, we're going to be looking to export and compete on those global markets."

Ron Bennett, president of the Canadian Federation of Agriculture, barely scratched the issue of supply management at a forum Friday in Washington, D.C., led by the Inter-American Institute for Cooperation on Agriculture. Regarding NAFTA, Bennett said the trade talks should "do no harm" to the current agricultural trade. He said regulatory changes could be made to streamline approval of biotech products and pesticides. Bennett noted others at the forum had raised issues such as dairy and he countered, "I could raise the sugar issue." Last month, Bennett had told reporters CFA supported the Canadian government's position to keep supply management.

Dairy access for the U.S. was already a raging debate before the Trump administration decided to renegotiate NAFTA. Last year, U.S. dairy exports to Canada became less competitive after Canada changed a pricing strategy for implemented a new pricing system for ultrafiltered milk. The pricing strategy lowered the costs for Canadian processors for domestic milk and undercut U.S. milk exports to Canada in the process.

The Canadian-Europe Trade Agreement, or CETA, which went into force this week, gives more market access to Europe for specialty cheeses, specifically additional market access for up to 16,000 metric tons annually of tariff-free access, along with access of 1,700 metric tons of more generic cheese products. That's above and beyond the 13,471 metric tons of cheese access the EU already had in Canada. Once fully implemented, the EU would have roughly 7.5% of the Canadian cheese market.

Europe did eliminate its tariffs on the entire dairy sector from Canada, essentially betting politically that Canada would never get rid of its supply management system. That's because even though they now have a trade agreement, Canada is still restricted when it comes to dairy exports sold below domestic prices under a World Trade Organization ruling.

In return for accepting CETA, the Canadian government agreed to give the dairy industry $350 million CAN ($283.9 million) over five years with $250 million CAN going to farmers and another $100 million CAN going to Canada's dairy processors.

Supply management was also on the table in the TPP, and Canada has yet to take supply management off the table in talks among the remaining 11 TPP countries. Under TPP in 2015, Canada agreed to open up 3.25% of its market to other countries that sign the trade deal.

The access Canada gave up under CETA and TPP shows Canada is loosening its stance, Vetter said. "That previous sort of orthodoxy that those commodities can't be touched, I just don't think that argument holds water anymore," Vetter said. "The real question is how much access are they willing to give up and will it be usable access?"

Meanwhile, even as NAFTA talks continue at a quick pace, the U.S. doesn't have a chief agricultural negotiator. Gregg Doud, a former economist for the National Cattlemen's Beef Association and also a former staffer for the Senate Agriculture Committee, was nominated in mid-June to be the chief agricultural negotiator at the U.S. Trade Representative's Office. He has yet to get a confirmation hearing from the Senate Finance Committee. That's not unusual, considering Vetter's nomination took six months to clear the Senate in 2014. Still, USTR is now in the midst of NAFTA talks without a leading voice for the agricultural sectors.

"That adds to the difficulty because what you want at the senior level is someone who can figure out how they are going to structure the negotiations and what's the strategy of getting issues to resolution in a way that reflects your priorities," Vetter said.

Supply management isn't the only possible focus of the NAFTA talks for agriculture. A bipartisan group of lawmakers from Oregon and Washington state wrote U.S. Trade Representative Robert Lighthizer this week asking him not to move ahead on adding special trade remedies for perishable and seasonable products as part of the NAFTA talks. Fruit and vegetable groups in Florida and other Southeast states pitched the idea of limiting seasonal items to stem the flow of competing products from Mexico. But the Northwest lawmakers point to the trade of apples, pears, cherries and other crops that now rely on exports. They argued that any provision to limit perishable and seasonal products would come right back at them.

"We expect that Canadian and Mexican industries, including the tree fruit industry, may take advantage of such a provision to restrict exports of U.S. products," the group of 10 members of Congress wrote.

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Chris Clayton