When the Canadian dairy industry set below-market prices on milk ingredients earlier this year, Craig Alexander saw his company’s sales to Canada shrink before his eyes.

Alexander works for O-AT-KA Milk Products, a dairy cooperative in Batavia, NY. Before the new rules were enacted, Alexander said his company shipped about 3.5 million pounds of a concentrated milk product to Canada every week. When the artificial price drop made it nearly impossible for O-AT-KA to compete in Canada, the amount his company shipped fell by about 70 percent.

“Some of the processors lost all their business up there,” Alexander said.

In April, President Trump knocked Canada’s “supply management” system, inserting himself in a trade dispute between U.S. dairy exporters and Canadian farmers. While the system – which regulates the market supply for the Canadian dairy and poultry industries through quotas, tariffs and price fixing – has been a boon for the farmers under its protection, supply management shields the Canadian dairy industry from outside competition, limiting American business and raising Canadian consumer prices.  

The dairy controversy first drew national attention in America when the president criticized Canada’s trade practices during a speech in Wisconsin last month. “In Canada, some very unfair things have happened to our dairy farmers and others, and we’re going to start working on that,” the president said at the headquarters of Snap-On tools.

“What’s happened to you is very, very unfair. It’s another typical one-sided deal against the United States. And it’s not going to be happening for long.”

The president’s comments followed a public letter from a number of U.S.-dairy interest groups protesting new regulations in Canada on “ultra-filtered milk,” a concentrated dairy ingredient used to make cheese and other products. Canada’s dairy and poultry regulations have limited competition from American dairy farmers partially through heavy tariffs on most dairy imports, but ultra-filtered milk had successfully slipped under the radar for years.

American dairy farmers, taking full advantage of the loophole, produced millions of pounds of ultra-filtered milk for export. But when the Canadian government lowered the price of the ingredient for their dairy processors, American farmers, no longer able to compete, were effectively shut out of the market – and stuck with surpluses of ultra-filtered milk.

“It was a foolish thing in my opinion, and in many economists’ opinion, to do it,” said James Vercammen, professor of food and resource economics at the University of British Columbia.

“Supply management was coming under attack for many years anyway for being trade-distorting, and then to go ahead and do this additional distortion by plugging the loophole was sure to be countered” by other trading partners, he said.

Ultra-filtered milk, like most dairy products, can’t be kept in storage for long before it exceeds its sell-by date. For farmers and processors such as Craig Alexander, the choice is stark: “sell it or smell it.”

Exports of dairy products and eggs from the U.S. to Canada fell in 2016 to the lowest value since 2013, accounting for nearly $365 million of the export sum.

Strengthened protectionism in Canada risks damaging an otherwise-vibrant trade relationship: Canada is America’s second-largest trading partner, buying more than $266 billion in goods exported from the U.S. in 2016.

The trade relationship can largely be credited to the North American Free Trade Agreement (Nafta), a trade deal that lifted many of the existing trade barriers between the two nations. But at the time the original deal (the precursor to Nafta, called the Canada-U.S. Free Trade Agreement) was being negotiated in 1987, neither country wanted to liberalize their highly-protected dairy industries.

“Basically they sat across from each other and said, ‘you don’t want to do dairy, do you?’” said Andrew Novakovic, professor of agricultural economics at Cornell University.

As the U.S. became more involved in global markets in the 1990s, particularly through accession to the World Trade Organization in 1995, its dairy industry became less protected.

“Since then the U.S. dairy industry not only entered world markets, but we’re getting pretty darn good at it,” Novakovic said. Canada, in contrast, “continues to be highly protectionist.”

One price of protectionism has been a consolidated dairy industry. While America still retains some price regulations on its dairy industry, Canada’s system of controls is far more constricting, for foreign competitors as well as Canadian upstarts. The number of dairy farms in Canada, for instance, has dwindled precipitously over several decades, from more than 100,000 at its height to fewer than 12,000 by 2014.

This reduction is the result of quota exchanges, a facet of supply management requiring farms to purchase shares in the dairy market. Quotas are adjusted by the government in accordance with demand, and cost farmers tens of thousands of dollars per month. Designed to secure stable revenues and avoid overproduction, the system also creates a barrier for new farmers trying to enter the market.

The beneficiaries of supply management are quick to defend the system. Roger Pelissero, chairman of Egg Farmers of Canada, said that supply management helps grow the economy. If local dairy and poultry farms have more money, he contends, they’ll spend it on local businesses, which will repeat the process and create a “ripple effect” of economic growth.

“I’d say there’s only winners and winners,” Pelissero said.

But the farmers’ higher incomes come at the expense of consumers. America’s consumer prices for dairy products grew 19 percent from 1996 to 2009. Canada’s, meanwhile, grew 59 percent in the same time period – 12 percent faster than the European Union, according to the International Dairy Foods Association. Between 2016 and 2017, average retail prices for most food products went down – but milk went up.

And while dairy farmers’ families made an average annual income of $121,372 in 2013, the median income for two-parent families in Canada was $84,080.

Yet President Trump delivered his withering remarks against Canada’s protectionism in the midst of a speech advocating a return to American protectionism. And shortly following his rally in Wisconsin, the president imposed a tariff on Canadian softwood lumber imports in retaliation for Canada’s conduct in the dairy industry.

“It reminds me of the old saying,” Novakovic said. “‘All I’m asking for is a fair advantage.’”

With the ultra-filtered milk loophole closed, there are few advantages left for American dairy workers, such as Craig Alexander, in selling their products to Canada. America may have “evolved” to free trade in the dairy industry, as Novakovic put it, but Canada has doubled-down on protectionism.

“They don’t want to compete,” Alexander said. “They don’t want to play by the rules.”

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