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Nafta's fate hinges on a four-letter word: milk

Trump is willing to jettison Canada by the end of the week if it does not drop its dairy tariffs of 270 per cent

Ottawa

FOR THE seasonal salad at the popular Oz Kafe here, the shavings of Gouda cheese are a salty and delicious culinary accompaniment. To the United States, they are an element of an increasingly bitter trade dispute over dairy products, one that threatens to undermine its decades long agreement with Canada.

Canada's long-standing policy of managing its dairy supply with production quotas and high levies on imports has become an intractable sticking point in negotiations over the North American Free Trade Agreement, one that risks scuttling a 25-year-old pact that has stitched together the economies of Mexico, Canada and the United States.

President Donald Trump has seized on the practice as unfair and insisted that he is willing to jettison Canada by the end of the week if it does not drop its dairy tariffs of 270 per cent. On Tuesday, the chief trade negotiator for the United States, Robert Lighthizer, said Canada was "not making concessions in areas we think are essential" including "issues of dairy". But the melee over milk is puzzling to many trade experts. The United States supports its dairy farmers with a complex price support system that is economically similar to Canada's system of supply management.

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And while American dairy farmers may want to sell more milk into Canada, trade observers say access to a relatively small sector of the agricultural economy is not worth jeopardising a trade relationship that has become critical to industries across North America.

"Opening up Canada's very tiny dairy industry is a pretty tiny gain to risk blowing up the most advantageous trade agreement in history," said Tony Fratto, founder of Hamilton Place Strategies, a public affairs firm that advocates free trade. "But it won't make more than a dime's worth of difference to jobs and standards of living in either country. Try to fix these things? Sure. Blow up Nafta over them? That's crazy."

Canada counters that the US government has its own price supports for dairy farmers that play to the United States' advantage.

Ironically, lowering Canada's dairy barriers had already been ironed out over years of arduous negotiations that led to the Trans-Pacific Partnership, a sweeping trade agreement between countries on both sides of the Pacific, including Canada, the United States and Mexico. But Mr Trump withdrew the United States from the pact in his early days in office and the 11 remaining countries completed the deal without it.

The United States, even with the high tariff structure on Canadian dairy products, still benefits from its trading relationship. It imports about US$137 million worth of Canadian dairy products, compared with the US$470 million it exports annually to Canada, according to Canadian officials.

The United States is the top foreign supplier of cheese to Canada, with 25 per cent market share in 2017. Canada, meanwhile, was the 10th-largest cheese supplier to the United States that same year, with a market share of 2.9 per cent.

Other nondairy matters continue to impede the chances for a trilateral deal, including a disagreement over a culture exemption to Nafta that makes it hard for American media companies to buy Canadian ones, and issues around potential future tariffs on cars and car parts. Canada and the United States also continue to disagree over a mechanism that allows Nafta countries to challenge one another's anti-dumping and countervailing duty decisions outside the court system.

Yet negotiators in Washington have latched on to dairy.

Larry Kudlow, who leads the National Economic Council, told Fox Business Network last week that "one of the big problems with Canada is a four-letter word, M-I-L-K, milk, OK. That's all."

For Canada, the support for dairy producers, cheesemakers, chicken ranchers and the like goes beyond simply economics. Dairy is to Quebec - the largest dairy-producing province in Canada - as ethanol is to Iowa: If you want to play in national politics, you do not go against the industry. This is especially true for liberals in the country who can struggle in prairie provinces; politicians cannot win nationwide without the support of the voters of Quebec.

With provincial elections in Quebec on Oct 1, many trade analysts say Prime Minister Justin Trudeau of Canada has little to gain from conceding on dairy beforehand.

Cheese is also a matter of national pride. Menus like the one at Oz Kafe include the Canadian provenance of their cheese offerings, which have gained some international attention and led to a consensus among major parties in Canada that the current system must be preserved.

"Canada's supply management system has been in place for over 50 years," said Oliver Anderson, a spokesman for the Canadian agriculture minister. "It is designed to balance domestic dairy supply with consumer demand to prevent overproduction and help Canadian dairy producers weather difficult trends in the global market. The government of Canada will continue to defend Canada's dairy farmers and supply management system." NYTIMES