Trump throws down the gauntlet on Canada’s dairy protectionism

“We’re going to call Canada.”

That promise, from President Donald Trump in cheese country, may as well have been a declaration of war.

Trump was throwing down the gauntlet on a strange topic: Milk.

“In Canada, some very unfair things have happened to our dairy farmers. And we’re going to start working on that,” Trump told a crowd of supporters in Kenosha, Wisconsin. Trump turned the state Republican in the last election for the first time since 1984.

The president didn’t elaborate as to what part of Canadian dairy policy he was referring but he did heavily intone that it was a situation that would soon come to a head, especially as negotiations on rewriting the North American Free Trade Agreement loom.

“We’re going to get together and we’re going to call Canada, and we’re going to say: ‘What happened?’ And they might give us an answer, but we’re going to get the solution, not just the answer, OK?” Trump told the crowd.

His sudden interest comes on the heels of a letter, penned by Paul Ryan, Speaker of the House of Representatives, that raises the alarm about “recent actions by Canada that are restricting American milk exports to the Canadian market.”

Ryan, a Wisconsin congressman, contended that the provincial government of Ontario, as well as the federal government, adopted new rules that displaced American “ultra-filtered milk.” That resulted in 75 Wisconsin dairy farmers receiving notice that they would no longer be able to export their products to Canada, as of next month.

“This situation underscores how Canada’s new pricing policies are not only undermining trade with the United States but are displacing fresh milk produced by hard-working dairy farmers in Wisconsin and around the country,” the letter, co-signed by various elected officials from Wisconsin, including Governor Scott Walker, added.

It concludes with a shot across the bow for upcoming negotiations over NAFTA: “We look forward to working with you to break down these trade barriers, enforce existing rules, and improve Canadian market access for our producers in any future trade negotiations.”

Ryan and his fellow Republicans suspect that Canada’s newest push to close off its dairy system might run afoul of trade obligations to which both are party. And they might be right.

But in opening the door to this one, relatively minor, issue, Ryan might have sparked a much larger fight over a much more touchy issue: Supply management.

Dairy collectivism

On a farm in Ottawa, beside a lake, next to a barn full of butter, sits an 80-year-old building that houses an office the American government would very much like to close.

The Tudor Revivalist building is the headquarters for the Canadian Dairy Commission. It, and its 60 employees, are the core of a national system designed to keep prices high, waste low, and foreign dairy out. It manages what is, by definition, a cartel system of dairy boards. Dairy farmers must be quota to enter the market, and can only produce the equivalent to the amount of quota they own. All farmers must sell their milk, cheese, butter, chicken, and turkey to their respective provincial board. The board sets the price. The board sells the goods. Canadians, with few exceptions, must buy that Canadian dairy from that board.

The central planning means that there is little waste — hence why a stockpile of butter sits in a barn near the dairy commission’s HQ — but it does guarantee higher prices for consumers.

In general, foreign dairy is subject to impossibly high tariffs. For turkey, it’s 154 percent. Eggs? 238 percent for eggs. It can go as high as 299 percent for butter. Free trade agreements, including NAFTA, have secured an amount of tariff-free imports, but they remain just a fraction of the lucrative market.

“Ultra-filtered milk,” which was the target of Ryan’s letter, isn’t on the tariff list and had been coming into Canada tariff-free. Recently, new rules have allowed Canadian dairy producers to undercut the price of the syrup-y American milk, which is used in cheese production, and beat American competitors. The tightly managed supply system allows producers to do that with ease.

For decades, the whole supply management system has worked. Much to the ire of Canada’s trading partners, the system has weathered just about every storm that’s come at it. In trade deals with both Europe and the Pacific rim, Canada wore down its partners and eked out draft agreements that left its dairy system largely untouched.

But when Foreign Affairs Minister Chrystia Freeland sat down with Speaker Ryan in February, supply management came up, according to a source who was in the room. It was there that Ryan made a push for Canada to walk back its nationalist dairy system. The Canadian source says it was more of a necessary formality, however — the American government, with its liberal, but subsidized, agriculture system has never picked much of a fight with Canada’s isolationist market.

Yet it may be Trump, the economic nationalist, who could be the one to take on Canada’s cheese cartel.

Domestic opposition

Ryan and Trump aren’t the only two critics of Canada’s supply-managed system, which has been, for years, a sacred cow. Their federal lobbyists are, according to public reporting, more active than even their counterparts in the oil and gas industry, holding an annual fete that is attended by the who’s-who in the Canadian political scene.

But there is dissent. Maxime Bernier, a self-styled libertarian and contender for the leadership of the second-place Conservative Party, has come out hard against the supply management system, vowing to dismantle it if he were to become prime minister.

He’s modeled his plans off Australia, which had a similar protectionist system that they abandoned in favor of a free-market solution — buying out dairy farmers from their, then-very valuable, quotas in the process.

He’s been roundly criticized by his competitions for, in their words, refusing to stand up for small Canadian farmers. (This belies the fact that there are relatively few mom-and-pop dairy farms left, as larger corporations buy up the lucrative quotas.)

Bernier is virtually alone in his opposition. In a 2005 vote in the House of Commons, before Bernier was elected, every single Member of Parliament stood to vote in favor of vigorously supporting the supply management system, even in the face of World Trade Organization ruling that the system is a form of subsidy.

Trudeau goes to bat

And there are clear signs that the current prime minister isn’t interested in breaking with tradition.

“Canada does not accept the contention that Canada’s dairy policies are the cause of financial loss for dairy farmers in the United States,” reads a letter from Ambassador David MacNaughton to Speaker Ryan and Governor Walker. “The facts do not bear this out.”

A spokesperson for the Canadian government referred VICE News to the letter as the government’s official response.

The ambassador’s letter attached a U.S. Department of Agriculture report that, he contended, proved Canada wasn’t to blame. And, indeed, the letter blames a decline in exports — notably, not including Canada — as the reason for a decline in business for the American dairy sector.

As MacNaughton phrased it: “Canada is not a contributor to the overproduction problem.”

The letter even makes the rather spectacular claim that “Canada’s dairy industry is less protectionist than that of the U.S., which has employed technical barriers to keep Canadian dairy out of the U.S. market.”

Canada’s response was arguably one of the sharpest-worded missives sent to the Trump administration, at least publicly, since the Republican took office. It underscores a deep worry that the “America first” policies of the nationalist president could spell economic disaster for Canada.

In one of his first acts as president, Trump signed an executive order green lighting the Keystone XL pipeline, for which Ottawa has lobbied aggressively. But Trump’s insistence that the pipeline must be made with American steel quickly set off alarm bells north of the border — luckily for the pipeline manufacturer who had already acquired much of the steel, Trump backed down on that pledge for Keystone.

But on Tuesday, just after going after Canada on its dairy protectionism, Trump signed an executive order endorsing a concept that Ottawa thought it had already vanquished: Buy American.

“It shall be the policy of the executive branch to maximize, consistent with law, through terms and conditions of Federal financial assistance awards and Federal procurements, the use of goods, products, and materials produced in the United States,” the order reads.

It is no coincidence that Trump chose to launch an attack on Canada’s collectivist, cartel-run dairy sector and sign an order that vows to bring back American manufacturing in a dairy-dominated rust-belt state that, by the conventional wisdom of American politics, he should never have won.

And while Trump usually reserves his most biting attacks for countries like Mexico and China, Canada may be the country shouldering much of the effects.