There was a diary on the rec list this morning titled Trump Quietly Handed Early Defeat on Trade. I don’t have a (ahem) beef with that post, but it was a little light on details and many people in the comments section had more questions than answers. Meanwhile, I was just geeking out on the topic, doing my best to explain what I could.
So I figured I’d kill time by explaining more in depth what happened and why it happened, and a bit more on the trade policies at play here.
(Please note that some of the links I might provide will discuss different types of milk and milk product and many of them will have different abbreviations and/or descriptors. That’s somewhat important, but not important enough to for me to go into detail about here. For the purpose of this discussion, just think of it all as milk product. If you’re not exporting it, it’s not a critical distinction.)
One point that is semi-important to understand when discussing dairy is that most dairy/yogurt/cheese/milk companies don’t own land or cattle. They source their product from small, medium, and large dairy farms. This means that your local family farm rarely sells products directly to customers, they typically sell to one large company who processes it then resells it, and this is especially true in exports.
The reason that is important is because what happened to the dairy industry in Wisconsin (and other states) is that one of those large processing companies, Grassland Dairy Products, recently sent letters to their suppliers in Wisconsin and New York to let them know that they would no longer be buying milk from them:
Behind this action is a new pricing structure implemented by Canada, which dramatically increased the cost of U.S. dairy imports and encouraged dairy companies there to purchase similar items from Canadian dairy producers.
Every day for years, Grassland has sent more than 1 million pounds of ultra-filtered milk, a product with elevated protein content that's typically used in cheese production, to Canada, but it was informed by its Canadian customers last month they were immediately discontinuing buying the product from Grassland. According to the company, it left them little choice but to reduce its milk intake.
Now, make no mistake. This is devastating to U.S. dairy farmers for a few reasons, and it will reverberate throughout every Ag-dependent state. These farmers now have a shit ton of milk to get rid of and nowhere to sell it, and if they are able to sell it, it will be for pennies on the dollar. When you have that much unusable product just sitting there, prices plummet. The best thing that can happen to these farmers is that they somehow break even, but that’s an optimistic view.
So, what happened? Why did Canada do this?
Well….
Contrary to popular belief, free trade deals don’t say “I get free access to your economy and you get free access to mine. Cool?” There is a reason why they take so long to negotiate, and that reason is that there are some products that each country is going to be very protective of, while also wanting better access to another country’s resources.
Take the TPP, for example.
One of the sticking points during negotiations was with Japan. Japan’s strength in exports is cars, and the U.S. (read: Detroit) wants to be more competitive in that market. So writing auto parts and such into the TPP was a mess. Japan didn’t want to sign off on anything that threatened its strength, while the U.S. wanted some concessions so that we could compete more efficiently.
Thus we have long negotiations with other nations. What can the U.S. give to Japan in exchange for a larger share of the auto market? The U.S. has to sweeten that deal somehow and sometimes we end up on the short end of that stick and some times we end up BEING the stick.
In the case of NAFTA, we have been the stick when it comes to dairy and Canada. We export a lot of milk products to Canada, and while Canada never agreed to include dairy products in NAFTA, they have not been enforcing the tariffs on many dairy products, so we essentially had the benefits of NAFTA without adhering to the letter of the law.
In general, we have had a strong trade relationship with Canada that is mutually beneficial in most ways. But here’s the rub. You know (or can imagine) how loud these small Wisconsin mom and pop dairy farmers are screaming about the enforcement of this tariff. It does have the ability to decimate them and, as I said above, you don’t get a surplus of any commodity without the value of that commodity plummeting.
Well, Canada’s dairy farmers have been under that particular thumb time for a while now. All the milk products that we’ve been exporting to Canada were supposed to have tariffs placed on them but that wasn’t being enforced, so the U.S. was able to compete with Canada’s dairy farmers on their own home turf. Under NAFTA, that was NOT supposed to happen. But it happened, and that ended up disadvantaging Canadian dairy farmers while rewarding American ones.
Canada was concerned about this very issue when negotiating the TPP. Under that agreement, Canada would have been given more access to our dairy market, making things a little more even-handed. But the TPP is pretty much dead now as far as the U.S. is concerned (I have my doubts about that, but that’s a topic for another day) so Canada, without the option of easily exporting to the U.S., is simply saying “OK, but you can’t easily export to us.”
Chuck Schumer actually sounded the alarm about this very topic last year. And politicians left and right are scrambling to find a way to nail Canada on this to try to find a way to force them to lift the tariff.
“We believe the policy was designed to discourage U.S. exports of ultrafiltered milk and incentivize Canadians to purchase Canadian milk, which is a possible violation of World Trade obligations,” Wisconsin Gov. Scott Walker said.
In a statement Tuesday, Congressman Mike Gallagher, a Green Bay Republican, said Canada’s new policy “preventing the sale of our dairy products in their country is not consistent with our values nor our agreements.”
“Trade must be free but fair, and Canada must play by the rules and end their protectionist policies,” Gallagher said.
U.S. Sen. Tammy Baldwin, a Democrat from Madison, asked the U.S. Department of Agriculture to investigate whether Canada is unfairly blocking U.S. exports and if trade agreements have been violated.
Sigh. Yes, this was done to incentivize Canadians to purchase Canadian milk. I don’t think anyone, least of all Canada, would argue with that. And the arrogance and hypocrisy of the U.S. in this situation is rather jaw-dropping because given our druthers, most Americans would say “Hell yes!” to implementing the sort of thing that Canada just did.
And if the U.S. really wants to push the Canadian government on this, our only route is through the WTO, or through an ISDS action, which we just told the world that we have no use for.
I don’t know what the answer to this is, but bottom line? It’s easy to threaten a trade war, it’s not so easy to fight one.
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I have to add my normal disclaimer: I am agnostic on trade deals and this is not written in support or opposition to the practice.