Trade Liberalization in the Dairy Sector: An Overview

The world dairy industry is one of the most heavily protected in the agri-food sector. Exports of dairy products are dominated by the EU, the United States, New Zealand, and Australia. The major importers of dairy products are far less concentrated but include the EU, Japan, Mexico, Russia, the United States, and many others. The Canadian dairy industry came out of the Uruguay Round of trade negotiations with the continued ability to practise supply management, thereby allowing it to: (1) maintain prices above world market levels and (2) control the allocation of output to the domestic market. In fact, the Agreement on Agriculture opened the door for Canada to become a more aggressive exporter of dairy products by practising price discrimination between domestic and export markets. The Canadian dairy export program introduced in 1995 was challenged by the United States and New Zealand, and the WTO appellate body ruled against Canada because of the involvement of government agencies in the export process. Recent changes in Canada's dairy export program remove the direct involvement of government agencies but Canada may face a new WTO challenge, one that would force the WTO to rule if price discrimination, at least in some situations, is an export subsidy. Progress towards future trade liberalization in the dairy sector will involve reductions in export subsidies and over-quota tariffs, and increases in minimum access commitments. Reductions in explicit export subsidies will have the most effect on the EU. The effects of tariff reductions and increases in minimum access on domestic product prices, production, and consumption are commodity and country specific. Careful analysis of any proposed changes in these instruments will be required to fully understand their effects, both in Canada and on world markets.