DAIRY AND THE NEXT NAFTA

"Our NAFTA modernization goal, when it comes to dairy, would be Maintain Mexico and crack Canada."

Shawna Morris
May 25, 2017

Shawna Morris is Vice President for Trade Policy at the U.S. Dairy Export Council and holds the same position with the National Milk Producers Federation. Speaking at GBD's May NAFTA event, Ms. Morris painted two dramatically different pictures of NAFTA as seen through the eyes of America's dairy farmers and processors. We shall share some of what Ms. Morris had to say about both of America's continental trading partners, but the first point to note is what she had to say about NAFTA itself. 

 
Ms. Morris described the dairy sector as one of NAFTA's biggest supporters, adding that her members "have absolutely no interest in doing away with this agreement." 

 
She went further in the Q and A session. "Even with our appetite to see significant improvements in this agreement," she said, "we very much agree that withdrawal from it is not an option and would be absolutely catastrophic."

U.S. Dairy and Mexico. The Mexican component is critical, but we'll let Shawna Morris tell the story. 

MS. MORRIS:
Twenty years ago, we had a visionary dairy farmer chairman of the U.S. Dairy Export Council and the National Milk Producers Federation. He made the decision that our industry had to look outward, not inward, and offered the necessary leadership to be able to move the industry in that direction. [The Industry leader she was talking about was Tom Camerlo of Pueblo, Colorado.]
So now it has been almost two decades that we have been focused primarily on the benefits that trade can offer, and so looking forward, not backward, when it comes to that. The U.S.-Mexico agreement, together with the Uruguay Round, is really what offered the opportunity to be able to shift our vision toward the export market. After riding out some hiccups earlier on in the tariff elimination years, Mexico ... has become a strong and dependable trading partner. It's frankly where ... a lot of the U.S. companies that are now exporting all around the world first got their feet wet, [where] they came to realize that trade can offer opportunities and, from the dairy side, not only concerns. 

 
Today, Mexico accounts for roughly a quarter of U.S. dairy exports around the world, and those sales total roughly $1 billion dollars a year. In turn, they support tens of thousands of jobs all across this country that are involved in the production and processing of the product that goes to Mexico. 

 
When it comes to Mexico, our primary focus is ensuring that the integration and partnership that's been built up over the years doesn't take any steps backwards. That's critical in the broader NAFTA discussions, which is why we believe those talks need to be focused on moving forward from the existing foundation of trade openness that has already been put in place. ... [That is] extremely important as Mexico negotiates with other countries. 

Homework with Canada. At one point in her May 25 remarks, Ms. Morris referred to "unfinished homework with Canada." The key to the Canada portion of her comments was this simple statement about the NAFTA negotiations generally. "In terms of market access," she said, NAFTA was "a series of bilaterals between the countries involved. So, in the negotiations between United States and Mexico, dairy was part of the deal and trade between the two countries is essentially duty-free. 

 
In the U.S.-Canada negotiations, however, dairy was not included, and there are dairy tariffs on both sides. "Tariffs of 200 to 300 percent still hold back ¬¬¬¬U.S. dairy exports to Canada," Ms. Morris said. "If that's not the best opportunity for modernizing this agreement, well, it's hard to think what would be a good candidate."

The heart of the U.S. dairy dispute with Canada is Canada's supply management system. The system applies to milk, cheese, eggs, chicken and turkey, but it is the dairy sector - milk, cheese, and other milk products - where the clash with U.S. interests is most acute. "Even more grating than being one of the only sectors that still faces exorbitant tariffs has been Canada's repeated use of policy tools to try to thwart dairy trade, Ms. Morris said. "Canada seems to have its cake and eat it too, by shutting down import avenues and dumping extra product on global markets." 

We took Ms. Morris's comments to be a reference, at least in part, to the tortured story of ultrafiltered milk. This relatively new product did not have the protection of super high tariffs in Canada, and so, for a while, U.S. ultrafiltered milk was doing well in Canada. Then a regulatory change effectively undercut that market.

We are rather cynical when it comes to phrases like "I make a difference" or politicians selling "change" without any real discussion of what that change might be. But there are people who make a difference, a very positive difference. Some of them do it by spotting opportunities and then encouraging others to make the changes necessary to turn those opportunities into real benefits. From what we have been able to learn about him over the last few days, James P. "Tom" Camerlo was such a person. He was the Colorado dairy farmer and former head of the U.S. Dairy Export Council who saw clearly the untapped potential of export markets - including Mexico - for U.S. dairy. He died in December 2009, and part of his legacy is the big difference he made in the way American dairy farmers see themselves and their industry. 

Talking about the dairy industry today, Shawna Morris said, "My members' view is that trade done right can be a tremendously positive thing, both for farmers and for processors." 

 
For us, the most important fact about NAFTA is that it was one thing as a proposal in 1993. It is a very different thing as a functioning reality in 2017. The top line of this chart from the U .S. Dairy Export Council is one illustration of the current reality. 

We'll conclude with another platitude, verity - call it what you will: Nothing is static. Even if there were no NAFTA renegotiation in the offing, the nature of NAFTA is bound to change, if not from within then from forces outside of NAFTA. Among those outside forces are the agreements that Canada and Mexico are forging with other trading partners, most notably the European Union. Those agreements have two obvious effects. One is that, to the extent that America's trading partners grant preferences to others, the value of the preferences they extend to U.S. producers is diminished. It's called preference erosion, and there is really nothing you can do about - especially if you believe in free trade. 

 
The introduction of new restrictions vis-à-vis specific products is another possible result from the EU's recently concluded deal with Canada and their recently launched negotiations with Mexico. That is the issue of geographical indications, which Ms. Morris mentioned in her comments in May. It is bound to come up again at the GBD event on June 23.