Canadian Agriculture Is Not Prepared for the End of NAFTA

Background

Canada, whose trade profile has long been dominated by the United States, has vacillated between free and restricted trade since its independence.

Free trade between the US and Canada has been a fraught affair since the latter’s independence in 1867. Each country imposed high tariffs on imports, which severely hindered bilateral trade. Canada’s Conservative Party leveraged fears of American annexation in order to gain power, while the Liberal Party of Canada sought free trade with its southern neighbor. Trade wasn’t even close to free until the 23-country General Agreement on Tariffs and Trade (GATT) in 1947 paved the way for more liberalized economic relations. Decades of GATT negotiations eventually led to a Canada-United States Free Trade Agreement in 1988, eliminating trade barriers between the two partners. That ultimately served as a precursor to NAFTA.

NAFTA established a trilateral trade bloc of Canada, Mexico, and the United States. Although NAFTA had taken effect by January 1994, specific tariff line items within the agreement were phased out gradually through 2008, when most tariffs were finally eliminated. For free trade advocates, the opening up of agriculture, textiles, and automobile manufacturing industries to trade liberalization provided the key motivation behind NAFTA.

NAFTA has been a boon to all of North America, at least on paper, but individual perceptions of the trade deal’s benefits vary widely based on industry and location. Agricultural exports have quadrupled across the continent since NAFTA came into effect. Basic free trade tenets have generally dictated where industries relocated. Low-skill manufacturing and tropical fruit and nut production shifted to Mexico, while row crop farming and livestock production moved north. With most of the NAFTA debate centering on manufacturing, the loss of nearly two million small farming operations in Mexico has long gone under-reported. Outside of some US sugar and fruit farmers, this has strongly benefited agriculture in Canada and the US, albeit only for those able to keep up with the breakneck pace of globalization.

What would the end of NAFTA mean for Canada?

While Donald Trump’s rhetoric has almost exclusively been focused on Mexico, Canada has not avoided criticism entirely. While the president’s communication has generally attempted to associate Mexico with the decline in US manufacturing, Trump has also taken aim at specific Canadian industries. The US recently demanded that Canadian supply management systems for dairy, eggs, and poultry all be scrapped if NAFTA is to survive.

Under these systems, respective industry commissions establish support prices after periodic reviews of production costs. Their findings are used to pay farmers when they sell to processors. Foreign supply is then restricted through a number of means, such as tariffs, which can ultimately reach as high as 200 to 270 percent. Canadian producer prices for milk, for example, were an additional 47 percent higher than US producer prices between 2011 and 2016. It’s estimated that Canadians paid an extra $2.6 billion per year for milk between 2002 and 2011, or about $276 per family (not adjusted for inflation).

Without supply management systems in Canada, US businesses would likely capture significant market access for each commodity. These systems were meant to protect local industries, however, so the ceiling to growth will remain sharply inline with the size of Canada’s relatively small domestic consumption.

Yet Canada stands to lose even more if officials do not reach a compromise on the supply management systems and the US scraps NAFTA outright. Lumber is Canada’s biggest single agricultural export, specifically sawn wood which accounted for $7.74 billion in 2016. As a group, however, cereals and leguminous row crops accounted for a larger proportion of Canadian export value. In 2016, Canada exported $4.5 billion of wheat, $6.58 billion of rapeseed and rapeseed oil (including canola), $3.1 billion of dried legumes, and $1.87 billion of soybeans, among various other row crops. Canadian animal product exports accounted for $11.2 billion in 2016, of which crustaceans ($2.39 billion), pigs and pork ($2.7 billion), and bovines and beef ($2.3 billion) made up the predominant share. Of all Canadian exports, 76 percent went to the US in 2016, but only 1.5 percent went to Mexico. Therefore, Canada’s exports to the US, and consequently the agricultural industries likely most hurt by a full NAFTA repeal, closely resemble Canada’s total export composition.

President Trump also publicly expressed frustration with Canada’s lumber industry, although the dispute began during the Obama Administration. In 2017 alone, the US imposed several import duties on Canadian lumber as high as 24.1 percent, and more are likely in the future. The Trudeau Administration responded by announcing a $642 million package to support its domestic lumber industry, further escalating the row. It is still unclear if lumber will make it into NAFTA renegotiations despite the fact that Canadian lumber is by far the country’s largest export to the US. Of note, Canadian lumber exports have actually fallen since NAFTA, indicating something fundamentally different in the industry.

Canadian consumers will be hurt most by a sudden barrier to trade with their North American trade partners. Even more than the US, Canada relies heavily on Mexico for fruits and vegetables year-round but especially during the winter months when the US is unable to compete. Canada imported 52 percent, or $218 million, of its tropical fruits from Mexico in 2016. Fruits represent Mexico’s largest export to Canada outside of automobiles, their parts, and electronics. Canadian farmers will suffer some, too: over 12 percent of Mexico’s imported beef comes from Canada, as does over 95 percent of their imported canola.

What can Canada do?

Walls and other barriers, whether physical or fiscal, are by their very nature obstacles to trade. Canada losing access to its closest and most logical trading partner will hurt most industries. Canadian agriculture has grown leaps and bounds since NAFTA went into effect and will suffer disproportionately without the trade deal. Entire industries have emerged over the past few decades to meet cross-border demand. Anecdotally, the reappearance of tariffs will shutter many Canadian vegetable and livestock companies who already survive on the slimmest of margins.

But there is still hope. The underlying fundamentals of Canada’s farms, forests, and fisheries remain generally sound. As MacAulay reminds, “People have to eat and the market is going to be there. And, quite simply, we have to be in the position to provide that food.” The confluence of rising global temperatures and populations puts Canada in an unusually strong position, unlike much of the rest of the world. Estimates indicate that between 26 and 40 percent more arable land might open in Canada by 2040. Canadian agriculture is also heavily focused on row crop production, meaning Canada’s labor deficit can be ameliorated by impending automation.

Canadian officials are obviously well aware that access to new markets is integral to sustained industrial growth. They also appear to be well aware that access to the Chinese market is the crown jewel of any trade deal. Canadian Prime Minister Justin Trudeau appears determined to bolster his progressive image, however, and efforts to launch negotiations with China keep falling flat due to those demands. That is not to say a deal won’t happen, but China clearly has the upper hand in negotiations (a similar episode took place recently with Canada, Vietnam and the remaining TPP countries). Either Canada will have to relent on its more progressive demands or wait until China decides to make reforms itself.

The UK, in a far less enviable trade situation due to Brexit, has recently courted Canada, and a deal seems likely between the two commonwealth members. The UK is still technically in the EU, which itself entered a trade deal with Canada that just recently came into effect. Regardless, Canadian officials are likely aware that the health of their agricultural industry lies more in striking trade deals with developing Asian countries, whose demand for cereals and other row crops will only continue to grow. How Prime Minister Trudeau handles and forces progressive labor and environmental reforms may ultimately be the limiting factor to success.

Lastly, although President Trump’s actions are notoriously difficult to predict, the fact that NAFTA survived 2017 unscathed points to a lasting resilience. Canadian officials are understandably calling the removal of supply management systems a non-starter, despite farm groups pleading for a “do no harm” approach to renegotiations. Unfortunately for the dairy, egg, and poultry industries, Canadian officials are unlikely to let supply management systems imperil the entire country’s economy. Compromises are almost assured. Supply management systems may be phased out over a period longer than a decade—the timespan the US has initially demanded—among other potential changes. Regardless, Canada seems both destined and determined to become further intertwined with global markets. Using Statistics Canada data on Gro can help monitor this fundamental evolution as it happens.