Matte, Kempton L.

English

Research Papers in Economics

Discussion
NATIONAL  DAIRY  COUNCIL  OF  CANADA
Kempton Matte
Canadian dairy processors have participated in three disputes, not nec-
essarily by choice. They  were:
*  Ice cream and yogourt import prohibition by Canada under the GATT
(January  1988 to December  1989).
* NAFTA import tariffs for U.S. dairy products versus tariffication un-
der the new WTO (July  1995  to December  1996).
* the Special Classes for Export Purposes  (5D & 5E) Program,  and
fluid milk import restrictions also under the new WTO (October 1997
to October  1999).
In  each case the predominant political interest  was to protect the protectionist
consensus  of dairy farmers,  reflected in  supply management  in the Canadian
market.
Ice Cream  And Yogourt Import  Prohibition
In the first case,  so fearful were  the dairy farmers of having to face  a
GATT panel that they indicated a willingness to government to give the United
States access  to  a substantial  portion of the Canadian  ice cream and yogourt
markets  in  order  to reach a  settlement.  This outraged  product manufacturers
who  were interested  in trade  liberalization.  Manufacturers  urged that one of
two courses  of action be undertaken:
* negotiate a bilateral access  agreement whereby both parties would
acquire  access  rights with some relationship  to market  size; or
*  fight the battle at the GATT.
Since the farmers did not wish to see a trade precedent set regarding access, the
GATT  route  was  clearly  the only politically  acceptable  course  of action.  In
spite of Canada's best efforts in presenting its case, the GATT panel ruled against
Canada's prohibition  of imports of ice-cream and yogourt. Canada then chose
not to implement the panel ruling pending the outcome  of the Uruguay Round.284  NAFTA  - Report Card on Agriculture
NAFTA (Article 2006) And Tariffs
This  dispute  arose because of the expectation  that U.S.  tariffs would
decline relative to GATT tariffs.  Canadian tariffs on U.S. dairy  products were
in fact  on  a  declining  path when  the  Uruguay  Round  adopted  tariffication.
Canada then applied the new WTO agreed tariffs to all its trading partners in-
cluding the United States.
As  members of the supply management  community, dairy processors
found  themselves  reluctantly  drawn  into  the defence  of a tariff  structure  de-
signed  to  eliminate  any  possibility  of increasing  trade  flows.  As  before,  the
political imperative  was protecting  the system inside Canada favoured  by the
dairy farmers.
Though undertaken reluctantly, there were two main reasons why pro-
cessors agreed to participate  in, and share the high costs of, defending the tar-
iffs. First, under the agreements  in force at the time, losing the tariff protection
meant lost market because  there would  have  been no opportunity  for proces-
sors  to  access  additional  U.S.  market.  If tariffs  were  reduced,  the  domestic
markets would have been opened up to an influx of U.S. product at a time when
raw milk prices  in the United  States were decidedly lower than in Canada.
Second, dairy  farmer leadership,  being well funded  and astute lobby-
ists, positioned this dispute as an unfettered attack on the family dairy farm in
Canada.  Politics  being what it is, the government,  as well as dairy processors,
simply had no choice but to step up to the bar.
The  NAFTA panel  ruled in Canada's favour and the high tariffs con-
tinue to protect our domestic system.
Outcomes
As  indicated in the Cox and LeRoy (2000) paper,  at this  stage in the
process  (December,  1996) Canada had lost one dispute and won one.  But did
we learn something  in the process?  And did we make any adjustments?
During the first dispute, dairy processors became convinced that if ice
cream  and yogourt  are  not "like  products"  to  milk,  and if we experienced  a
negative outcome (which was confirmed), then we would likely lose other trade
284 NAFTA - Report Card  on AgricultureMatte  285
challenges. This would mean that our markets would open up and the domestic
supply management  system would have to adjust.  Processors  therefore began
to look  seriously  at  their  ability  to compete  in  a  more price  sensitive  envir-
onment.  What they found was a need to rationalize operations, modernize plant
base and squeeze costs out of their operations.  The mantra became "only those
with the  sharpest  pencils  will  survive".  A  dialogue  of similar tone  was  at-
tempted with the farm leadership but they remained convinced that they needed
to make no substantive changes to their current structures and methods.
As a result of this situation, processors began to consolidate  facilities
and operations.  This move was dramatically visible in western Canada but also
very active  in eastern Canada.  These changes  included product line rational-
izations but more importantly,  mergers,  amalgamations,  and  joint ventures on
a commodity  or product basis, as well as licencing agreements  for brand shar-
ing and marketing.  All of this occurred in a mature market stilted by low or no
growth.
Dairy  farmers  reacted  to  these  developments  with  a  mixture  of
bemusement and fear:  bemusement because  they had always claimed the pro-
cessor sector was unable to co-operate  and, indeed, unable to creatively market
product;  with fear because  now their only customers were growing in scale  by
buying  market  share,  and  were becoming  more  vocal  about their needs,  and
more critically,  the needs of the market  and consumers.  Resistance  to policy
driven price increases on the part of processors further exacerbated  the grow-
ing divide within the industry.
Special Classes  For Export And Fluid Milk Import Restrictions
We lost a critical element of the third dispute, which by the way, pro-
cessors spent hundreds of thousands of dollars defending alongside dairy farm-
ers providing  proof there  is no escaping  the political reality  of our domestic
supply situation.  While we won the right to restrict imports of fluid milk to non
commercial  purchases,  we  were  obligated  to remove the  previous  ceiling  on
such imports. It was determined however that our milk classes 5d and 5e were
in  fact subsidies  and  a redesign  of our export  structure  is  therefore required.
Processors,  while still supporting supply management for the domestic market,
are now clearly pushing for a truly market driven structure for the export busi-
Matte 285286  NAFTA  -Report Card on Agriculture
ness including the elimination of the marketing boards monopoly rights on raw
milk supply for exports.
Impacts
Trade.  The  NAFTA  impact on  dairy  cross-border  trade  was  negli-
gible due to the defacto  exclusion of dairy by both countries.
Investments.  There were huge impacts because NAFTA was seen as
a precursor of much more open markets  and the possible demise of dairy  sup-
ply management.  They showed up as:
* consolidations  and plant rationalization;
* adoption of "state  of the art,"  world-based  systems  and configura-
tions;
* an influx of management  from non-dairy  firms;
* an influx of European trained,  experienced  senior management;  and
* significant expansion into the United States by co-operative joint ven-
tures (DFA), and  by firms such as Saputo who now do most of their
business  in the United States.
Dispute  Resolution
GATT  Panel.  This approach has been  demonstrated  to be cumber-
some, have  little respect for time lines,  and result in enormous  slippage from
one phase of the process to another.  It is very long  and drawn out in time, and
expensive.
NAFTA.  There was a major delay initially because of a lack of roster
from  which to select the  five  panelists.  Overall  it is a legalistic,  but effective
mechanism  with little if any ability for political interference  once the process
begins.  However,  it is  still  an expensive  process for NGO's participating  di-
rectly with the support of trade or legal counsel.
WTO.  This approach  is  subject to the same roster  considerations  as
the  NAFTA process.  Nonetheless,  this process functioned  as advertized,  i.e.,
the time lines were known and relatively little slippage occurred.  There was no
evidence  of political  interference  in  any way.  The WTO dispute  Settlement
Body preserved  its reputation for thoroughness  and professionalism.  The cost
NAFTA  -Report Card  on Agriculture 286Matte  287
implications  remain very  significant  and  are  a  major burden  for NGO's  and
certainly would be for developing  countries, especially if they did not have "in
house" expertise.  Most simply do not have that capability.
Further  Cooperation  Between  The  United  States  And Canada
The jury is out - it is taking much too long to resolve the dairy harmo-
nization differences  for farm and plant inspections,  or equivalency discussions
for regulatory  and standards  issues.  Also, there remains the whole, and larger,
question of quantitative  market access for dairy  where each  side of the 49th
parallel gleefully  engages  in  calling  the other protectionist  when,  truthfully,
both are!

DISCUSSION: NATIONAL DAIRY COUNCIL OF CANADA

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