Trump's solution to 'unfair' American dairy woes: blame Canada

U.S. President Donald Trump swaggered into Wisconsin Tuesday and toldanxious American farmers that he knew the solution to their problems: beat up Canada for how it runsits dairy industry.

"In Canada some very unfair things have happened," he said. His administrationwould workon it "immediately."

But there's a difference between sabre-rattling and actually firing a shot and in this case, no trigger's been pulled to back up hisfighting words on this "terrible thing" happening to farmers.

I think that our supply management has worked well for our dairy farmersand for our consumers, and I'm more than happy to defend it all the time.- DavidMacNaughton,Canada's ambassador to the U.S.

That doesn't mean Canada's dairy farmers couldn't face a substantial trade challenge soon.

But Trump's words have already drawn out the best cover they could possibly hope for: unambiguous political support from Justin Trudeau's government, even as those same Liberals were otherwise trying to avoid coming to blows with the Republicans now in charge.

"I think that our supply management has worked well for our dairy farmersand for our consumers, and I'm more than happy to defend it all the time," Canada's ambassador to the U.S. DavidMacNaughtontold reporters in Halifax Wednesday.

MacNaughton 'happy to defend' supply management

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Canada's ambassador to the U.S., David MacNaughton, says that Canada's supply management system has worked well for our dairy farmers and that countries like the United States need to look at the degree to which they, and other countries, subsidize their agriculture industries.

It'smusic to the ears of Canada's dairy sector as it liesdeliberately low this week, more confident in leaving thepolitics to the politicians.

"President Trump's reaction is not surprising. He is defending his domestic dairy industry," said JacquesLefebvre, the head of the organization representing Canadian dairy processors. "We believe that further communications with the Canadian government will broaden his perspective on this issue."

Exhibit A:MacNaughton'sletter Tuesday eveningto the governors of New York and Wisconsin,two border states upset with recent pricing changesthat they say cut demand for American imports.

"The purpose of that was to try to set the record straight,to correct some of the errors," the ambassador said.

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Excess milk capacity isn't caused by Canada, he said.

Canada doesn't have an export-driven industry. Itsfarmers only producewhat the domestic market will consume.

"There's a lot of times when it's easier to blame somebody elsethan to deal with the market situation," MacNaughtonsaid.

Tariff loophole

Earlier this month, Wisconsin's Grassland Dairy Products Inc. suddenly announced what it called a "toughdecision": as of May 1, it will buyless milk and cut ties with75 of the state's farmers, as itreorganizes and builds its own corporate-owned 5,000-cow herd to cut costs.

Who's to blame? The Canadians who stopped buying Grassland's diafilteredmilk, it said.

Diafilteredmilk is a new product invented inthe U.S. toreplacefresh milk in the production of things like cheese, yogurt orice cream.

Normally, Canada uses high tariffs to restrict dairy imports. But this new product wasn't on Canada'stariff list and so these kind of restrictions weren't enforced. It exploited a loophole.

Cheap Americandiafilteredmilk became an attractive food ingredient for Canadian processors.

Last year, Canada's producersgot together and lowered their pricefor dairy ingredients not justdiafilteredmilk to makeCanadian milk more competitive with these imports.

The Dairy Farmers of Canadaalso updatedtheir brand strategyto help consumers spotAmerican ingredients on groceryshelves.

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Now the U.S. hastoo much milkon itshands not only because of Canada, but it didn'thelp.

AlMussell, a researcher withAgri-FoodEconomic Systems inGuelph, Ont., has argued against American farmers being portrayed as victims of North American trade. In fact, underNAFTAit's been the opposite, he's written.

"We've got competitive pricing here. Since when is the U.S. a victim of competition?" he said."I think it's a revisionist dialogue," he said.

But Trump's not being specific about exactly what he wants.

"They've given us no detail to back up their claims of losses," he said. "The data do not show this at all. What are they talking about?"

'Ared flag under a bull'

Rather than drop theirdiafilteredmilk prices, the U.S. industry islooking forpolitical saviours.With one eye on upcoming midterm elections, both Democrats and Republicans across the swing-pronefarm belt wantto deliver.

Trade analysts had a hunch Trump wanted to say something to farmersas soon as his Tuesday schedule showed him in House Speaker Paul Ryan's home state of Wisconsin. (Ryan's alreadymade a show of raising dairy issueswith Canada.)

Like presidents before him, Trump'sjoinedthefight.

"Every American administration targets our dairy industry, as do all our trading partners,"said trade lawyer Mark Warner.

Canada's latest pricing changes were"like waving a red flag under a bull."

Nevertheless, Canada's been able to reachtrade agreements with partners like the European Union.

"From an American point of view, we gave a lot less than most observers thought that Canada would have to give on dairy to be part of [the Trans-Pacific Partnership]," Warnersaid.

Had Trump not withdrawn from the TPP, just over three per cent of Canada's dairy market would have opened to American milk.

His decision to pull outhurt Americanfarmers. Now he has to make up for it in future trade talks.

WTO challenge looms

Before this week, the betting was that dairy could be left out of theNAFTArenegotiationand dealt with separately.

Trump wantsswiftresults on NAFTA. But agriculture dealsneverhappen quickly or easily that's why they're negotiated last, or carved out of trade agreementsentirely.

More certainis aWorld Trade Organization (WTO) challenge on Canada's dairy ingredient pricing.

Australia and New Zealand both aggressiveexporters and past combatants in trade disputes seemto bespoiling for thisfight.

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It would be a do-over of a WTO battletwo decades ago, when Canada was rapped for subsidizingexports and forced to dismantle a contentious program.

"It's always been a problem,"former prime minister JeanChretientold Rosemary Barton onPower & Politics Wednesday. "All of it and we survive it since."

Jean Chretien on navigating trade with the U.S.

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'Business is business,' says the former prime minister.

Theindustry believes recent pricing changes areWTO-compliant. The U.S. may not have a good case.

"Hopefully nobody's inclined to panic over something like this," Mussell said. "Canada's still a sovereign country. We're going to make domestic policy changes ... consistent with the conditions that we have to operate in."

But if the U.S. swampedCanada's capacity to fight on a lot of trade fronts,it might be forced to settle some, regardless of merit, hesaid.