Dairy protectionism and Pacific trade [Updated!!]

Canada's continued support for dairy supply management keeps it out of the Trans-Pacific Trade negotiations:

After months of angst and debate, Japan confirmed it’s ready to embrace a nascent Pacific free trade area.

Friday’s decision is a huge boost for the Trans-Pacific Partnership (TPP), which among other things will tackle lingering protectionism in agriculture.

It’s also bad news for Canada, which has been involved in virtually every major global effort to break down trade barriers in recent decades. Not this round.

Canada isn’t welcome at these talks because the Harper government won’t put Canada’s highly protected dairy and poultry sector on the table. The supply management system shields fewer than 20,000 farmers behind a massive tariff wall and forces millions of Canadian consumers to pay inflated prices for milk, cheese, eggs and chicken.

Japan, on the other hand, made the economic calculation that some pain for its rice and wheat farmers is worth the far greater gains that its export-oriented manufacturers can expect. And with the country’s economy stagnating, Japanese Prime Minister Yoshihiko Noda wisely sees trade as a way out.

...once the TPP deal is done, U.S. and Australian beef producers will have a massive advantage over Canada in the lucrative Japanese market. Ditto for pork, perhaps lumber as well.

It is a lose-lose for Canada. We all pay way too much for vital food items at the grocery store. And exporters who generate wealth for Canada are shut out of key markets.

The next time Prime Minister Stephen Harper vows to protect supply management, maybe a few more Canadians will understand they are the ones paying the price of his politically calculated pledge.

None of this is new; Canada was being shut out of the TPP back in April 2010 precisely because of their intransigence on dairy. Canada's dairy cartel is a perfect illustration of Gordon Tullock's Transitional Gains Trap. All the cartel rents are capitalised into the quota price Canadian dairy farmers have to pay, so they earn only normal returns after counting the cost of quota. But they lobby strenuously against anything that would impose capital losses. Solution? Buy them out. I wrote last year:

Either buy out the quota holders or start eroding quota value. Not only will you start seeming sensible in trade negotiations - damning tariff barriers elsewhere while defending supply management is an asinine bargaining position - but you'll also start getting much better ice cream. The cheapest store-brand ice cream here is on par with premium brands in Canada - seriously. 

Not making efficient moves makes Baby Pareto cry. Stop poking thorns into Baby Pareto's heart, Canada! Follow CD Howe's plan, and you get to remove a thorn from Baby Kaldor-Hicks's heart; follow mine, and you get to remove a thorn both from Baby Kaldor-Hicks's heart AND from Baby Pareto's heart. Happy baby giggles and good ice cream ensue.

I remain worried, as I was earlier this year, that American support for free trade in dairy may be more nominal than real. From this weekend's Press:

In a submission to the US Trade Representative last year, US dairy lobbyist the National Milk Producers Federation explained why these deals would be a problem.

"Our agreements with Chile, Singapore, Australia and Peru were very carefully calibrated to take into account the particular concerns and sensitivities of each of our trading partners in order to maximise US export opportunities," it said. "We strongly urge our negotiators to respect the good work that has already been done on existing US [free trade agreements] by leaving their market access provisions untouched."

In particular, New Zealand's dairy industry should on no account be granted open access to the US, it said. "Gross revenues received by US dairy farmers would plunge by a cumulative US$20b over the first 10 years of the FTA if US dairy restrictions on exports from New Zealand are fully phased out in the TPP."

The strength of US fear can be seen in the high tariffs applied to dairy imports. On skimmed milk powder, for example, the US has a quota on imports of 5261 tonnes from all countries. Imports in excess of that attract tariffs of 86.5c a kilogram. On wholemilk powder, the over-quota rate is $1.092/kg. On cheddar cheese, 8300 tonnes is permitted from New Zealand on tariffs of 10-16 per cent; anything more gets slapped with tariffs of $1.50/kg or more.

For New Zealand, nothing less than complete removal of those tariffs will do. Indeed, a TPP that perpetuated trade tariffs would be a failure.

That Canada is being further sidelined because of their dairy cartel makes me more optimistic that the Americans might be serious about free trade in dairy. Let's hope!

UPDATE:

Prime Minister Stephen Harper announced Sunday Canada will apply to join a new free trade agreement with the United States and the Asia-Pacific region, and suggested that Canada’s farm supply management systems could be on the table for negotiation.