Supply Management: Problems, Politics and Possibilities

Abstract

Despite a professed commitment to free trade, Canada has retained a staunchly protectionist supply management regime in several agricultural sectors, notably in the dairy industry. Canada’s dairy farms are governed by a system that prices milk based on intended usage, locks out most foreign products with exorbitantly high tariffs and even determines how much farmers can produce — in other words, a cartel. Everyone suffers. Canadians are forced to pay twice the amount for four litres of whole milk as Americans, while the farmers are barred from taking advantage of the opportunities and efficiencies a truly free market affords. At the same time, Canada’s insistence on protecting supply management makes it difficult for Canada to open up access to international markets. This means that all other Canadian enterprises that rely on trade (including the farmers in the non-supply-managed sectors who make up by far the majority of Canadian farmers) — all those who would benefit from Canadian participation in trade arrangements such as the Trans-Pacific Partnership, are being denied lucrative access to some of the world’s largest and rapidly growing markets. The system needs to go. However, it is possible to dismantle it fairly. Australia managed it by offering dairy farmers transition payments over eight years, financed by a temporary retail levy on milk, which was still less than what consumers were paying under protection. Consumers now enjoy lower prices and Australia has one of the most dynamic and efficient dairy industries in the world. New Zealand did away with its own tariffs and subsidies even faster, and its dairy sector has become that country’s largest export earner. The potential gains for Canada are very real. At the same time, and, just as importantly, the threats to risk-averse politicians from the dairy lobby are, contrary to widely-held assumptions, negligible. Since 1971, the number of Canadian dairy farms has dropped by a staggering 91 percent. There are now few, if any, ridings where dairy votes could plausibly swing elections — particularly compared to the votes of all those in those same ridings who would benefit from dismantling supply management. This paper assesses Canada’s political, agricultural and economic landscape, highlights the problems with the present regime, challenges long-held political assumptions, and draws on lessons learned from the most successful reforms abroad to make the case for liberalizing the Canadian dairy industry. With lucrative free trade agreements being considered, and in particular the prospect of joining (or being refused access to) the Trans-Pacific Partnership, now is the time for the Harper government to reach out to the provinces and farmers, and move away from supply management for the good of all Canadians.