For more than 20 years, the North American Free Trade Agreement (NAFTA) has facilitated an expansion of trade in goods and services between Canada, the United States and Mexico. That expansion, the business built upon it and US$2 billion a day in trade between Canada and the U.S. are all potentially at some risk in the looming NAFTA renegotiations. Several shots have already been fired from south of the border over long-standing trade irritants – softwood lumber and dairy. Senior policy analyst Naomi Christensen and policy analyst Eric Dalke tee up some of the big issues in the upcoming trade talks.

Naomi: The countdown to NAFTA talks have only just begun, and as can be expected in pre-negotiation posturing, the U.S. administration is already airing its issues with several Canadian sectors, including  dairy, lumber and energy. When it comes to dairy and lumber, consumers on both sides of the border are getting hammered by current policies. Updating NAFTA is a great opportunity to address this.

Eric: Agreed. U.S. President Donald Trump’s comments likely signal some of the big irritants on a U.S. trade “hit list.” There is an opportunity for Canada to negotiate NAFTA in a way that benefits both the Canadian and U.S. consumers. For example, making changes to our supply management system for dairy would decrease prices for Canadian consumers. It would in turn give us leverage to negotiate on some of Canada’s own trade issues with the U.S.

Naomi: Speaking of trade issues…it seems like every decade or so the Canada-U.S. dispute over softwood lumber flares up. This month, the U.S. began collecting a 20 per cent average countervailing duty on Canadian softwood lumber shipped to the U.S. An additional anti-dumping duty is expected in June.

Eric: Why is the U.S., the largest importer of Canadian softwood, taxing our lumber?

Naomi: Simply put, since most timber in Canada grows on Crown land (about 70 per cent), the U.S. argues it is subsidized and that duties level the playing field. This has been disproven by multiple international dispute panel rulings, but the appeals process is lengthy and duties still apply while the process is taking place. The U.S. also takes issue with the B.C. and federal log export restrictions.  The federal policy restricts log exports on private land in B.C., something our trade partners from the U.S. to China and Japan – as well as private forest owners in B.C. – understandably have problems with.

Because softwood is excluded from NAFTA, since the 1980s, Canada and the U.S. have instead used Memorandums of Understanding (MOUs) or Softwood Lumber Agreements (SLAs) to manage softwood trade. The last SLA expired in October 2015 and it doesn’t look like we are anywhere close to reaching another anytime soon. Giving the U.S. something it wants would certainly help gain leverage to get a new softwood deal or get softwood included in a renegotiated NAFTA.

The latter is less likely, but softwood will no doubt come up when NAFTA’s dispute resolution mechanism – something the U.S. wants to make changes to – is reviewed. NAFTA panels adjudicating the softwood lumber dispute have continuously ruled in Canada’s favour.

What is the U.S.’s issue with Canada’s dairy industry?

Eric: Canada’s dairy sector (and egg and poultry sectors) is highly protected through supply management. This “made-in-Canada” cartel was designed to fix prices, limit supply and limit foreign competition by imposing tariffs on exports of dairy, egg and poultry products into Canada. The problem is, it has resulted in Canadian consumers paying significantly more for these products, has annoyed our trading partners, and  prevents our farmers from being able to grow and take advantage of global trade opportunities.

Our dairy business is largely exempt from NAFTA, and tightly controlled, which is partly why President Trump, and many federal and state legislators before him, sound off about it. The recent dispute over U.S. access for ultra-filtered milk is an example of a trade problem with roots in supply management. U.S. producers want access to the Canadian market – like they have in every other agricultural commodity traded across our border (over 90 per cent of Canadian agricultural producers also have tariff-free access to the U.S. market).

The irony is that even as President Trump pushes for access to Canada for American dairy producers, the U.S. is trying to restrict access to the U.S. market for Canadian softwood lumber.

Naomi: So the protectionism in our dairy industry results in higher prices for Canadian consumers, compared to what U.S. consumers pay for dairy? That reminds me of the effect of U.S. duties on Canadian softwood lumber imports. Duties make Canadian lumber more expensive, reducing competition for U.S. domestic producers, who then also raise their prices. Just the speculation over duties before they were announced caused the price of lumber to increase. Anyone building, buying or renovating a home in the U.S. is now paying more as a direct result of the U.S. government’s decision to tax Canadian lumber. In the case of both lumber and dairy, the consequence of protectionism through tariffs is higher prices for consumers.

Eric: Yes, exactly. The nuances of supply management of dairy and softwood trade are different, but one thing is similar: protectionism in both industries harms producers, consumers and processors on both sides of the border. The interesting thing to watch will be how U.S. and Canadian negotiators deal with these issues either in NAFTA renegotiations, or in other bilateral agreements going forward.

It’s also important to remember much of the posturing is likely pre-negotiation bluster before talks formally start. There are details Congress and the President will need to work out, including fast track authority. In addition, it’s not clear the U.S. will ask for full liberalization of Canada’s dairy sector; it may simply push for an increase in the Tariff Rate Quotas (TRQ) which is usually how our competitors have gained marginal access to the Canadian marketplace (like in the recently concluded Comprehensive Economic and Trade Agreement with the EU). We should remember the Americans have a trade surplus with Canada in dairy right now, so they may not want full liberalization of the Canadian dairy industry (preventing further competition from Canada’s dairy industry in their own market!)

Naomi: I would certainly like to pay less for milk, cheese and poultry and I bet I’m not the only Canadian! If we can make that happen while also ensuring our softwood lumber exporters can sell into the U.S. without having to pay punishing duties, it would be a win-win for Canada.

Naomi Christensen in a senior policy analyst and Eric Dalke is a policy analyst at the Canada West Foundation