Do International Trade Deals Help or Hinder Canadian Dairy?

Within the span of the last four years, Canada has signed the Canada-EU Comprehensive Economic and Trade Agreement (CETA), the Canada-United States-Mexico Agreement (CUSMA), and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), all of which are free trade agreements that some argue targeted the Canadian dairy industry excessively and affected it negatively. While international trade theory concludes that there are always benefits to international trade, Canadian dairy clearly took one for the team to benefit the Canadian economy overall.

Conventional economic policy argues that free trade’s positives outweigh the negatives, which is why a social safety net exists. If there is specialization in the production of the goods and services in which producers have a comparative advantage, there is a decreased possibility of low-wage countries out-competing higher-wage countries (such as the US and Canada) and taking jobs. Thus, free trade should increase efficiency, drive competitiveness within industries, increase access to higher-quality and lower-priced goods, and promote overall economic growth. However, there are some consequences of free trade, such as the loss of certain industries due to crowding out, increased job outsourcing, and reduced government revenue from tariffs and taxes. So, for those hurt by trade, the Keynesian view suggests that the government should enlarge state intervention policies through labour adjustment programs, such as job retraining programs and wage support, rather than abandon free trade. 

Recall the article on Canada’s dairy supply management published earlier this year, in which President Trump lambasted Canada for the high import tariffs the government imposes on dairy. Canada's dairy supply management was a huge sticking point for CUSMA negotiations, forcing Trudeau to fold by conceding almost 10 percent of the dairy market overall. With the CUSMA and CETA, small dairy farmers and consumers are suffering major economic losses; domestic agricultural interests are sacrificed to foreign ones, since the trade deals would undercut farm incomes and weaken rural communities by granting tariff-free access to (usually subsidized) European producers. The influx of US agricultural products, including US dairy, came simultaneously with CETA, which allowed EU imports of 5.3 million new kilograms of cheese in 2018. Furthermore, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) opened up 3.25 percent of the overall dairy market. Many dairy farmers, as a result, have decreased labour costs by firing employees, downsizing, or shutting down their operations and changing industries entirely. According to Statistics Canada, there were 11,737 dairy farms in 2015 but 10,679 by 2018, an 11 percent decrease in the number of dairy farms from 2011 to 2018. 

As a result of CETA and CUSMA, Ottawa increased compensation to existing dairy farmers to $1.75 billion to offset losses in market share and income, with $345 million given out in the first year in direct payments according to the dairy farms’ production quotas. In the plan’s first few years, the aggressive compensation payout could lessen the impact of income loss even more than a gradual payout over eight years; additionally, this compensation plan mirrored that of the Harper government’s of up to $4.3 billion when the CPTPP entered into force. While the Liberal government’s compensation would support farm incomes and rural communities, the weakening of the supply management system due to new sources of supply not controlled by the domestic system will still expose dairy farmers to market volatility and increased foreign competition. 

It has been speculated that the US would be the biggest winner from CUSMA, while both Canada and Mexico were expected to lose revenue, exports, and investments from the deal; Canada’s economy could shrink by 0.4 per cent, and economic welfare could decline by more than US $10 billion. However, Ottawa declared that with all three of these trade agreements, Canada is the only G7 nation with free trade access to the Americas, Europe, and the Asia-Pacific region, with access to tariff-free goods from Japan and a 7% increase in merchandise exports to the EU. With the federal government leading the charge for free trade, we are left to question whether its compensation really made up for losses suffered by dairy farmers. In the face of CUSMA, CETA, and CPTPP, Canadians must evaluate whether the dairy industry’s losses are an acceptable casualty in order to pursue a more profitable and efficient economy.