What Traders Need to Watch in Dairy Dispute

Last week, President Donald Trump accused Canada of taking advantage of U.S. dairy farmers. The behavior of the U.S.’s northern neighbor “is a disgrace,” he told reporters.

Despite the harsh words, it remains to be seen how closely Trump plans to match his rhetoric with action. This week, he said he had decided to delay making good on a campaign promise to withdraw from the North American Free Trade and will seek to renegotiate the pact instead. The dairy dispute, even though it shouldn’t justify the end of NAFTA, deserves to be negotiated and Trump is right not to accept the status quo.

Americans have long complained about Canadian dairy production. Over the past year, U.S. lawmakers have had extensive communication with their Canadian counterparts, and with Prime Minister Justin Trudeau and his cabinet over the country’s dairy pricing policies. Even former President Barack Obama privately complained to Trudeau that Canadian policies were harmful to U.S. exporters. To no avail.

Canada’s dairy and butter represent a mere .97 percent of global production and dairy milk (fluid) only 1.56 percent. Nevertheless, trade in these products between the U.S. and Canada is meaningful. In 2016, according to Canadian government data, that country imported C$557 million ($413 million) in dairy products from the U.S., while C$113 crossed the border in reverse, creating a C$445 million deficit.

The argument focuses on what is known as ultra-filtered milk. In May 2016, the Canadian Dairy Commission modified the 4M milk class to enable all its processors to buy a liquid, high-protein concentrate used in the manufacturing of cheese and yogurt, instead of imported milk protein concentrates — known as MPCs or ultra-filtered milk — effectively displacing imports.  

Although the policy entailed a heavy domestic subsidy cost, it lowered the prices for this milk class to create incentives to produce domestic ultra-filtered milk and better compete with U.S.-produced imports….

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