Why Canada's 270% Milk Tariff Irks Donald Trump: QuickTake

(Bloomberg) -- Canada’s protectionist dairy policies have once again incited the furor of U.S. President Donald Trump. As he departed a Group of Seven summit on June 8, Trump singled out Canada’s 270 percent tariffs on some dairy products, tweeting that they’re unfair to U.S. farmers. Yet American producers, who also benefit from subsidies and tariffs, exported about $227 million worth of dairy goods to Canada last year, resulting in a surplus of about $114 million. Trump’s latest rebuke comes amid escalating tensions between the U.S. and Canada. Dairy could even become another issue in negotiations over a new North American Free Trade Agreement.

1. What got Trump’s goat?

The government-owned Canadian Dairy Commission in 2017 rolled out a new policy that made it cheaper for Canadian processors to buy domestic supplies of ultra-filtered milk, which is used in cheese and yogurt. As a result, some U.S. dairy companies, mostly in New York and Wisconsin, say they’ve lost all their Canadian sales of that product. Trump called that pricing policy “a disgrace." Now he’s turned to a related topic, the tariffs that kick in when Canada’s import quotas are filled. On June 8 he wrote on Twitter: "Canada charges the U.S. a 270% tariff on dairy products! They didn’t tell you that, did they? Not fair to our farmers!" (Though lower tariff rates apply to some dairy products, the rate for over-quota ultra-filtered milk and other "milk protein substances" is indeed 270 percent.)

2. How does Canada explain its actions?

The country’s dairy industry, which isn’t covered by Nafta, argues the way it manages its supply helps stave off the types of gluts that can strike U.S. milk producers. Since the 1970s, Canada has operated its dairy industry under a system known as supply management: It sets production quotas meant to match domestic output with demand. It also applies tariffs on imports. Import tariffs on certain milk powders that exceed Canada’s quota are 270 percent, as Trump points out. So even during a global glut, as is happening now, income for Canada’s milk producers has remained stable. The average net-operating income per dairy farm in 2018 will probably be C$172,191 ($132,628), down 0.2 percent from a year earlier.

3. What’s the effect on trade?

U.S. producers exported about C$296 million in dairy goods to Canada last year, Statistics Canada data show. Canadian producers sold C$148.1 million in milk products in the opposite direction, a 2-to-1 U.S. trade surplus. It’s a trade gap the Canadian ambassador to Washington, David MacNaughton, frequently cites.

4. Why such stress over dairy?

Americans are drinking less milk: Total consumption has tumbled as consumers swap dairy for alternatives such as almond milk. Meanwhile, growing demand for butter and cream has resulted in excess supplies of skim milk that are left over when butterfat is removed. There’s so much extra skim milk that some processors have dumped it into holes used for livestock manure. Farmers across the globe are struggling with low prices and excess supply. Benchmark Class III milk futures, a type used in cheesemaking, declined 11 percent in 2017. Cheese futures dropped 8.6 percent during the same period.

5. Can’t the U.S. just produce less milk?

Better technology has increased milk output per cow, and government subsidies meant to avert price fluctuations have encouraged farmers to keep churning out more milk. The U.S. has a margin protection program that compensates dairy farmers when falling prices or rising feed prices squeeze margins.

6. Could this be addressed in Nafta talks?

While Canada’s dairy industry wasn’t part of Nafta, the U.S. is proposing to effectively phase out Canada’s supply-managed system over 10 years and give the U.S. a greater share of the country’s dairy and poultry markets. Canadian negotiators have rejected the proposal.

7. Is this just a Canada-U.S. fight?

The dairy industries in Australia, the European Union, Mexico and New Zealand have also asked government authorities to initiate a dispute through the World Trade Organization to challenge Canada’s new pricing formula. They argue more ultra-filtered milk and other similar products from Canada, including skim milk powder, will leak onto the world market and depress prices. Between January and March, Canada shipped 18 million kilograms of skim milk powder worldwide, up 95 percent from the same time period a year earlier, government data show. Canadian-sourced skim milk powder products are now undercutting global prices by about $200 a metric ton in Mexico and Southeast Asia, according to The Milkweed, an industry publication.

The Reference Shelf

• A QuickTake Q&A on the U.S.-Canada fight over softwood lumber.
• The U.S. is seeking the end of Canada’s dairy system.
• A QuickTake explainer on Canada’s booming economy.
• Prime Minister Justin Trudeau defends his country’s protectionist dairy quotas.
• It’s tough to be a dairy farmer right now, writes Bloomberg View columnist Justin Fox.
• A Bloomberg Prophets column on what traders need to watch in the dairy dispute.

--With assistance from Megan Durisin and Lydia Mulvany.

To contact the reporter on this story: Jen Skerritt in Winnipeg at jskerritt1@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Millie Munshi, Paula Dwyer

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