By: Ruolan Ma

The controversy of Canada’s dairy market protectionism never ceases to spark debate in both domestic and international societies. Achieved through the supply management system, the protectionist barrier of Canada’s dairy industry is blamed for the high price of dairy products and diplomatic spats with trade partners, such as the United States. The U.S. has been filing complaints about Canada’s violation of terms stated in the Canada-United States-Mexico Agreement (CUSMA) as they are preventing US dairy exports from entering the Canadian market. However, the federal government remains reluctant in relaxing the protectionist policies in the dairy industry, due to strong lobbying power and the supply management system’s ability to alleviate the burden of the financial budget.

The supply management system works through three pillars: quotas, minimum prices, and high tariffs. A national marketing agency sets quotas on different commodities for each province which is a license that sets production to a certain amount. In addition, the producers are guaranteed a minimum price through negotiation. The resulting high price of dairy products is maintained through the imposition of tariffs on imports weakening foreign competition and pushing foreign producers out of the market.

However, as a product with inelastic demand, dairy products’ expensive prices disproportionally affect lower income households. An article states that the supply management system creates a cost burden of 2.3 percent of the incomes for the bottom 20 percent income level of households and only 0.47 percent for the top 20 percent of households in Canada. Moreover, up to 189,000 Canadians are pushed into poverty because of the high prices of dairy products. Governments claim the supply management system saves taxpayer money by avoiding direct subsidies to dairy farmers. However, a study shows that the supply management costs average Canadian households an extra $300 to $444 CAD annually. Besides, the inelastic demand of dairy products also determines the volatility of its price, which is highly sensitive to inflation. In 2022, Canada experienced two price increases due to high inflation, an 8.4 percent increase on February 1 and another 2.5 percent increase on September 1, which deteriorates the negative impact on living costs brought by the supply management system.

Other than hurting quality of life for Canadians, the supply management system is risking Canada’s diplomatic relations. In May 2022, the US requested a new dispute settlement consultation with Canada under CUSMA regarding Canada’s dairy tariff-rate quota (TRQ) allocation measures. The US is arguing Canada undermines the value of TRQ for US dairy exporters and prevents them from entering the Canadian market. This is the second time the US has requested public consultations regarding Canada’s allocation of dairy TRQs. The previous panel ruling ruled Canada was inconsistent with its commitment under CUSMA. However, the US has rejected Canada’s proposed changes to its policies regarding this issue. The ongoing conflicts between the two countries regarding Canada’s supply management can be traced back to the original North American Free Trade Agreement (NAFTA). Experts believe that CUSMA was a concession to the American’s dissatisfaction with Canada’s protectionism towards its dairy industry. The new trade agreement stipulates Canada must open a portion of its market to US dairy exports. However, it seems that Canada remains reluctant to ratify these agreements, and the tension between the two countries is escalating. In January 2023, the United States submitted another panel request to address Canada’s continuing failure to meet its CUSMA obligations. Canada replied in its statement that it will continue to defend its supply management system, showing no will to compromise.

Since the establishment of the Canadian Dairy Commission in 1972, all governments and major political parties have been in favor of the supply management system and behind this unanimous support is the dairy industry’s overwhelming lobby power. The supply-managed farms are disproportionally concentrated in vote-rich Quebec and Ontario which can effectively influence an election outcome. This is evident from the anti-supply management candidate Maxime Bernier’s defeat to the dairy advocate Andrew Scheer, who secured a great amount of the vote from members in dairy industry, in the 2017 Conservative Leadership Race. Theoretically, geographic concentration lowers transaction costs and strengthens the industry’s ability for collective action. Since dairy farms have a large concentration located in Ontario and Quebec, the dairy industry exhibits great political mobilization, which may be why the keyword “dairy” leads to a staggering number of nearly 7,000 results in the federal lobbyist registry. Compared to other industries, dairy lobbyists pour much more resources into activities that gain political favors than other industries. Politicians are receptive to the lobby due to the industry’s regard as “reputable and without corruption.” Politicians who advocate for protecting the dairy industry can be easily packaged as helping farmers and promoting nutritious products.

As opposition from both the Canadian public and international community to the supply management system grows, Canada’s determination of preserving the protectionist stance of the dairy industry has not wavered. As a consequence of the power of domestic politics, the protectionist trade policy of the dairy industry continues to sour Canadians’ bank accounts and hurt Canada’s relationship with trade partners. It is high time that Canada starts to reconsider how to balance the needs of domestic interest groups, ordinary citizens, and trade partners.

Ruolan Ma is a Master of Public Policy candidate at the University of Toronto’s Munk School of Global Affairs and Public Policy. She graduated from McGill University in 2022 with a Bachelor of Arts degree in Political Science and Economics. Her research interests include economic and immigration policy.