Free trade in agriculture is a Holy Grail often espoused by those who do not understand the complexities of agricultural production or the extent of rules-breaking in global markets for farm products. It was not an accident that trade in agriculture was largely outside the GATT rules-based global trading system until 1994.
The brave experiment of the WTO Agreement on Agriculture has encountered considerable difficulty in building on initial progress. Key players are unwilling to adopt new disciplines. Add to this the fact that rules about subsidies and disciplines are written to accommodate the practices of the deep-pocketed subsidizers. Regional and Plurilateral Agreements cannot address these problems because they require multilateral solutions.
Even long-established free trade agreements are not immune to serious distortions resulting from the big vs. little game. Take, for example, the long running dispute over US Country of Origin Labelling (COOL) Rules. While it is difficult to argue against the desirability or legitimacy of providing consumer information (in this case, labelling) – this is not an unfettered right, particularly not when the workings of the US system under dispute are seen to adversely skew the market in favour of using domestic livestock at the expense of imported livestock. Canada and Mexico have experienced considerable disruption and damage to their exports of live swine and beef cattle due to the US measures. The dispute has been dragging on since 2009. The aggregate damage to Canadian beef cattle and hog producers already exceeds $2.5 billion.
The WTO has condemned the US COOL measure on three separate occasions. The most recent dispute settlement panel has rejected US arguments that their efforts to comply with initial losses were legitimate. This came as no surprise to those involved. The allegedly remedial measures introduced by Washington were worse than the flawed system they replaced.
On November 28, the US appealed this latest loss. This is a classic case of ‘justice delayed is justice denied’. Canada and Mexico are now threatening retaliation. This may be business as usual for Mexico, but it is not at all normal for Canada.
Negotiating market access in a world of such subsidies and subterfuge in farm policy is not easy. Japan is reluctant to engage in the Trans-Pacific Partnership (TPP) talks aimed at opening markets for sensitive products because Japanese farmers understand the dangers of competing head-on with US farmers who benefit from massive government subsidies. Indeed, Japan’s rice and dairy farmers are fully aware of the extent of US farm subsidies. It is a reality they cannot ignore.
Canada, too, is often under pressure about its import regimes for dairy and poultry products. There have been calls from restaurants for freer trade in dairy and poultry products (I can’t understand this – which restaurants face cross border competition?). Frankly, farm groups should not include interests dedicated to keeping food input costs as low as possible.
Some academics have a rather flawed view of free trade. Politicians, from former party leadership candidate Martha Hall Findlay to former Prime Minister Brian Mulroney, are beating the drum for freer trade with no apparent concern about fairness. Mr. Mulroney’s comments last week were a bit surprising. He was able to negotiate free trade with the US and then NAFTA without throwing Canadian dairy and poultry farmers under the bus. Before advocating unilateral concessions it behooves those trying to shape public opinion and negotiate strategies to research the facts and get them straight.
Let’s be clear – I support free trade but truly free trade requires must be made “free” by parties on both sides; it must also be fair – and this requires more than simply the removal of tariffs.
Many farm product markets are skewed by billions of dollars of ‘domestic support’ (i.e., subsidies), principally by the United States and the European Union. This brief on the EU’s CAP program shows the extent of direct payments to its farmers. The value of these direct payments is projected at €292.484 billion from 2014 to 2020. In two of the major exporting countries the benefits are particularly striking: in France the value of direct payments is €51.4 billion; in Germany, €35.5 billion.
Canadian pork producers will finally receive enhanced access to the EU under the recently-negotiated (though not yet active) Comprehensive Economic and Trade Agreement (CETA). It is limited access but much better than has been available to date. It is worth noting, however, that the EU continues to provide considerable support and market insulation for EU producers of pigmeat.
The latest version of the EU Dairy Policy (outlined here) contains numerous elements which provide market stability – including export refunds and market insulation – and clearly skew the market in favour of EU farmers. But, the problems of dairy trade are not unique or isolated to a few countries. US dairy farmers calculate that free trade in dairy with New Zealand would cost them billions of dollars a year.
Canada has tariff rate quotas for dairy products, as do 29 other WTO members, including the United States and the European Union. That is 57 countries in all. Canada imports 8% of its dairy consumption, the US about 4% and the EU about 2%.
The United States does not come to the negotiating table with clean hands on a number of farm products. Sugar is a constant source of problems (though Canada also shelters sugar refiners). And, Washington has decided to buy its way out of its WTO sins on cotton instead of respecting the rules.
The US has dumped and subsidized its way to dairy exports success. The graph below compares US costs of production for milk with farm gate prices for milk. Since the WTO Agreements entered into force, the US Farm Gate price for milk has never been above its cost of production. The average shortfall has been $4.57 centum weight (cwt) ranging from a low of $1.42 in 2007 to a high of $9.80 in 2009.
Dairy farmers in the US are compensated for these shortfalls – i.e., for the difference between the farm gate price and the cost of production – through ‘mailbox’ programs like MILC (Milk Income Loss Contract). US dairy farmers are also entitled to risk management insurance – via the Dairy Margin Protection Program and the Dairy Livestock Gross Margin programs – though it would be more accurate to refer to these as risk elimination insurance. These programs provide insurance which is donated outright or subsidized by USDA. They have given dairy farmers $4.00 per cwt or about 20% of the average cost of production over the past 19 years – without payment of any premium. The next $4.00 per cwt does require a premium but it is shared with/subsidized by USDA.
The US system provides dairy processors with below cost of production milk, which makes their prices more competitive in export markets. US dairy exports are dumped and or subsidized. While the US may defend the situation claiming that the purchase prices for milk by processors are actual market prices, the only way that US dairy farmers can sell at a loss, as they have over nearly 20 years, is for the government to subsidize and offset the losses.
Subsidization has no place in a free trade equation. It is not fair trade.