A dairy-for-lumber deal? Think-tank paper proposes Canada-U.S. swap for NAFTA

The most common uses of Canadian dairy normally include milk, cream, yogurt, butter and cheese. But a new report suggests an altogether different application: use it as a bargaining chip.

A free-market think tank suggests offering American negotiators in upcoming NAFTA talks more open trade in dairy, in exchange for more stable trade in softwood lumber to secure long-term peace on that perennially problematic file.

Squeezing some protectionism out of both industries would be good for consumers, spur economic productivity, and ultimately result in more successful businesses in both countries, says the report from the Montreal Economic Institute.

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"Trade barriers have never made more than a small minority of people richer, at the expense of the vast majority," says the paper, released Thursday.

"Eliminating those that persist in the agricultural sectors under supply management and in the softwood lumber sector ... would be good both for consumers and for producers....

"That opportunity should be seized without hesitation."

Both industries face a critical moment. For dairy, the Trump administration is being pressed to include the issue in NAFTA talks by U.S. lawmakers, just as softwood lumber experiences its latest round of once-a-decade lawsuits and tariff threats.

The industries share similarities.

Both are shielded from open trade in the old NAFTA, employ more than 200,000 people in Canada, and claim a similar economic value of $14-15 billion to Canada's GDP. The paper suggests achieving freer trade in both industries by giving up supply management in dairy.

The current system limits the amount of dairy and poultry Canada can import before a tariff kicks in. Dismantling it would mean lower prices at the supermarket, and a more internationally competitive industry, says the paper.

It points to New Zealand's experience: dairy production nearly tripled after liberalization, and the country became a global player.

But Canada's dairy lobby vigorously disputes the promised benefits.

Dairy Farmers of Canada says supply management's critics get several things wrong starting with the price of milk. It cites statistics showing Canada in the middle of the international price range on milk, lower than New Zealand and France and higher than the U.S. and Germany.

The system also keeps prices stable, the group notes.

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It also says free trade in agriculture would cease to exist if Canada ended supply management. In the U.S. alone, research by the Congressional Budget Office has calculated that country will provide tens of billions in federal support for farm programs over the coming decade.

But the Montreal Economic Institute's paper says the industry could use a jolt.

It says dairy production levels compare to those of the 1960s; that the industry is slow to innovate, and failing to tap the growing international demand for dairy; and that it's being propped up by inflated prices that cost Canadian households $258 a year.

There are two major obstacles to this idea ever happening.

One is that all major Canadian political parties support supply management, which has vocal backing in rural areas, especially in Ontario and Quebec. There was noisy opposition when Canada agreed to merely open the system up a bit in trade deals with Europe and Asia.

The second obstacle: there's no guarantee U.S. negotiators would go for a logs-for-cheese deal.

The idea has old roots.

A senior negotiator from the original 1987 Canada-U.S. free-trade agreement said he would have loved to trade away supply management.

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In his memoir on the negotiations, Gordon Ritchie said the dairy system hurts Canadians at grocery stores, protects inefficient producers, and keeps the industry from becoming an international player like Canada's vineyards did, after liquor trade liberalized.

So what happened?

The Americans never made a big offer, Ritchie says, and Canada held on to its cheese chit.

"We were, regrettably, successful in protecting those (dairy and poultry) restrictions," he wrote in his memoir, Wrestling With The Elephant.

"I for one would welcome the removal of these restrictions," he wrote. "As a negotiator, however, I did not feel the Americans had paid us enough to be entitled to their removal."