Wedoany.com Report-Mar 17, In a recent social media post, President Donald Trump railed against Canada’s “Anti-American Farmer Tariff of 250% to 390% on various U.S. dairy products.” While technically correct, the president’s synthesis oversimplifies the United States’ complex agricultural trade agreement with Canada, called the U.S.-Mexico-Canada Agreement. That isn’t to say it’s flawless. The agreement has been a thorn in the American dairy industry’s foot since it was negotiated by the first Trump Administration in 2018.
“[Canada] has a large dairy producing constituency that it wants to protect, so they put a cap on imports that can be accessed at a competitive rate. That's what we call a ‘TRQ’ (tariff rate quota),” says Becky Rasdall Vargas, senior vice president of trade and workforce policy at the International Dairy Foods Association. Under the TRQ, Canada accepts a certain amount of dairy products duty-free, without tariffs.
“Above and beyond that cap, you are charged a tariff in the realm of 250-270%. That's the simplest way to think about it. Our complaint is we're not able to get anywhere near that cap, even though we have buyers who tell us they would like to bring in our product,” she says, noting the specific tariff rate depends on the product.
Controlling imports
Only a few commodities, including dairy and sugar, are restricted by TRQs under the USMCA. They are a common trade mechanism that countries use to protect vulnerable industries. The U.S. tariffs additional sugar imports the same way Canada restricts dairy, according to Ronald Baumgarten, Jr., counsel for the law firm BakerHostetler and a former deputy assistant U.S. trade representative under the first Trump administration.
Just on principle, a 250%-plus tariff seems outrageous, he says. And when considered “in isolation, people are shocked.” Retaliation seems reasonable. “But it’s not a realistic picture. First of all, [dairy] is one of the outliers for out-of-quota tariffs. Secondly, just because there's a quota” doesn’t mean it’s filled. Neither the cap amount or percentage are the issue at hand, and there isn’t a lack of Canadian demand.
“We have, both from the U.S. government and from our members, some market intelligence that suggests there are Canadian consumers who would really like to have U.S. yogurts in their markets,” Rasdall Vargas says. “The quotas are in place to cap the amount of product going into the country so that we don't flood the market.”
Rather, Rasdall Vargas blames the dispute on “a systemic set of failures” by Canadian administrators that intentionally prevent American dairy exports from reaching the import cap. These protectionist measures are intended to support Canadian dairy farmers. One rule, for example, requires that Canadian dairy processors be the primary recipients of American dairy products.
“If you’re a U.S. exporter, you're going to want to sell to your customers, not to a competitor,” she says. “Another one is that retailers aren't eligible to obtain an import license quota in Canada. There are layers upon layers of rules that ultimately prevent U.S. exporters from being able to fill those quotas.”
Bigger picture
Contextualized within the bigger picture, dairy makes up a tiny fraction of American exports to Canada. The Office of the United States Trade Representative values U.S. exports to Canada at $762 billion last year. Of that, dairy comprised 0.1%, or $1 billion. Comparatively, the USDA estimates the U.S. exported more than $28 billion in ag products to Canada last year, with much of it shipping from the Corn Belt states, Texas, Pennsylvania, New York and New Jersey.
“Overall, ag trade between the U.S. and Canada is really extensive,” says Baumgarten. “The relationship goes back to the late 1980s, with the Transatlantic Free Trade Agreement.”
Applying blanket tariffs to all goods to force Canada to uphold its end of the dairy import bargain is like swinging a broadsword to trim a blade of grass. Even so, Rasdall Vargas says tariff threats have been effective so far.
“We do hear that from our (Canadian) trading partners and foreign governments they wish things could happen more diplomatically. At the same time, we've seen more discussion on our barriers to trade with Canada in the past two weeks, with the threat of tariffs, then we have in years prior,” Rasdall Vargas says. “It's difficult to say that [tariffs] are only bad when suddenly we're getting our concerns heard and discussed. I wish, frankly, that Canada would've been willing to just engage without the threat of tariffs. I think tariffs can be an action-forcing event.”
Dispute history
This isn’t the first time the dispute has boiled over. The USMCA agreement began in the summer of 2020.
“Almost immediately, we felt like Canada's administrative rules were not consistent with their obligations in the agreement,” says Rasdall Vargas. “Very quickly after that, the U.S. government engaged in consultations, which are discussions with the government of Canada, as precursor to a dispute.”
The discussions were at a standstill by early 2021, prompting the U.S. to launch a formal dispute aligned with the USMCA arbitration mechanism. The U.S. won, and Canada “immediately changed its rules in a manner that kind of made the problem worse,” Rasdall Vargas explains. “So, the U.S. government took another dispute.”
Again, to no avail. With tensions ratcheting up, the stakes are rising for dairy farmers on both sides of the border.
U.S. dairy farmers export around 17% of domestic production (about $8 billion in total exports) to more than 140 countries globally, with a significant amount going to Canada ($1 billion). If Trump’s threatened tariffs take hold or Canadians boycott U.S.-made products, causing the dairy market to dry up, American farmers will have to ship their Canada-bound product elsewhere at a “huge cost,” Rasdall Vargas says.
“When ports were full during COVID and we couldn't get our containers moved through because they were too congested, warehouses filled up and then product backed up all the way to the farm level because we're so export reliant,” she says. “Truly, if we can't make these markets work, we will end up dumping milk.”
