There is a lot of angst in Canada about the looming renegotiation of the North American free-trade agreement.
Perhaps no sector has more to fear than the dairy industry.
It's highly protected. It has been a frequent target of U.S. trade complaints, even before U.S. President Donald Trump. And unlike other vulnerable Canadian sectors, it has few natural allies in the United States and a long list of enemies from big dairy-producing states, including House speaker Paul Ryan of Wisconsin and Senate Democratic leader Charles Schumer of New York.
When Mr. Trump comes looking for concessions from Ottawa, you can bet dairy will be near the top of his NAFTA 2.0 hit list.
The Trump administration knows that Ottawa is willing to give something on dairy – if only to protect other sectors, such as auto, steel and energy.
Mr. Trump recently pulled the United States out of the Trans-Pacific Partnership, calling the trade deal "a disaster in the making."
Canada had agreed to give up 3 per cent of its domestic dairy market in the TPP. It's reasonable to assume Mr. Trump's negotiators will want even deeper concessions in NAFTA talks.
U.S. Commerce Secretary Wilbur Ross – the U.S. President's point-man for renegotiating NAFTA – confirmed this week that Washington will seek major concessions from both Canada and Mexico. And he said the U.S. administration plans trigger the 90-day notice for renegotiating the deal in the coming weeks.
"The Mexicans know, the Canadians know, everybody knows, times are different. We are going to have new trade relations with people," Mr. Ross told Bloomberg Television last week. "And they all know they're going to have to make concessions. The only question is what's the magnitude, and what's the form of the concessions."
Without listing any specific demands, Mr. Ross said there's "a lot of meat to be dealt with" in NAFTA.
The fact that Canada's dairy industry is such an obvious target may explain the unusually quiet launch this month of a controversial "ingredients strategy."
Dairy farmers have been struggling to contain a deepening crisis that is threatening the survival of the carefully calibrated supply-management regime, which depends on high tariffs, strict production controls and fixed prices paid to farmers. That careful balance has been upended by a surge of concentrated milk protein imports, a glut of skim milk, underinvestment in dairy processing and infighting between Quebec and Ontario farmers.
The pending Canada-Europe free-trade agreement will open the door even further to imported cheese, and milk protein.
Farmers, particularly in Ontario, see their salvation in a new class of heavily discounted industrial milk – milk specifically directed to the production of protein concentrates used to make cheese, yogurt and other dairy products. The idea is to make these ingredients domestically and displace imported protein concentrates.
Under NAFTA, the United States is allowed to ship milk protein concentrates duty-free into Canada. Most other dairy products face impenetrable tariffs of up to 300 per cent.
That has allowed Canadian dairy processors to do an end-run around the tariff wall by buying imported milk ingredients at the much lower world price, rather than pricier Canadian milk. Imports of protein concentrates from the United States have surged in recent years, taking more than $200-million a year out of farmers' pockets, according to the Dairy Farmers of Canada.
Ontario responded first by selling cheaper industrial milk to processors last year. The industry agreed last year to roll out a similar pricing scheme nationally in a deal administered by the Canadian Dairy Commission, the federal regulator. The new price went into effect earlier this month.
Government and industry lawyers are apparently still working out the trade implications of the new pricing structure (Read: how the heck are we going to get this to fly with Trump & Co.?).
It's too early to tell if the new price has put a dent in U.S. imports.
U.S. milk producers and their allies in Washington have already made it clear they are not amused by what they see as blatant protectionism.
The U.S. industry has a powerful incentive to pry open the Canadian border even further. It's facing a milk glut and low prices at home.
Introducing the new pricing scheme is like waving a red flag in front of a bull (or a dairy cow) as Canada and the United States square off in tricky NAFTA negotiations.