Supply management: an antiquated barrier to trade

| June 28, 2012 | 0 Comments
The net effect of controlling domestic supply and prices while blocking foreign competition for agricultural commodities is higher domestic prices for basic food items such as milk, cheese, poultry and eggs.

The net effect of controlling domestic supply and prices while blocking foreign competition for agricultural commodities is higher domestic prices for basic food items such as milk, cheese, poultry and eggs.

The Conservative government of Stephen Harper has made it increasingly clear that international trade is one of its top economic priorities. Whether through expanding existing trade agreements (such as building on NAFTA) or negotiating new deals with the European Union, Japan, Korea, and the Trans-Pacific Partnership, Ottawa is placing ever-growing emphasis on trade deals as a way to open markets and diversify risk. But all is not clear sailing: In particular, the government’s trade ambitions risk foundering on its insistence on maintaining its outmoded policy of supply-management (SM) in several agricultural fields.
SM did not prove too great an obstacle in the yet-to-be-concluded talks with the EU on trade opening with Europe. That’s in part because the EU itself practises a high degree of protectionism in matters agricultural. On the other hand, while freer trade with Europe is a prize worth having, the truth of the matter is that Europe is in difficult economic circumstances and growth there will remain paltry for the foreseeable future.

 

Supply management permits poultry farmers to collectively control the quantity of poultry and eggs produced as well as to set industry-wide pricing.

Supply management permits poultry farmers to collectively control the quantity of poultry and eggs produced as well as to set industry-wide pricing.

Ottawa’s eyes are therefore fixed on a much richer prize: the fast-growing economies of the Pacific Rim. The most promising route to open access to the most important Pacific markets is through the Trans-Pacific Partnership (TPP). There’s the rub, however, for the TPP contains a number of nations, including New Zealand and Australia, who in recent decades have rid themselves of policies analogous to Canada’s SM. They did so in part to gain access to coveted foreign markets, and paid an uncomfortable domestic price for the privilege. They see little reason why Canada should enjoy the kind of valuable trade access they have achieved without paying a similar price of admission.
Indeed, SM is an antiquated policy that damages consumers here at home while impeding access to foreign markets. It would have to deliver startling benefits to counterbalance such disadvantages. Does it?
Let’s start with a definition. Supply management, which covers such agricultural sectors as dairy and poultry, provides producers with the power to set domestic prices (loosely based on the “costs of production”) while protecting the market from foreign competition through high import tariffs. In addition, domestic production is controlled through the use of production quotas. Put simply, supply management creates enormous powers (and accordant benefits) for domestic producers at the cost of foreign competitors and domestic consumers.
In an essay for our institute, noted Nipissing University economics professor Christopher Sarlo examined the transfer to producers implicit in supply management. The net effect of controlling domestic supply and prices while blocking foreign competition for agricultural commodities covered by supply management is higher domestic prices for basic food items, which include chicken, eggs, milk and cheese.
Professor Sarlo highlights the effect of supply management on several dairy-related products to emphasize the effect on prices. For example, Sarlo quotes a study comparing prices in Australia and New Zealand — which are basically open markets — to those observed in Canada, which has an essentially closed market, as well as the United States, which is also a somewhat closed market but not to the same extent as Canada. In 2009, the Canadian price of milk was calculated to be 38 percent higher than in the United States and 42 percent higher than in Australia. Similarly, the price of butter was 26 percent higher than in the United States and 57 percent higher than in Australia.
In a rough sense, there is an income transfer from Canadian households to farm producers covered by supply management through higher prices for food goods. However, the transfer is not equally borne by all families. As Sarlo demonstrates, the percentage of a household’s average income spent on food items varies considerably, with poorest households hit hardest.
For example, low-income households spend almost 24 percent of their average income on food items. Those in the next group, lower middle-income households, spend nearly 15 percent of average income on food. On the other end of the scale, higher income households spent a little under 6 percent. Simply put, the overwhelming burden of higher prices for basic food items is borne by lower-income individuals and households. Thus, the true nature of the transfer imposed by supply management is to take income from essentially lower-income households and individuals and transfer it to a small, select group of farmers covered by supply management.
The egregious nature of the income transfer implicit in supply management should be enough to motivate reform. Due to a combination of vested and powerful special interests coupled with a romantic view of farming, reform of supply management to-date has been minimal. However, the growing obstacle SM poses to future trade deals may be the necessary catalyst for real reform.
The Asia-Pacific region contains many of the world’s fastest growing economies. As Carleton University professor Ian Lee describes in another essay, the trade opportunities represented by deals with countries in this region, or better still the region as a whole, are immense. The Trans-Pacific Partnership (TPP) originally included Brunei, Chile, New Zealand and Singapore. The initial deal was approved in June 2005, and came into force in May 2006. The aim of the trade pact is to further liberalize trade across signatory countries while also bringing into force agreements on the environment, labour, property rights and government procurement.
Six additional countries (Australia, Malaysia, Peru, Japan, the United States and Vietnam) are currently negotiating to enter the TPP, although Japan’s ability to approve a negotiated deal has been compromised by domestic political considerations. Canada has signalled its interest and intent to enter the TPP.
The opportunity for Canada is unmistakable. The countries covered by the TPP, not including the United States, possessed $2.3 trillion in GDP in 2010 and a population base (i.e., potential customers) of 195.6 million people. In addition, these countries are generally growing much faster than Canada’s current principal trade partners (the United States and Europe). For example, Singapore (14.5 percent), Chile (5.2 percent), Malaysia (7.2 percent), Australia (2.7 percent), and Vietnam (6.8 percent) are all recording growth in real GDP in excess of the United States and Europe. In addition, these countries have much brighter growth prospects for the future compared with the United States and Europe, both of which face deep structural challenges over the coming decade.
If Japan were to join, another $5.5 trillion in GDP plus 127.6 million customers would be added to the TPP region. In addition, there are nine other APEC countries that could reasonably be expected to join TPP in the near future, including China, South Korea, Russia, Taiwan and Thailand. Collectively, they represent another $10.3 trillion in GDP and 2.0 billion people.
Canada’s entry into the TPP is not, however a given. The United States, New Zealand and Australia have all expressed strong reservations for Canada’s entry based on our support for supply management. For example, New Zealand Trade Minister Tim Groser stated on Nov. 23, 2011: “Canada follows a policy that many governments used to follow but most have moved forward. It is called supply management. It is completely inconsistent with tariff elimination. We will be looking for clear political signals of a reasonably broad-based understanding that it is not just a matter of turning up at the club and demanding membership.”
The former U.S. trade representative, Ambassador Clayton Yeutter, stated the obstacles for Canada more bluntly on April 12, 2012: “Canada needs to address policies in its dairy and poultry sectors that are opposed by the U.S., Australia and New Zealand before it can join TPP. Canada currently limits foreign access to its dairy and poultry markets through a system of supply management.”
The opposition by both New Zealand and Australia is to some extent understandable given the wrenching reforms that both countries undertook to eliminate SM in their countries. The result of the opposition of these countries is that Canada will find it very challenging to gain admission to a critical trade bloc, which includes enormous exporting, investing and importing opportunities, unless it tackles supply management in a fairly fundamental manner.
It seems almost unfathomable that Canada would forgo the immense opportunity to enter the TPP and gain access to large growing markets in order to defend an outdated model of agricultural support, which entails a regressive transfer of income and unjustified privileges for a small minority of farmers.

 

Brian Lee Crowley, PhD, is managing director and Jason Clemens is director of research for the Macdonald-Laurier Institute (www.macdonaldlaurier.ca), which recently released a collection of essays examining issues associated with supply management in Canada.

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