Trade

EU dairy sector finds unlikely ally: Donald Trump

Much of Europe is gnashing its teeth over U.S. President Donald Trumps unpredictable trade moves, with tariffs and other protectionist maneuvering coming fast and furious this year.

But Europes dairy industry was quietly thrilled when Trump recently raged against Canadas leader: Trump latched onto the obscure topic of dairy tariffs when he branded Canadian Prime Minister Justin Trudeau “dishonest” and “weak” for protesting U.S. steel tariffs. “Our Tariffs are in response to his of 270% on dairy!,” he tweeted.

Many onlookers were shocked by the diplomatic affront. But EU dairy industry officials said they think Trump was in the right — citing their own fractious relations with Ottawa.

These officials share the view that Canadas milk policy is archaic. By setting high import tariffs and allowing farmers and processors to set their own prices, they said Canada effectively subsidizes milk exports. Canadian exports have lately become a problem for Europeans: Theyre now so competitive that theyre displacing EU sales in its traditional export markets, such as Algeria. Several groups have raised the issue with the European Commission.

“Canada is — in the dairy world — North Korea,” one industry official told POLITICO.

Canadian Prime Minister Justin Trudeau speaks with dairy farmers in Ottawa, Ontario | Michel Comte/AFP via Getty Images

However, Ottawas view is that its milk exports are a drop in an ocean compared with the EUs and the U.S.s, whose dairy industries are subsidized to the hilt. “Canada is a small player in the global dairy trade, representing less than 1 percent in 2017. As such, there is no reason to believe that Canada is disrupting or distorting international dairy markets,” the agriculture ministry told POLITICO.

How things work in Canada

Canada is one of the few countries that still supports its dairy sector by managing supply and demand. This was once a common approach to dealing with the milk markets extreme volatility across the Western world: The EU only got rid of a similar system in 2015, for example.

Thats not keeping Canadas anachronism from attracting growing howls of criticism.

Combined with high import tariffs, Canadas dairy supply-management system affords a premium to producers without government subsidies. The consumer, in effect, subsidizes Canadian milk farmers by purchasing dairy products at above-average prices.

Broadly, Canadian farmers produce to quotas and then sell to processors at a mutually agreed price. These prices are negotiated through provincial milk marketing boards, but the Canadian Dairy Commission — a state-owned enterprise — sets reference prices for the whole country.

Some in the dairy sector think the Commission hasnt been as openly critical of Canadas policy as Trump because its worried about international reception to its own policy of buying up milk powder during the dairy crisis.

However, international frustration with Canadian dairy boils down to a new development known as “Class 7.” Although first rolled out in Ontario, the Canadian Dairy Commission introduced the Class 7 price band nationwide last year, designed to fix prices for so-called “non-fat solids” such as skim milk powder (SMP) and whole milk powder. Prices for these types of milk were set below world prices.

To U.S. farmers, this smacked of pure protectionism. Canadian farmers had long complained that the Americans were evading Ottawas strict tariffs with so-called diafiltered milk — a type of milk passed through a membrane to isolate its protein content. At a time of global oversupply, U.S. producers had been shipping this milk alternative to Canadian cheese processors tariff free.

Washington quickly complained that Class 7 was shutting out American milk from the Canadian dairy market since cheesemakers were now sourcing cheaper skim milk powder from Canadian farmers again, rather than diafiltered milk from the Americans. Canadian farmers hit back that this was strictly a domestic policy and that all the same import conditions to U.S. milk still applied.

The debate is still raging. Former U.S. Agriculture Secretary Tom Vilsack, who now heads the U.S. dairy exporters lobby, said in April that its “critical that the U.S. pursue an aggressive strategy to stop Canadas ongoing and intentional disregard of its trade commitments.” He added that Canadas policy is affecting U.S. exports in third markets too.

Blame Canada

Class 7 has rubbed European producers wrong — and chiefly because of export competition.

The EU is the worlds largest dairy exporter, and it has a desperate need to offload milk powder stores. The Commission bought close to 400,000 metric tons of skim milk powderduring the 2015-2016 dairy crisis in a bid to raise prices — a policy that has received ample criticism since most of this volume is still in storage and is keeping world prices low.

So additional Canadian milk on the world market has been unwelcome.

U.S. President Donald Trump says U.S. farmers have been hurt by Canadian tariffs | Scott Olson/Getty Images

Canadian SMP exports grew from about 14,000 metric tons in 2015 to about 72,000 metric tons last year, for example. And Canada has also been making inroads on Europes doorstep, in Algeria. Canada went from exporting zero SMP there in 2015 to about 13,000 metric tons last year, according to figures provided by the European Dairy Association.

“That was always regarded by the European dairies as kind of a home market,” said EDA Secretary General Alexander Anton of Algeria, who added that he thought Canada was using an unfair export subsidy.

The secretary general of the EU dairy traders lobby Eucolait, Jukka Likitalo, agreed that Class 7 had artificially reduced Canadas SMP prices, acting as an export stimulus. “For sure they took some market share away from Europe and the U.S.” he said.

Both dairy bosses said they had taken up the issue with the Commissions trade and agriculture departments, which they said were in regular contact with their Canadian counterparts. Vilsack also traveled to meet European Commissioner for Agriculture Phil Hogan in April, in part to discuss Canadas Class 7.

Some in the dairy sector think the Commission hasnt been as openly critical of Canadas policy as Trump because its worried about international reception to its own policy of buying up milk powder during the dairy crisis.

The Commission did not respond to requests for comment.

Whats certain is that the dispute isnt going away. Before Trump lashed out at Trudeau, dairy groups from the U.S., EU, Mexico, Argentina, Australia and New Zealand wrote a joint letter demanding that their governments take Canada to the World Trade Organization over the policy.

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