The United States and Canada have been fighting about milk for years, but new Cornell research suggests recent Canadian trade concessions removed some barriers to U.S. dairy exports.
Using monthly trade data, Christopher Wolf, the E. V. Baker Professor of Agricultural Economics in the Dyson School of Applied Economics and Management, in the SC Johnson College of Business, found that U.S. dairy exports to Canada increased after the 2020 U.S.-Mexico-Canada Agreement (USMCA), despite disgruntlement from all parties.
"Trade Protection Via Tariff Rate Quota Administration," which published in February in Food Policy Volume 131, found that the USMCA dispute settlement mechanism worked effectively and efficiently to resolve trade disputes. Wolf is co-author along with K. Aleks Schaefer, associate professor of international markets, trade and policy at Oklahoma State University.
The North American Free Trade Agreement (NAFTA), which took effect in 1994, enabled a great deal of agricultural trade between Canada and the U.S., with a few notable exceptions. Among them: Canada maintained steep tariffs on dairy products, considering trade protection essential to its national dairy supply management program.
NAFTA was renegotiated into the USMCA under the first Trump administration, which opened the door on limited access to Canadian dairy markets beginning July 1, 2020. Still, the U.S. said the access was allocated was illegally restrictive. In January 2022, a USMCA dispute panel ruled that Canada had improperly restricted access to its market for U.S. dairy products.
Canada made changes, but the U.S. brought a second case to challenge them. In November 2023, a dispute panel sided with Canada, allowing it to continue to restrict the dairy access the U.S. sought.
At the time, members of Congress wrote a letter to then-U.S. Department of Agriculture Secretary Tom Vilsack, saying "Canada's unwillingness to provide fair market access harms U.S. dairy producers and processors."
The researchers assessed the economic outcomes associated with the dispute from the perspective of the U.S. dairy industry and found that, even under Canada's original quota administration procedures, Canadian concessions represented meaningful trade liberalization relative to pre-USMCA levels.
"Forty-three percent of U.S. dairy exports, by value, go to Canada or Mexico," Wolf said. "To Canada, it's a lot of butter, cream and higher-value products. Mexico is a big buyer of cheese. When we negotiated NAFTA, Canada said dairy was off the table. Canada had binding quotas to restrict production and keep prices up."
The U.S., Canada and other members of the World Trade Organization have established tariff rate quotas (TRQs) for dairy production, which allow imports at low tariffs up to fixed amounts. Any additional imports are subject to higher tariff rates. Canada maintains TRQs for 14 categories of U.S. dairy products under the USMCA. Tariffs get steep pretty quickly, ranging from 241% for liquid milk to 298% for butter, effectively pricing those imported products out of the market.
Wolf and Schaefer set out to examine the effects of regional trade agreements on agricultural trade outcomes. In contrast to the chronically deadlocked mechanism under NAFTA, their research found that the USMCA dispute settlement mechanism can work to efficiently and effectively resolve trade disputes.
"I've always been fascinated that Canada has this massive amount of protection, and I've done research on the changing structures of dairy industries," Wolf said.
He said that with the USMCA, Canada agreed to allow U.S. dairy farmers access to about 3.5% of the $17 billion domestic market, a financially negligible sum when compared to, say, the auto industry. But the U.S. dairy industry has always had a powerful and vocal lobby, he said.
While the USMCA renegotiated agreement is an improvement, there are still barriers to trade, Wolf said, even when TRQs are not binding.
An underlying motivation for this research was to explain why several dairy import categories could have unfilled TRQs when U.S. dairy product prices are, in general, much lower than Canadian domestic prices, Wolf said.
"We show that quota administration requirements represent additional constraints on trade that are "binding" beyond the volumetric restrictions. This finding is in contrast to the general consensus that TRQs must be binding to be a trade barrier," he said. "This is a nuance that is centrally important to understand this trade dispute and its economic consequences."
A grant from the USDA National Institute of Food and Agriculture supported this research.
