Farm Subsidies in Canada and the United States - The Pot and the Kettle

Updated September 2018

With it appearing that the Trudeau government is about to sign a new NAFTA deal with some changes to the manner in which dairy trade is treated, it looks like Canada's decades-old dairy supply management system is being threatened by American trade policies.  Let's look at a bit of background about supply management and then take a closer look at how the U.S. farm industry is being subsidized by Washington.  While I don't have specific data on how Washington is subsidizing its dairy industry, I think that you will find the information on overall agricultural subsidies to be food for thought (poor pun, indeed).

Supply management is a government-mandated program which was founded in 1971 under the Pierre Elliot Trudeau government.  The purpose of this scheme is to control the farming industry in Canada (and other nations) by controlling the supply of commodities, most particularly milk, cheese, eggs and poultry in Canada.  Through the imposition of production limits, prices remain higher and governments avoid the costly necessity of directly subsidizing farmers with cash payments.  In addition, supply management must entail controls on imports that would otherwise flood the domestic market, pushing prices down and reducing farm incomes.  Supply management gets mixed reviews; while farmers are in favour, and tout the fact that Canada's dairy products are of better quality, many consumers feel that they pay higher prices for dairy products than they would under a free-market system. 

Here's what the Dairy Farmers of Canada, the organization that represents Canada's roughly 17,000 member dairy farmers and acts as its lobbying and marketing force, have to say about supply management:

"Canada’s supply management system provides balance in the dairy sector by enabling Canadian dairy farmers to act collectively to negotiate price and adjust milk production to meet consumer demand.

While farmers around the world face unexpected and inexplicable wild market fluctuations, Canadian farmers sell their milk at constant and stable prices.

As a result, Canadian dairy farming is one of the few agricultural sectors that are self-sufficient – providing income security for farmers and requiring no government subsidy. This means Canadian farmers can invest in their farms, communities and Canada."

Here are some of the key facts as presented by Dairy Farmers of Canada:

Here is a graphic which shows how Canada provides more market access for imports of dairy and poultry products than either the United States or the European Union:

Dairy Farmers notes that, despite supply management, Canada imports a very substantial portion of its dairy products as shown on this table:

Roughly 8 to 10 percent of Canada's total dairy products are imported tariff-free. 

Here is a table showing the value and quantity (in kilograms) of butter imported into Canada over the past five years and the source nation of the butter:

Here is the same data for cheddar cheese:

Here is the same data for milk:

As you can see in each case, the United States is the primary source of Canadian imports of these three products.

Now, let's completely switch gears and look at how the United States government subsidizes American farmers.  Thanks to the Environmental Working Group, we have a complete database of all subsidies provided to American farmers since 1995.  

Here is a listing of the top farming industry recipients of USDA subsidies:

In total, 3,916,900 recipients shared in over $353.5 billion in USDA subsidies over the two decade period from 1995 to 2016. 

Let's break down the data and look at a key aspect of farm subsidies in the United States.  Here is a graph showing the commodity subsidies given to the farming industry on an annual basis in the United States between 1995 and 2016:

In total, over the two decades, commodity subsidies paid to the farming industry totalled $198.2 billion. 

Here are the programs included in the commodity subsidy payments:

Here is a list of the 20 largest recipients of commodity subsidies between 1995 and 2016:

The top 10 percent of commodity payment recipients were paid 77 percent of the $198.2 billion worth of commodity subsidies.

  

Lastly, here is a table showing the states which received the most commodity subsidy payments over the two decade period:

As you can see, Iowa, Texas, Illinois and Nebraska accounted for nearly one-third of all commodity subsidy payments.

After you've looked through this data, it's pretty hard not to draw the conclusion that both Canada and the United States governments play a heavy role in their respective farming industries through the use  of supply management and subsidies.  Gone are the days of the small, 100 acre mixed-crop family farm.  In the new economic reality, farms have become major industrial operations that rely on government intervention as part of their business model.  While the Trump Administration is pointing the finger at Canada's dairy industry, it need look no further than its own farming industry to see that it is clearly a case of the pot calling the kettle black.

Trade Bullying and the Boomerang Effect of the Trump Tariffs

One of the preferred ways that governments have to impact bilateral trade is to impose tariffs, those nasty taxes that generally result in higher prices for goods and services.  Governments impose tariffs for several reasons:

1.) to protect domestic industries from international competitors by raising the price of international goods

2.) to raise revenue

3.) for reasons of national defense

4.) for environmental reasons

5.) to protect nascent (i.e. new) businesses

The Trump Administration is proving itself to be a bit of a bully when it comes to international trade, provoking even its largest trade partners to respond to the imposition of tariffs by the United States, most particularly on steel and aluminum.  While Donald Trump has stated that trade wars are easy to win, in actuality, the battle is not always won by the party that started the war.  A recent Policy Brief by Trade Partnership Worldwide takes a close look a the impact of the 10 percent tariff on aluminum and the 25 percent tariff on steel, both of which were recently imposed on Canadian, European and Mexican products as their exemptions expired.

First, let's look at the retaliatory response of some of the nations to the imposition of tariffs on their steel and aluminum:

It is these retaliatory measures that are going to have significant and unintended consequences for the United States and its workforce.

The lead author of the Policy Brief, Dr. Joseph Francois, has concluded that the economic impact of the tariffs are as follows:

Change in GDP: -$36 billion

Percent Change in GDP: -0.2 percent

Change in Steel Imports: -44.4 percent

Change in Aluminum Imports: -12.7 percent

Change in All Imports: -1.9 percent

Change in All Exports: -1.0 percent

Net number of United States Jobs Impacted:

Primary Agriculture: -6,782

Primary Energy: +974

Manufacturing: -19,931

Services: -376,706

Total Job Losses: 402,445

The biggest job gains will be made in the steel and iron sector (+23,424), however, these are far outweighed by job losses in trade and distribution (-98,088), construction (-63,930), personal and recreational services (-35,033) and business and professional services (-26,590).  Other services will also see a decline of 128,102 jobs.  Service sectors are the hardest hit because, as consumers reduce spending when they are hit with higher costs (i.e. more expensive appliances, vehicles), they reduce spending on services such as entertainment and healthcare.  It is interesting to note that job losses in steel-consuming sectors, many of which provide jobs to workers living in the Rust Belt and southern regions of the U.S. will see annual employment declines of 97,614 jobs in the first one to three years that the tariffs and their accompanying retaliation measures are in place.

Let's look at the states which will experience the greatest job losses, noting that states which have an important steel and aluminum sector like Indiana, Illinois, Pennsylvania, Ohio, Michigan and Wisconsin:

California - 49,092 job losses

Texas - 36,372 job losses

New York - 26,284 job losses

Florida - 24,897 job losses

Pennsylvania - 16,823 job losses

Ohio - 15,889 job losses

Illinois - 15,389 job losses

Georgia - 12,575 job losses

Michigan - 11,365 job losses

Virginia - 11,172 job losses

New Jersey - 11, 152 job losses

Illinois - 15,389 job losses

As you can see from this analysis, trade bullying does not always produce the desired results, in fact, sometimes the boomerang effect produces a very negative and unanticipated impact.  In this case, the Trump Administration's imposition of tariffs would appear to lead to a significant number of job losses in states already hard-hit by America's long-term de-industrialization.