The wait is (kind of) over. Trade authorities in the U.S., Mexico and Canada have agreed to a trilateral free trade agreement that replaces NAFTA.
The finer points of automotive manufacturing earned most of the headlines during the protracted negotiation period, but dairy trade was another key sticking point. Here, we hope to offer some details and context to provide a clearer picture of how things will look once the deal is effective.
Or, more like if. The deal first must survive the next few months of legislative review in three separate national capitals. As we discuss later, when it comes to lawmakers and politics, nothing is a done deal until it’s a done deal.
Opening Canadian markets
USMCA increases the duty-free volume of a wide range of American products allowed in Canada. According to data released by the USDA, access is granted to:
- 50,000 metric tons (MT) of additional fluid milk.
- 12,500 MT of additional cheese.
- 10,500 MT of additional cream.
- 7,500 MT of additional skim milk powder.
- 4,500 MT of additional butter and cream powder.
- 1,380 MT of additional concentrated and condensed milk.
- 4,135 MT of additional yogurt and buttermilk.
- 520 MT of additional powdered buttermilk.
- 2,760 MT of additional products of natural milk constituents.
- 690 MT of additional ice cream and ice cream mixes.
- 690 MT of additional other dairy.
- 4,134 MT of additional whey (by year 10, the over quota tariff on whey will be eliminated).
- Tariffs on margarine are eliminated after five years.
The agreement creates a six-year ramp up to reach the levels listed above; smaller increases then kick in each year afterward for 13 years.
The Canadian dairy lobby isn’t happy about this. Over the last three weeks, they’ve lobbed stinging critiques at the government with phrases like “Death by a thousand cuts” and comparing the terms of the agreement to a slow bleed.
An Ontario dairy farmer minced no words in an interview with the Canadian Broadcasting Corporation: “We’re a sixth-generation dairy farm, and we’re probably not going to survive this, so I guess it just sucks to be us,” she said.
It’s grim language, and it’s about what you’d expect to hear from an industry newly bound by freer markets after decades of protectionism.
But just because the agreement allows U.S. producers to sell (marginally) more product into Canada, it doesn’t mean Canadian buyers must buy it. And even if U.S. producers supply Canadian buyers at the full volume allowed under USMCA, it still only amounts to something like one extra truckload of milk a day.
And for Canadian dairy farmers, any business they lose as a result of the deal would likely be covered by compensation as promised by Prime Minister Justin Trudeau.
Elimination of Canada’s Class 6 & 7
The thorniest issue with the U.S. and Canada’s dairy trade relationship was the creation of new Canadian milk classes for ultrafiltered milk. Prior to the introduction of the classes, plants in southern Canada relied on milk collected from Wisconsin, Michigan, New York and other northern states.
The new formulas priced Canadian milk below the world market price. Canadian processors logically switched to buying cheaper domestic product. The result was a sudden loss of business for dairy farmers in regions of the U.S. already plagued by an oversupply of milk.
The elimination of Canada’s Class 6 and Class 7 theoretically means the playing field is once again evened. We’ll see if that happens in practice. The new trade deal doesn’t account for the possibility that Canada may attempt to restrict its markets in some other way.
Preserving our relationship with Mexico
As it pertains to dairy trade between the U.S. and Mexico, USMCA and the NAFTA it replaces are functionally identical. That’s a good thing, for the most part, because U.S. dairy exports to Mexico are worth $1.2 billion annually. It’s by far the most lucrative dairy trading relationship we have.
Canada, our second most valuable dairy trading partner, accounts for a little over half that value.
Even though duty-free dairy trade between Mexico and the U.S. is enshrined in the new trade deal, the U.S. would presumably need to end its tariffs on steel and aluminum before Mexico agreed to end its retaliation so that the normal dairy trading relationship could resume.
It’s unclear if the language of the steel and aluminum tariffs permits the U.S. to selectively enforce them or if rolling them back on Mexico can only occur if they’re rolled back for everyone else, too.
What happens next?
All parties must ratify the agreement, a protracted process that can’t even start until Nov. 30, which is the earliest each head of state can sign off.
President Donald Trump will sign the deal. So will Trudeau. And Nov. 30 is Enrique Peña Nieto’s last day in office as Mexico’s president—he’s definitely signing the deal. The whole point of the Sept. 30 deadline to reach an agreement was so that Peña Nieto would still be in office to sign it after the required 60-day wait.
Andrés Manuel López Obrador, the Mexican president-elect, takes over on Dec. 1. He’s stated he wasn’t interested in making any changes to the deal if it was signed before he took over.
After heads of state sign off on the agreement, it’s up to the national legislatures. According to this ratification timeline, it’s not likely that lawmakers in Mexico or Canada will up-end the deal. That’s because Mexican law appears not to allow the Congress to change the text of the agreement—they just get to review it before taking an up-or-down vote. In Canada, Parliament will debate and vote on the deal, but those votes appear not to be legally binding. That power is left up to Prime Minister Trudeau and his Cabinet.
Things are a lot trickier in the U.S.
Starting Dec. 1, Congress has 105 days to identify changes in federal law that must be made to accommodate the provisions of the USMCA and then write an implementation bill. Because both the Senate and House will write their own version of the bill, each chamber then has 45 days to reconcile the two versions. An agreed bill is then sent to President Trump.
The smoothest path to ratifying the USMCA is to do it while Republicans hold total control over Congress. This is virtually impossible: They would need to compress four or five months of work into just 34 days in order have an agreed bill on President Trump’s desk before the new Congress—which will be split—is seated on Jan. 3, 2019.
Most likely, the legislative review will begin once the new Congress is seated. And the implementation bill that emerges from the process may not be as much to Trump’s liking since it will be the result of a compromise between a split Congress. That’s best-case scenario.
Worst-case scenario is that Congress won’t agree and the USMCA will not go into effect at all. If that happens, we fall back on NAFTA, which has no expiration date.
Clearly, there’s a lot still up in the air. Expect to have a better idea of what will happen after Jan. 3.
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