Terry H. Schwadron
June 12, 2018
Congratulations to President Trump and North Korean leader Kim Jong-Un for stepping back from the brink of nuclear war and to start talking. Beyond that, we all need more information about intents in the place of direct actions towards denuclearization. Nevertheless, the television heads are sagely nodding about, well, they don’t really know.
That gives us a chance to revisit all the vituperative remarks from President Trump about how Canada is beating up the United States over dairy products. In the name of complicated problems, I figured it might be worth understanding how those tariffs work and what they cover.
We know that Trump walked away from a meeting with allies in Canada, refusing to sign the resulting communique, because he said Canada is ripping off America over dairy products, charging up to 270% of cost in certain tariffs against U.S. milk and cheese. It is a soft spot in the general Canadian approach and commitment to free trade, an area of protectionism that speaks to internal Canadian politics more than to ways to annoy the United States. But that’s about the extent of the public conversation.
Indeed, overall Canadian tariffs amount to about 1% of all imported goods, in line with the United States and several other countries. So, Step One here, as always, seems to be in recognizing that these dairy tariffs are more complicated than a slogan can explain. No matter how you count it, dairy is not the biggest issue in overall trade balance between the United States and Canada. And overall, counting goods and services, the United States maintains a positive trade balance.
You do have to ask yourself: What’s the real problem here?
What I’ve learned is that these specific tariffs speak to Canada’s approach to controlling prices through supply, to protecting its own farmers, to recognizing how much milk and cheese is needed overall, and to the fact that there are more cheese-making plants in Canada than across the U.S. border.
According to Bloomberg News, Canada has 12,000 dairy farms mostly around politically potent Quebec with about 950,000 cows and gross receipts of $6 billion in 2016. The United States has 49,000 dairy farms mostly in Wisconsin and New York with 9.3 million animals and receipts of $34.6 billion in 2016.
U.S. dairy exports to Canada in 2016: were worth $631.6 million while Canadian dairy exports to the U.S. were $112 million. Hmm, sounds like a positive trade balance in dairy for the United States.
Indeed, U.S. dairy farms are running about five-to-one ahead of Canada. At various times, Canadian dairy farmers have complained that too much U.S. milk and cheese are being “dumped” into Canada and has sought protections from the Canadian government. In other words, from Canada’s viewpoint, overproduction of milk products and cheese are depressing overall prices.
Since the 1960s, the Canadian government has worked with provincial officialsto set supply quotas for dairy, poultry and eggs to keep prices stable. Sometime after the adoption of NAFTA in 1994, Canada did allow for import of unfiltered raw milk or ultra-filtered milk paste to Canadian plants, where it is turned into cheese, but is treated as an “ingredient” not subject to tariffs. But Canadian dairy farmers have insisted on rewriting milk standards in cheese-making as a way to limit this milk paste. Canadians argue that American exports of unfiltered milk along with rising numbers for use of soy or almond milk are ruining Canadian dairy markets.
According to the Economist magazine, imports of U.S. unfiltered milk products that are within the overall Canadian official quota are not charged an import tax or tariff. But after a certain point, the tariffs kick in. Canada does impose extremely stiff tariffs on imported dairy products, according to Fraser Institute.Skim milk bears a 202% tariff, while butter reaches a 298% tariff. Sky-high trade tariffs like this are not a minor deterrent but rather a major detour around international competition entering the domestic market, and they are intentional. The supply management system installed by Canadian politiciansin the 1970s enshrine this economic protectionism and quota-based production blueprint as features, not bugs.
Now, it turns out that both the United States and Canada (as well as other nations) actively support dairy farmers with direct subsidy programs.
The biggest market for American milk powder, cheese and whey protein actually is Mexico, which buys about double what Canada does. So, apart from the president’s complaints about NAFTA parties and regulations, Mexico and Canada are the biggest importers of U.S. dairy products. In other words, the United States has a very positive trade balance in dairy products with both Mexico and Canada.
Over time, Canada has raised import fees or tariffs on specific dairy products, or it has changed the definition (is a pizza kit a taxable dairy product?) in other cases. Canadianrestrictions limit the use of generic product names such as Asiago, Feta and Muenster, something American farmers find constraining.
One Wisconsin farmer explainedthat he would start at 5 a.m. daily to herd the family’s 120 Holsteins cows to pumps in the 12-stall milking parlor, where they produce 3,800 pounds of milk in each of the herd’s two daily milkings. The milk is siphoned via stainless-steel pipes to a Civil War-era cold room, where it awaits pickup by an insulated tanker truck. The milk travels 194 miles west to Greenwood, Wis., where Grassland processes it into butter, cream, dry milk powder and a high-protein milk concentrate called ultra-filtered milk. Excess skim milk may simply be dumped. The bulk of ultrafiltered milk is then shipped to Canada and used as a protein added to cheese.
Last April, Canada took steps to tax that imported dairy product,
All these trade arrangements, like those in NAFTA, are portrayed as a single trade agreement rather than a bundle of hundreds or thousands of specific provisions affecting thousands of products in hundreds of industries.
The dairy case shows that dealing in broad-brush terms even with something seemingly as specific as dairy products really is much more complicated and as reflective of domestic politics as of international “fair trade” issues.
In his zeal for American dominance in all trade markets, Trump may be overlooking the obvious: American farmers are producing a lot of milk, cheese and unfiltered milk products and need a market to sustain themselves. Trump could “win,” by shutting exports to Canada, but American farmers and consumers would also count themselves among the losers.