Saturday, 21 November 2009

Canadian Dairy

Terrence Corcoran reports that Stockwell Day remains set on scuppering the WTO negotiations if Canada's ridiculous supply management system is put under threat. Effects of supply management in Canada?
Canada is a dairy industry production backwater. Over the last 10 years, the value of Canadian exports of dairy products has dropped by 30% to $255-million. Last year, Canada had a dairy product trade deficit of $422-million.

Supply management keeps Canada out of the world market for dairy products, although some plants do export to the United States and elsewhere under a bizarre program that in fact does nothing but protect consumers from low-cost made-in-Canada cheese and ice cream. It’s called the Imports for Re-Export Program (IREP).

Two IREP examples: There’s a Baskin-Robbins ice cream plant in Peterborough, Ont., that imports cheap American milk and cream at U.S. prices, turns the cheap milk into ice cream, and then exports the cheaper ice cream to the United States. But that cheaper ice cream cannot be sold in Canada. For Canadians, Baskin-Robbins has a separate production run that uses overpriced, supply-managed milk and it then sells overpriced Canadian ice cream. No wonder Canadian ice cream sales are falling.

At a Parmalat cheese plant near Belleville, Ont., American milk is used to make Black Diamond cheese for export to the United States. But the Black Diamond cheese made for Canadian consumers must use more expensive Canadian milk.

Even with the IREP import-export scheme, Canada’s cheese and dairy product manufacturing sector is going nowhere. A whole sector of the economy is stalled, unable to grow and expand nationally or internationally.

For most things, if you want to get a ballpark comparison from NZ to Canada, New Zealand is about order of magnitude smaller. Not on dairy though. 2007 dairy exports for New Zealand: $6.3 billion (about $4.5 billion Cdn). On that one, we're more than an order of magnitude bigger than Canada, or two orders of magnitude bigger than you'd expect given everything else about the two countries.

The Canadian ice cream manufacturing stories remind me of the stories of the bad old days in New Zealand, when a Kiwi entrepreneur realized he could make a lot of money by having a Japanese company disassemble the televisions coming off the end of the line, ship them to New Zealand, reassemble them here, and undercut the price of domestically produced TVs despite charging multiples of the world price: importing television parts was allowed, but not televisions. Writes Alan Gibbs in 1990:
Naturally, I and other manufacturers didn't rush out and tell you that. No fear.

We told you how indispensable we were to the New Zealand economy. In addition to enlisting the Manufacturers' Federation in our service, one of my businesses had a whole floor of people in a building on The Terrace who did nothing but tell politicians, bureaucrats and anyone else who would listen how valuable we were.

I am afraid, however, that the truth is that most of those businesses relied on heavy protection, they were a disaster for the economy, and ultimately when we had to shut them down, they were a disaster for us also.

A typical example was the television assembly industry.

We would go to Japan and explain to wide-eyed Japanese that our government wanted us to assemble their TV sets in New Zealand.

They could hardly believe their ears.

They said no one assembles Japanese TV sets. "Do you have cheaper labour?" they asked. "Make your own tubes? Transistors? Anything?"

"No," we said, "we just have to make them in New Zealand, and because there are only a few of us permitted to do this, we make good money doing it."

After much time and explanation and shaking of heads, the Japanese finally agreed to sell us the bits to assemble their sets in New Zealand.

However, they explained this was very costly.

They were making tens of thousands of sets a day and we only wanted parts for a few thousand each year.

At great cost they contracted outside people to come in, sort out all the pieces we needed and put them in boxes.

They got engineers to write out all the instructions in English for reassembly, and shipped them on their way.

Naturally, someone had to pay for this, and on average they charged us, as a special favour, 110 percent of the price of the finished goods - all boxed ready to go to the retailer - for the parts.

We then opened a factory, imported much machinery, paid the highest wages in the neighbourhood, employed the most intelligent engineers to decipher the instructions, used a great deal of electricity, and finally produced a TV set with negative New Zealand content at twice the imported price.

Thanks to Roger Douglas and David Caygill, that nonsense has gone in the TV industry and many others.

As a result, TV sets and many other goods have halved in price.

I think the saddest party in this story is not really the consumer who got ripped off but the people in that industry who worked their guts out but, due to no fault of their own, made no contribution to the society in which they worked in exchange for the goods and services they consumed.

They may as well have been digging holes and filling them in.

They were, in fact, on welfare and the welfare cost was much higher to society than the dole.
Gibbs there was in a debate on tariffs sponsored by Federated Farmers of New Zealand. The free traders won in New Zealand. Will Canadian dairy farmers ever stop being welfare bludgers? It's hard to imagine their ever even sponsoring an open debate on the topic.


  1. Eric have you seen Brian Lee Crowley's book Fearful Symmetry? Hi thesis is that policies like this one in particular will be unlikely to survive over the next two decades as demographic changes make Ottawa look West more and to Quebec less.

  2. Haven't seen -- will have to check it out. But isn't Quebec guaranteed somewhere around a quarter of seats regardless of population? Or, more accurately, Quebec is guaranteed a quarter unless Parliament is substantially increased in size.