NAFTA and Dairy

Eureka! At last, we have a renegotiated NAFTA

Free Market Reflections with Steve Dittmer

While it seems like forever to us, these kinds of diplomatic trade battles usually take several years to settle, not just a little over a year. Of course, President Trump wasn’t around before now, pushing people’s buttons and impatiently demanding results like a business tycoon.

Prime Minister Justin Trudeau made a major point that the agreement meant economic stability and certainty for Canadian businesses and investors. Foreign Minister Chrystia Freeland had held her ground all along, reminding folks she was after a good deal for Canada.

And she got her most important priority — keeping the dispute resolution procedures in place — and next, getting what is effectively an exemption on any upcoming 25 per cent auto tariffs, getting 2.6 million units duty free, compared to the 1.6 million currently exported.

From a distance, it is hard to say how much damage the dairy sector will have to absorb. I know some folks will say 3.59 per cent is not a big deal but when an industry is fundamentally oversupplied, even a couple per cent is significant. We learned that lesson years ago in the beef industry. The market is much more sensitive when the supply is close to the edge than when demand is out ahead of supply. Apparently, the supply management and subsidies were left intact, so the government will have an easier time figuring out how to compensate producers for their losses.

That supply management and subsidy “problem” is left to another day, likely another government. Your beef industry is much closer to a free market system and so the government control and subsidy for dairymen is a bit foreign to cattlemen. But I ran across an opinion piece from a Canadian before the final agreement that some livestock folks may think still applies.

Colin Robertson, vice-president of the Canadian Global Affairs Institute, noted Trudeau’s political problem in executing a dairy deal right before a Quebec election October 1. (Of course, other issues had already determined that election outcome, it’s just no one knew that for sure before October 1.) Robertson told Politico that there were some cracks in the Quebec supply management defense. Some favour the end of supply management and he concurs with the opinion that “Canadian cheese can be world busters” and Canadian dairymen can be competitive with the Aussies and Kiwis. He thinks the adjustment assistance necessary during a transition is “affordable” and that dairy can be just as successful as Canadian “beef, pork, grains and lentils.”

“Mr. Trump may force us to do what we should do,” Robertson concluded.

Now, Canadians will have to decide what, if anything, they want to do and find a new bad guy to force it.

I think your Minister Freeland did a very good job, holding her dispute resolution position, beating back the sunset clause with a pretty clever device and protecting Canada from a 25 per cent auto tariff. Given her toughness and the backing she has apparently gotten from Trudeau, I would guess she will get a good deal on the steel and aluminum tariffs very soon, probably a quota with some headroom.

After all, it is not easy negotiating with the trading partner you sell 75 per cent of your exports to. Especially when that partner realizes its advantage, pushes it and has a booming economy and substantial hubris behind its approach.

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One thing I have learned from my conversations with Canadian friends and trips to your meetings: the fundamental attitude is totally different in an exporting nation versus one dominated by its domestic market. It has been your advantage to have producers who instinctively cut right to the customer’s thinking when structuring their whole industry, versus the American cattlemen’s attitude for many past years that we’ll produce what we want to produce and the domestic market will always be there.

It has also been pointed out that the strengthening of the auto manufacturing model, to require 75 per cent of the content to be made in North America to be duty free and that 40 per cent of it be made by workers making at least $16/hour, helps Canada as well, as some of its auto and parts manufacturing has been lost to Mexico over the years.

Canadians feel President Trump has been too hard on Canada during these negotiations and I can’t blame them. But, when you are trying to tackle the brute running back (China), some other guys are going to get bumped along the way. But deep down, businessmen in both countries are aware of how integrated our businesses and economies are. That kind of pressure undoubtedly played a part in getting this thing done, especially with our mid-term elections so soon.

Oh, I see Canada has been busy with the process of ratifying the TPP agreement— you know, the one without the U.S. in it. Go figure.

Oh, Canada!



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