Trump's solution to 'unfair' American dairy woes: blame Canada

U.S. President Donald Trump swaggered into Wisconsin Tuesday and told anxious American farmers that he knew the solution to their problems: beat up Canada for how it runs its dairy industry.

"In Canada some very unfair things have happened," he said. His administration would work on it "immediately."

But there's a difference between sabre-rattling and actually firing a shot — and in this case, no trigger's been pulled to back up his fighting words on this "terrible thing" happening to farmers.

I think that our supply management has worked well for our dairy farmers and for our consumers, and I'm more than happy to defend it all the time.- David MacNaughton, Canada's ambassador to the U.S.

That doesn't mean Canada's dairy farmers couldn't face a substantial trade challenge soon.

But Trump's words have already drawn out the best cover they could possibly hope for: unambiguous political support from Justin Trudeau's government, even as those same Liberals were otherwise trying to avoid coming to blows with the Republicans now in charge.

"I think that our supply management has worked well for our dairy farmers and for our consumers, and I'm more than happy to defend it all the time," Canada's ambassador to the U.S. David MacNaughton told reporters in Halifax Wednesday.

MacNaughton 'happy to defend' supply management

8 years ago

Duration 2:45

Canada's ambassador to the U.S., David MacNaughton, says that Canada's supply management system has worked well for our dairy farmers and that countries like the United States need to look at the degree to which they, and other countries, subsidize their agriculture industries.

It's music to the ears of Canada's dairy sector as it lies deliberately low this week, more confident in leaving the politics to the politicians.

"President Trump's reaction is not surprising. He is defending his domestic dairy industry," said Jacques Lefebvre, the head of the organization representing Canadian dairy processors. "We believe that further communications with the Canadian government will broaden his perspective on this issue."

Exhibit A: MacNaughton's letter Tuesday evening to the governors of New York and Wisconsin, two border states upset with recent pricing changes that they say cut demand for American imports.

"The purpose of that was to try to set the record straight, to correct some of the errors," the ambassador said.

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Excess milk capacity isn't caused by Canada, he said. 

Canada doesn't have an export-driven industry. Its farmers only produce what the domestic market will consume.

"There's a lot of times when it's easier to blame somebody else than to deal with the market situation," MacNaughton said.

Tariff loophole

Earlier this month, Wisconsin's Grassland Dairy Products Inc. suddenly announced what it called a "tough decision": as of May 1, it will buy less milk and cut ties with 75 of the state's farmers, as it reorganizes and builds its own corporate-owned 5,000-cow herd to cut costs.

Who's to blame? The Canadians who stopped buying Grassland's diafiltered milk, it said.

Diafiltered milk is a new product invented in the U.S. to replace fresh milk in the production of things like cheese, yogurt or ice cream.

Normally, Canada uses high tariffs to restrict dairy imports. But this new product wasn't on Canada's tariff list and so these kind of restrictions weren't enforced. It exploited a loophole. 

Cheap American diafiltered milk became an attractive food ingredient for Canadian processors.

Last year, Canada's producers got together and lowered their price for dairy ingredients — not just diafiltered milk — to make Canadian milk more competitive with these imports. 

The Dairy Farmers of Canada also updated their brand strategy to help consumers spot American ingredients on grocery shelves.

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Now the U.S. has too much milk on its hands — not only because of Canada, but it didn't help.

Al Mussell, a researcher with Agri-Food Economic Systems in Guelph, Ont., has argued against American farmers being portrayed as victims of North American trade. In fact, under NAFTA it's been the opposite, he's written.

"We've got competitive pricing here. Since when is the U.S. a victim of competition?" he said. "I think it's a revisionist dialogue," he said.

But Trump's not being specific about exactly what he wants.

"They've given us no detail to back up their claims of losses," he said. "The data do not show this at all. What are they talking about?"

'A red flag under a bull'

Rather than drop their diafiltered milk prices, the U.S. industry is looking for political saviours. With one eye on upcoming midterm elections, both Democrats and Republicans across the swing-prone farm belt want to deliver.

Trade analysts had a hunch Trump wanted to say something to farmers as soon as his Tuesday schedule showed him in House Speaker Paul Ryan's home state of Wisconsin. (Ryan's already made a show of raising dairy issues with Canada.)

Like presidents before him, Trump's joined the fight.

"Every American administration targets our dairy industry, as do all our trading partners," said trade lawyer Mark Warner.

Canada's latest pricing changes were "like waving a red flag under a bull." 

Nevertheless, Canada's been able to reach trade agreements with partners like the European Union.

"From an American point of view, we gave a lot less than most observers thought that Canada would have to give on dairy to be part of [the Trans-Pacific Partnership]," Warner said. 

Had Trump not withdrawn from the TPP, just over three per cent of Canada's dairy market would have opened to American milk.

His decision to pull out hurt American farmers. Now he has to make up for it in future trade talks.

WTO challenge looms

Before this week, the betting was that dairy could be left out of the NAFTA renegotiation and dealt with separately. 

Trump wants swift results on NAFTA. But agriculture deals never happen quickly or easily — that's why they're negotiated last, or carved out of trade agreements entirely. 

More certain is a World Trade Organization (WTO) challenge on Canada's dairy ingredient pricing.

Australia and New Zealand — both aggressive exporters and past combatants in trade disputes — seem to be spoiling for this fight.

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It would be a do-over of a WTO battle two decades ago, when Canada was rapped for subsidizing exports and forced to dismantle a contentious program.

"It's always been a problem," former prime minister Jean Chretien told Rosemary Barton on Power & Politics Wednesday. "All of it — and we survive it since."

Jean Chretien on navigating trade with the U.S.

8 years ago

Duration 13:04

'Business is business,' says the former prime minister.

The industry believes recent pricing changes are WTO-compliant. The U.S. may not have a good case.

"Hopefully nobody's inclined to panic over something like this," Mussell said. "Canada's still a sovereign country. We're going to make domestic policy changes ... consistent with the conditions that we have to operate in."

But if the U.S. swamped Canada's capacity to fight on a lot of trade fronts, it might be forced to settle some, regardless of merit, he said.