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The sour smell of Canada’s milk and cheese rules

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Silly rules make people do strange things to flout them. Consider a bizarre trade case between Canada's milk producers and a supplier to Pizza Pizza, J. Cheese Inc., which has found a laughably sneaky way to get past Canada's import rules around milk and cheese. It probably shouldn't be allowed, but J. Cheese isn't the problem – our artificial dairy supply regime is.

For 40 years, Canada has protected dairy farmers with a supply management system that severely restricts the import of milk products. That's great news for Canada's 12,000 or so dairy farms, but lousy for the rest of us, who pay significantly higher prices: one recent study found that Montrealers and Torontonians pay at least 77 per cent more for three bags of 2 per cent milk than people in upstate New York. The prices, as the C.D. Howe Institute points out, are set by provincial milk marketing boards and based on increases in production costs and inflation but don't take into account the concerns of customers, and force none of the competitive pressures on dairy farmers that in other industries would lead to greater efficiencies, economies of scale and innovation. Many Canadian food manufacturers have simply shifted production to the U.S. It has also left Canadian milk blocked from entering a booming global market at a time when other countries have been liberalizing their milk regulations. Meanwhile, dairy farmers have remained reactionary and small-minded; they have even had the chutzpah to promote a campaign pointing out that just one in three Canadians consume the recommended amount of milk a day.

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Unfortunately, most politicians have made their bed with the dairy farmers (with the exception of failed Liberal leadership candidate Martha Hall Findlay), so we're all trapped paying high prices for milk and cheese. The situation is even worse for pizzerias, who face the added insult of watching frozen pizza-makers qualify for preferential prices under a special class permit system.

So hats off to J. Cheese. They have cleverly sourced packages from U.S. that combine mozzarella cheese and pepperoni in "a packaged pizza topping food preparation" as if it were some kind of intricate concoction. They asked for and got permission to classify them as such from the Canada Border Services Agency.

The dairy farmers called them out for flouting the rules, and asked the Canadian International Trade Tribunal to overrule the CBSA. The farmers have a point: inside the packages, the two foodstuffs are kept apart by wax paper and presumably separated at their destination. The farmers argue that the products should be considered separately "as they lack the 'togetherness' required to be a food preparation," which would leave the cheese subject to a 245.5 per cent tariff.

The dairy makers might have a tough time, says Darrel Pearson, co-head of the international trade and investment practice with law firm Bennett Jones, as the battle is strictly over classification and not broader public policy. "The members of the tribunal will be very, very cautious. They won't be influenced by politics and will be handcuffed by rules and precedent."

Here's hoping he's right. A ruling in favour of J. Cheese would be threaten the supply management system and force the supposedly pro-consumer federal government to explain to Canadians exactly why we should continue to pay unconscionably high prices for milk, cheese and so on, and to protect an industry that would ultimately be a lot better off competing on the world stage. Spoil the milk regulations, and spare the consumer.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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