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More Cheese Please

Feb 06, 2013

Associate Director
Global Commerce Centre

The European Union Trade Commissioner is in Ottawa today to hopefully complete Canada’s most significant free trade deal since the Canada-U.S. agreement in the late 1980s.

Negotiators are now getting into the toughest issues, one of which is cheese. Canada applies 200–300 percent tariffs on dairy products and holding “import quota” is currently the only way to legally import dairy products into Canada duty-free. The EU wants, at a minimum to increase the amount of cheese it can export to Canada duty-free. Early indications in today’s Globe and Mail suggest that the Canadian government is prepared to admit more European cheese into this country in return for greater access to EU markets for Canada’s beef and pork.

Chart showing Tariffs for Selected Canadian Dairy ProductsWhy wouldn’t Canadians welcome more, say, French cheese? Many consumers no doubt would, but cheaper European cheese imports undercut farmer milk prices. So Ottawa has prohibitively high tariffs to keep imports out (see Chart). If Canada allows in more EU cheese imports, it will be hard to sustain farmer milk prices without having to limit production more and more each year. (For those that want to understand how the system works in more detail, see the 2009 Conference Board study Making Milk).

This trend could erode Canada’s long-standing system of dairy supply-management over time, especially if it sets a precedent for other trade negotiations, such as the Transpacific Partnership trade talks which Canada recently joined. Participants in those talks, such as Australia and the US, have long been pushing for more access to Canada’s dairy market.

Opening doors to EU cheese would pose complications. For one, the EU subsidizes its dairy farmers. However, EU subsidies have been cut back, and Canada’s dairy farmers also benefit from protection. For another thing, if Canada offers the EU a greater share of imports, it would risk irritating partners in its other trade negotiations such as the TPP.

So, should Canada’s policymakers continue to support this policy or should they welcome greater openness, starting with the EU?

All political parties in Canada have traditionally supported supply management (though Liberal leadership candidate Martha Hall Findley has proposed getting rid of it). Recently, Quebec Premier Pauline Marois reiterated how vital supply management was for Quebec in the context of the Canada-EU talks.

To be clear, the policy has largely succeeded at its initial goal: boosting traditionally-low farmer incomes. But a 2012 Conference Board study, Canada’s Supply-Managed Dairy Policy: How Do We Compare? shows that Canada is the only country among its peers that both maintains dairy supply management policies and has stagnating dairy production. Farmers are unprepared for even a partial opening of Canada’s dairy market, and are unable to seize opportunities in fast-growing markets.

Much more than the dairy industry’s well-being is at stake. Buyers of dairy products—processors, restaurants, retailers, and consumers—effectively subsidize dairy producers by paying higher prices. The Organisation for Economic Co-operation and Development estimates the subsidy at $175,000 per dairy farm. The poorest in our society—for which dairy products form a larger share of their budget—are the hardest-hit.

The existing system has broader effects. Food processors that use higher-priced dairy products have found that they are unable to compete in export markets. And Canadian cheese processors pay at least two times more for their milk compared to those who make other dairy products. The costs are then passed on to restaurateurs and consumers.

Sometimes the incentives created by the system stretch believability. Last year, three men were arrested as part of a massive cheese-smuggling ring—they allegedly smuggled cheaper U.S. cheese across the border and sold it to Canadian restaurants at a six-figure profit. If this sounds like the plot of a crime drama, it actually is—cross-border cheese-smuggling formed the backdrop for last week’s episode of CSI: NY.

The EU deal is an opportunity for Canada to embark on reform of a policy that meets neither the interests of the broader public, nor, arguably, even the interests of the dairy sector.

Lowering dairy tariffs, or raising our import quota for dairy from all countries, could allow the industry to gradually adapt to increased competition. At the same time, doors would be opened for Canadian businesses to sell in and from the EU, and to have freer access to the best EU technologies, goods, and services.

Canada should take this opportunity to say “more cheese please.“

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