Phillips, Rick

English

Research Papers in Economics

-DISCUSSION
IMPACTS OF PAST U.S./CANADIAN  DAIRY  PROGRAMS
ON STRUCTURE, EFFICIENCY AND  TRADING  RELATIONSHIPS
Rick Phillips
Comments made on behalf of the Dairy Farmers of Canada follow by topic.
Supply Management Economists  Versus Free Market Economists
At the core of differences  in policy formulation is the fact that supply management
economists  do  not believe  that  "free"  markets  are  necessarily  "perfectly  competitive"
markets.
Free  market  economists  appear  to be mainly  concerned  with  where  the long run
"perfectly competitive"  equilibrium  lies.  Supply management economists on the other hand
are more concerned with whether a "perfectly competitive"  equilibrium  is attainable and, if
so, what adjustments are necessary to attain that equilibrium,  and who pays the adjustment
costs associated with the move to equilibrium.
Supply  Management  As An  Evolving  Concept Which  Considers  The Objectives  Of
Various  Stakeholders
The  supply  management  system  that  was  established  in  Canada  has  evolved
significantly since its inception in the 1970s and continues  to evolve.  A basic objective is
to allow all producers to share equally in all milk markets and the system is well on its way
to solving producer equity concerns.
Policy  development is now  focused on processor  equity  issues and processors  are
deeply involved in the negotiation process.  Processor "equity" has been defined to mean that
all processors have the "same competitive access to milk".
Supply management economists would argue that consumers would find themselves
in a similar situation with or without supply management.  The Dairy Price Index (DPI) has
tended to rise at a slower rate than the Consumer Price Index.  This would suggest that dairyProceedings
products have become relatively  less expensive.  Where consumption has declined  this was
likely more a function of changing consumer preferences than price.
There  is  some evidence  to suggest  that the relative price  stability  associated with
supply management (market equilibrium in a supply management system is achieved mainly
through quantity adjustment) is of significant benefit to consumers.  Recent experience  in the
United States would tend to support this conclusion.  The DPI in the United States has risen
at a faster rate than in Canada even though there were price increases at the producer level
in Canada.  The U.S. producer price has been trending downward.  This is a consequence  of
higher variability  in the producer  price in the United States, combined with the exercise of
unfettered  market  power  at  the retail  level  as  evidenced  by  the  observation  that  price
movements  in the United States appear to be asymmetric.
The  Canadian  industry  evolves  through  negotiation  and  the  establishment  of
consensus.  Market  forces may drive the discussion,  but the market  does not necessarily
dictate  the speed  of the adjustment  process  nor the distribution  of adjustment  costs.  In
Canada the industry tends to buy out, rather than push out, those exiting the business.
Barriers to Trade
The tariff equivalents  established  as  a consequence  of the  GATT Uruguay  Round
agreement were conversions of import quotas into tariffs.  During the negotiations Canada
established  the  level  of  these  tariffs  using  a  methodology  utilized  by  the  European
Community  and  accepted  by  the United  States.  Canada  used the  U.S.  methodology  to
establish its access levels.  Whatever the differences,  the tariff equivalents imposed by the
United States and Canada are meant to accomplish the same thing.  They are meant to act
like import quotas.
Technically there are no barriers to Canadian access  to U.S. fluid milk markets.  In
reality the United States keeps Canadian milk of  the same or higher quality out of its market
through the  use of non-tariff barriers  and in particular the combination  of the Pasteurized
Milk Ordinance (PMO) and the National  Conference of Interstate Milk  Shippers (NCIMS)
which  operate  to  set restrictive  standards,  Canada has  already  been  exposed to the trade
inhibiting potential  of these  non-tariff barriers  in  its ultra high temperature  (UHT)  milk
market to Puerto Rico.
The  greatest barrier to future trade liberalization  is the harassment potential of U.S.
trade actions.
Imperfect Competition
The economic analysis presented at the conference tended to be from the analytical
framework  of the "perfectly competitive market".  Much of the analysis considered where
long term market equilibrium might lie.  Implicit in these models was the assumption that
134Phillips
adjustment  costs  are  zero,  and  are  ignored.  Since  "perfect  competition"  is  assumed,
distribution  effects  are  also  ignored.  From  a  policy analyst's  perspective,  however,  the
"politics" of policy making is in the adjustment to equilibrium and the distribution of  market
revenue between producers and others in the marketing chain.  If markets are "imperfectly
competitive"  this policy focus is entirely justifiable.
Economists have to recognize the possibility that food markets at the retail  level are
not perfectly competitive,  nor do they "behave"  as though they are perfectly  competitive.
There  is  prima facia evidence  for  this  market  structure  in  high  levels  of  industry
concentration  and the asymmetric pricing behaviour  observed at that level.
The major implications are that:
* If pricing is asymmetric  at the retail  level, price stability  is an important  policy
objective  at the producer level.
* The benefits  of deregulation for consumers tend to be overstated  and the costs to
producers  understated.  (i.e.,  The retail  "pie" in the end  is the same size.  It is the
producer share of this pie relative to others in the marketing chain that changes and
perhaps this is a function of relative market power as opposed to perfectly competitive
behaviour.)
* Border measures are necessary  to protect Canadian institutions that correct what
producers  believe are  domestic market distortions  (U.S. retailers seem  to have the
same  relative  market  power).  Tariff equivalents  should  not be  reduced until  the
alternative arrangements required to resolve this issue are developed.
U.S.  Negotiating Techniques
There is some peculiar logic in the papers that are presented here.  To move surplus
milk from a federal milk marketing order (FMMO) in surplus to a FMMO in deficit requires
the FMMO price plus transportation plus a "give  up" charge.  Movement of surplus fluid
milk to Canada on the other hand will be at "marginal cost".  Something does not quite add
up but this is typical of the type of argumentatation  we often hear from the United States.
The biggest impediment to the expansion of trade between  the United  States and
Canada is the apparent inability of the United States to accept the results of a negotiation.
U.S. negotiators may bargain in good faith but the American "system" inherently bargains
in "bad faith".  The alternative  is to believe that Canadian negotiators  are totally inept.  Our
belief is that Canadian negotiators  are not inept.
The Level Playing Field
From a producer perspective, the end of high tariffs is not a "sufficient"  condition to
ensure a level playing field with the United States.  The Canadian dairy industry has its own
history of the U.S. exercise  of non-tariff barriers  to limit imports.  UHT milk is a  good
135Proceedings
example.  We believe  that given the PMO  and NCIMS,  U.S.  specific compositional  and
labelling  standards,  and the demonstrated difficulty in determining "equivalency"  of health,
safety and inspection standards,  our fears about the U.S. ability to impede imports are well
founded.
It seems that if we wish to access the U.S. market unimpeded, we have to give up our
ability to produce  "Canadian"  policy solutions.  We must conform  to the U.S. perception
about the "right" way to do things.  Ultimately it seems that the only way to do this is to give
up our sovereignty  and  "adopt" the  "U.S." solution.
Inevitability
There was a time when the United States "had" to convert to metric and Canada would
"have to" beat them to it. There  is no apparent trade imperative to reduce border measures
for  supply managed  products  within the NAFTA  context.  The  WTO  context  is a  more
appropriate context to deal with dairy.  Access to the European  Union, which is critical for
the Canadian industry in the longer term,  can only  be dealt with in this context.
Research Directions
There are several  areas on which this structural process can and should be focussed.
Expand the Analytical framework.  Economic  researchers  who  wish  to develop  viable
policy proposals must recognize that economics  is not divorced from politics.  In Canada, no
national government would willingly adopt a policy that would require Quebec producers to
do their work in Alberta.
The economics of "perfect competition"  is nothing more than religion if it does not
recognize  the  political  and sociological  context  in  which  markets  operate.  A  general
criticism of the economic  research community  is that researchers tend to take the research
path of least  resistance.  They  tend  to concentrate  on  areas  where  there  are  good  data
availability  and stick to a theoretical framework that a Masters  candidate can deal with.
Don't ignore  imperfect  competition.  How  have stakeholder  shares of market  benefits
changed  over  time  in  markets  characterized  by  increasing  size  of players,  especially
concentration at the retail level,  when  1) marketing systems at the producer/processor  level
have not resulted in effective supply/price control  at the producer level, 2) marketing systems
at the producer/processor  level have resulted in effective  supply/price control at the producer
level?
Don't ignore adjustment costs.  Increase emphasis on analysis of  the dynamics and costs of
adjustment  to  market  equilibrium  as  opposed  to  simply  determining  where  market
equilibrium lies.
136THEME: WHAT IMPACTS WILL CONTEMPORARY  POLICY CHANGES
HAVE  ON  STRUCTURE, EFFICIENCY  AND  TRADING  RELATIONSHIPS?
OBJECTIVE
To discuss the nature and extent of the impacts of current policy changes and likely changes
on the prices, supply, demand, trade, structure and efficiency on both sides of the border.138  Proceedings

DISCUSSION: IMPACTS OF PAST U.S./CANADIAN DAIRY PROGRAMS ON STRUCTURE, EFFICIENCY AND TRADING RELATIONSHIPS

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