Compositional Standards, Import Permits and Market Structure: The Case of Canadian Cheese Imports

The imposition of new cheese compositional standards by the Canadian authorities has created divisions within the Canadian dairy industry and has motivated criticisms from several of Canada’s trade partners. The standards impose minimum limits on the percentage of casein coming from fluid milk which vary across cheese types. We develop a theoretical model to investigate the implications of Canada’s compositional cheese standards while accounting for Canada’s tariff rate quota specificities. The “use it or lose it“ clause on import permits makes it possible for cheeses not directly constrained by the standards to be strongly impacted. We also show that the regulations on cheese composition may or may not increase the domestic demand for milk. Without information on technical coefficients in the cheese industry, we were unable to resolve through empirical simulations the ambiguities arising from our theoretical results. Our empirical investigation focused instead on the pricing and composition of cheese imports. We identified structural breaks in the processes determining import unit values shortly before or shortly after the beginning of the implementation of the standards. We found differences in break dates across cheese types and also across countries supplying the same type of cheese. Thus, the standards had some impact on the market shares of our trade partners as well as inflationary effects on cheese prices.