If We Must Rewrite NAFTA, Scrap the Farm Subsidies

When one considers Donald Trump’s long list of demands that would take much of the free trade out of the North American Free Trade Agreement, it’s ironic that one that seems to have alarmed Canadian Prime Minister Justin Trudeau is the call for eliminating Canada’s dairy and poultry supply management system.

Given how much it costs Canadian consumers and potential exporters, Canada should give up supply management and be grateful for the excuse that NAFTA talks provide. And the United States should forsake its tariffs and subsidies to protect sugar. It is time for both governments stop cutting off their own consumers’ nose to spite each other’s face.

Unlike most of his mercantilist demands, USTR Robert Lighthizer’s proposal to eliminate within a decade Canada’s supply management system for dairy, chicken, eggs and turkey would actually make trade freer, and leave consumers and intermediate producers better off. Canadian supply management and U.S. sugar tariffs and subsidies are virtual mirror images of each other. They both reflect the outsized influence of the farm industry. People may consume over a thousand different goods and services. But they only produce one – and they will fight to protect it, while ignoring how much the rest is costing them as a result.

But that is no excuse for governments to pander. By limiting dairy and poultry imports and setting fixed prices, Canada’s supply management system ensures a floor price for farmers – and adds to the weekly food bills of consumers. This benefits the roughly 20,000 Canadians who happen to own permits, at the expense of the other 34 million.

These rents hit consumers where it hurts most. As Canada West Foundation CEO Martha Hall Findlay has pointed out: “At home, the main problem caused by supply management is that Canadians pay two to three times more than necessary for basic nutrition.” A disproportionate price is paid by low-income Canadians, including many single parents, who spend a larger share of their income on food.

It isn’t just end-use consumers who would benefit from scrapping the supply management system, but also intermediate producers. Right now, Canadians are producing dairy products only for other Canadians. If they want to sell outside Canada, they have to set up shop outside Canada. One of the country’s largest dairy processors actually produces more outside Canada than inside, using U.S. dairy products. When a major Canadian co-op processes more milk in the United States than in Canada, that tells us all we need to know about the efficiency of supply management. Logically, Canada should end it without being bullied –  as New Zealand did, improving its position as a leading dairy exporter.

In the same way, Americans would be better off if they scrapped tariffs and subsidies for the favored sugar cane and sugar beet growers. These policies have driven up the price of sugar to twice the average world price, prompting many cookie and candy manufacturers to move operations to other countries. About 140,000 jobs have been lost in sugar-consuming companies since 1997, according to the U.S. Census Bureau. The Commerce Department has estimated that for every sugar-growing job saved by high prices, about three American jobs are lost.

Sugar protectionism also hits American consumers at the check-out counter. High sugar prices cost American consumers and businesses up to $3.5 billion a year, a form of price-fixing that might be against federal anti-trust laws if it wasn’t government mandated.

This largesse may taste sweet to the approximately 18,000 growers who benefit. But it leaves a sour taste in the mouths of the roughly 600,000 Americans employed in direct manufacturing in the sugar-using industry, and the roughly 330 million who buy their products.

Crony capitalism on both sides of the border has favored a few growers at the expense of hundreds of millions of consumers and thousands of intermediate producers. Subsidies for dairy, poultry and sugar have driven prices up and jobs away. Mercantilist demands at the trade negotiating table may not be the prettiest route to free trade in agricultural products, but it is often the one that works.