The three NAFTA partners are reportedly making progress on a deal around auto-content rules, meaning we could see a change in focus to the remaining issues, which includes Canadian market access for U.S. dairy products.
There’s plenty of speculation about what the ultimate compromise required to get a deal done will be, but we can narrow it down to five possible scenarios based on our conversations and observations over the last 12 months:
- The removal of Canada’s Class 7 pricing: Originally implemented in 2017 to close a loophole that enabled increasing diafiltered milk imports from the U.S., Class 7 has been the real target of U.S. dairy from before the beginning of the NAFTA talks. U.S. Ag Secretary Sonny Perdue has stated, “it’s not our job to tell Canada they shouldn’t have a Parliamentary system or supply management, but…frankly, I don’t know how we can go forward if Canada insists on a Class 7 part of their program, and hopefully we can make that clear to them.” The Canadian dairy lobby maintains that Class 7 is fundamental to the entire system and can’t be separated.
- CPTPP-like market access: Within the original Trans-Pacific Partnership, Canada provided 3.25% market access to other countries in the deal — which the U.S. would have had a distinct advantage of accessing over Australia and New Zealand. When the U.S. withdrew from the TPP, it gave up that market access. One might presume that the U.S. could possibly accept making itself whole by regaining that same level of access (although Canadian dairy would dig its heels in on the idea of giving up another 3.25 percent.)
- A side deal for northeastern U.S. processors: It was the closing of Grassland Dairy in Wisconsin that really got the ball rolling for the U.S. to make Class 7 pricing system its enemy. What if we saw a compromise deal to specifically assist northern U.S. plants, maybe allowing them to operate within the Canadian system as previously done before Class 7 pricing began?
- Complete collapse of supply management: One thing about the negotiating strategy of U.S. President Donald Trump is that he goes for the jugular. What if the U.S. Trade Representative (USTR) has ideas about bringing home the dairy vote in the U.S. by bringing down Canada’s house of supply management completely? The cost to the Trudeau government politically and economically will make this the long shot of the options.
- Nothing: It’s entirely possible that dairy market access is the compromise that the USTR finds. Automobiles have accounted for a majority of the talks up until this point, with a rebalancing of the country of origin of components and labour standards. If you look to the China battle as an example, the Trump trade team is willing to take heat from farmers to fry bigger fish.
Whatever the outcome for Canadian dairy in the NAFTA talks, one thing is clear in my opinion: the dairy issue will not be a long-term hang up like autos have been. Just like in the U.S., Canadian farmers are not the most important voting base, so a compromise will be found similiar to what happened in CETA and CPTPP.
Even if they do reach a deal on autos, there are other higher priorities than dairy. On Wednesday on RealAg Radio, Carlo Dade of the Canada West Foundation mentioned that the five year sunset clause being pushed by President Trump is the largest hurdle yet to be solved, and not dairy.
All Canadians would potentially be impacted by the scenario that the government chooses, but at this point it is unclear which choice is the most preferable to close the deal for either the Canadian or American sides.