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Talking Trade blog

Dairy highlights challenges to TPP closure

Published 19 August 2015

The Trans-Pacific Partnership (TPP) negotiations did not close in Hawaii last month partly due to disagreements over dairy access. Why did bargaining across 12 countries get so bogged down over milk and cheese market access? What does the dairy dispute tell us about problems ahead?

Agriculture has historically been protected more than industrial goods, since nearly every country has particularly sensitivities around farming, farmers, and food.  The global trade regime under the GATT/WTO has made only modest inroads into agricultural trade so far, mostly by limiting tariffs in some sectors. 

The protection of agriculture has continued in various free trade agreements (FTAs) signed between WTO members, as Jo-Ann Crawford demonstrated by looking at 162 tariff schedules.  The countries in the sample varied in the extent of market liberalization for agricultural goods; however, overall, agricultural commitments made in trade agreements regularly omitted or excluded tariff lines.  The most frequent products carved out of FTAs include sugar (HS Chapter 17), miscellaneous edible preparations like coffee and tea (Chapter 21), beverages (Chapter 22), cereals (Chapter 10), dairy (Chapter 4), and meat (Chapter 2). 

This strategy for handling sensitive agricultural sectors—by simply excluding the items from market liberalization at all—was not supposed to take place in the TPP.  From the earliest days of discussions, officials took pains to announce that the TPP would contain “no exceptions.” 

Hence, even tough issues like dairy, sugar, meat and cereals (like rice and wheat) have had to be on the table for negotiations.  It will perhaps not surprise anyone to learn that these sectors, however, have been some of the very last items to be dealt with in the TPP. 

Canada apparently did not put forward an offer on dairy until just days ahead of Hawaii.  The original offer appears to have been a liquid milk equivalent tariff quota for all dairy products.  This gets rather complicated, but in short it meant that the partners could have access to a certain portion of Canada’s dairy market at lower tariff rates.  Once the quantitative cap was filled, everything after that would be charged (much) higher tariff rates.

Under a liquid milk equivalent scheme, all products made with milk, including cheeses, butter and all sorts of milk items would be interchangeable—in other words, partners could ship whatever form of dairy added up to the equivalent amount of liquid milk at lower tariffs up to the filling of the cap.  It could be that the entire cap could be filled with butter, leaving no room for cheese exporters, or the reverse. 

This is a deeply problematic outcome, however, for dairy exporters, as it is extremely difficult to determine what sort of outcomes farmers might receive in practice.  Quota systems are widely used in dairy and can sometimes be completely filled within a matter of weeks.  A sort of “blanket” quota would be even harder to judge since there could be no way to determine what portion of the quota other member countries might be able to fill or when.

Canada’s revised offer appears to have split up quotas for major subsectors of dairy.  This is an improvement, but still remains problematic.

The reason for Canadian delay in offering anything at all on dairy relates to specific domestic challenges.  Canada has a long-standing set of policies in place for dairy (and poultry) to protect the market against encroachment by (mostly) American dairy farmers. 

Under supply-management, the government has sheltered the dairy sector behind extremely high tariff walls (more than 300 percent, in some cases) and limited import quotas.  The system also includes complicated marketing boards that determine domestic prices, and controls on supply through the use of quotas per farmer for production. 

The net results of this system are a lucrative source of revenue for dairy farmers and extremely high dairy prices for Canadian consumers.  Efforts to dismantle or dramatically revise the system in the past have been complicated by the fact that the bulk of the 13,000 dairy farms in Canada are geographically concentrated in two important voting provinces.  While consumers would presumably benefit from cheaper products, like consumers worldwide, the average Canadian is not likely to rise up and lobby hard in favor of reduced dairy and poultry prices. 

Despite the soaring rhetoric of the TPP as a new kind of trade agreement better suited to the 21st century, dairy reforms in Canada will likely remain grounded firmly in the past.  Whatever happens, reform is likely to be limited, with changes to dairy phased in slowly over long time horizons.

Canada is not the only country, of course, with complex systems of support in place for dairy production.  Japan’s butter market follows a similar pattern—the government controls import volumes and prices and uses high tariff walls.  The result is that Japanese consumers pay more than triple the international price for butter and even experience shortages.

Like in Canada, however, consumers are not carrying protest signs around the trade ministry begging for lower butter prices. 

In the absence of visible support from consumers, officials are mostly getting an earful now from potentially disadvantaged firms.  It might be expected that industries that rely on dairy as an input, including all sorts of food manufacturers, bakeries, restaurants, and so forth would be working hard to convince governments that cheaper products could also be beneficial.  While some of this is undoubtedly taking place, their efforts are likely modest. 

Even firms that could be clear winners can be withholding visible support.  Many argue that, in the absence of a text that clearly lays out the extent and scope of changes that are coming, they cannot say anything at all. 

But once the agreement is finished and revealed, whatever (likely modest) changes are included for dairy are likely to provoke backlash from entrenched interests that benefit from current schemes.  Expect to hear loud calls for maintaining systems that “benefit small, family farms” and “produce high quality, safe food products” and “ensure adequate domestic supplies of dairy and dairy products.” 

Such complaints will be made even though: domestic farms remain set to continue to dominate markets; many farms could carve out an advantage in exporting; TPP products are of similar or equal quality; and supplies of products like butter, milk powder and cheeses are likely to increase.

Groups that feel under threat will not likely sit quietly.  Simply having the text available will not settle the issues.  

In the face of what can appear to be overwhelming support for the status quo, officials and political leaders can go wobbly.  They can backtrack on commitments for market opening and threaten to undo or torpedo the entire deal. 

A similar scenario will happen in various other sectors of agriculture and elsewhere.  Revealing the specifics of the compromises made in each of the 12 member countries is likely to set off vigorous debates.  Firms and industries that have decided to sit on the sidelines until the text is released may be joining the battle much too late. 

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).

Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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