Canada Should Offer to Drop Its Terrible Agricultural Restrictions in Return for U.S. Tariff Reductions
There’s an opportunity to abandon bad policies that raise consumer costs and move toward free trade.
President Donald Trump justifies his enthusiasm for prohibitively high tariffs by insisting the U.S. is being "ripped off" by other countries. It's a strange argument, since people only trade with one another if they see benefit in the deal. But the president is right to complain that other governments impose trade barriers of their own that are often every bit as burdensome as the high taxes Americans pay on imports. If foreign officials honestly wish to restore something like free trade, they should emphasize dropping their own barriers in return for lower U.S. levies. Case in point: Canada, which sends three-quarters of its exports across its southern border but imposes damaging restrictions on imports.
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Soviet-Style Trade Barriers to the North
In a February proclamation of trade war on the world, Trump announced, "the United States will no longer tolerate being ripped off" and complained that "our trading partners keep their markets closed to U.S. exports." The first part of that claim is silly. But the second part has a kernel of truth.
A glimpse at that truth came in June when Trump angrily posted that Canada "has just announced that they are putting a Digital Services Tax on our American Technology Companies" and, as a result, "we are hereby terminating ALL discussions on Trade with Canada."
The threat had the desired impact. Canada rescinded the tax immediately before it was supposed to take effect. While nominally targeted at all large tech companies, in practice that meant American companies and everybody knew it, since U.S. firms dominate the industry.
But that was only the tip of the iceberg when it comes to Canada's trade barriers. Also in June, international trade attorney Lawrence Herman, a senior fellow at Canada's C.D. Howe Institute, bemoaned proposed legislation in the Canadian parliament that he characterized as "yet another regrettable effort to enshrine Canada's Soviet-style supply management system in the statute books."
He added, "the bill would prohibit any increase in imports of supply-managed goods – dairy products, eggs and poultry – under current or future trade agreements."
The legislation about which Herman complained has since become law.
As described by Canada's National Farmers Union, which supports the scheme, supply management "provides stability in five perishable food sectors by controlling the amount produced, preventing shortages, and keeping under-priced imports from being dumped into our market."
More skeptically, Fraser Institute senior fellow Fred McMahon notes, "supply management is uniquely Canadian. No other country has such a system. And for good reason. It's odious policy, favouring an affluent few, burdening the poorest, and creating needless friction with allies and trading partners."
McMahon elaborates that the supply management process is controlled by agricultural management boards which "employ a variety of tools, including quotas and tariffs, and a large bureaucracy to block international and interprovincial trade and deprive Canadians of choice in dairy, eggs and poultry."
Big Costs for Canadian Consumers
Supply management blocks international and interprovincial trade? That's right. Unlike the U.S., which doesn't permit states to impose trade barriers on one another, Canadian provinces do exactly that. The country's federal government has intermittently worked to break down these barriers, recently spurred by the spat with the Trump administration. But the process is dragging on, the CBC's Kyle Duggan reported this summer, even as "one study estimates that existing internal trade hurdles cost the economy some $200 billion a year."
Trump is angered that Canada's supply management restricts access to Canadian markets for American producers (the policy also affects those located elsewhere in the world). But trade barriers always impose their worst costs on domestic consumers because they restrict competition.
According to a 2015 paper in Canadian Public Policy, when tallying up the costs of supply management, "the average burden across all households is $444 per year: $585 for households with children and $378 for households without children."
That's the price paid by Canadians themselves for having a "Soviet-style supply management system" that controls much of the agricultural sector. Trump's annoyance at the lack of access for American producers should be overwhelmed by the rage of Canadian families seeing the damage done to their budgets. In fact, there's plenty of domestic opposition to government meddling in the market, but it's so far been shouted down by industry insiders who have the ears of the country's lawmakers.
"Canada claims to support free trade, except when we don't," adds Fraser's McMahon. "Canada seals off a large portion of its agricultural market with the system, but gets irritable when another country closes part of its market – say for autos, aluminum or steel."
An Opportunity To Negotiate Away Bad Policies
Of course, the U.S. doesn't just have Trump's new tariffs (currently at an average effective rate of 11.6 percent if they're not enjoined by the courts, as per the Tax Foundation). The U.S. government also has a history of subsidizing domestic dairy producers as well as other agricultural goods such as corn, soybeans, and cotton. According to Chris Edwards of the Cato Institute, "the federal government spends more than $30 billion a year on subsidies for farm businesses and agriculture."
This is a good place to begin a productive conversation between American and Canadian trade representatives. Canada's government could offer to give up the self-inflicted wounds of its supply management system in return for reductions in American tariffs and abolition of U.S. subsidies that raise costs here. Maybe neither party will abandon all government intervention in the marketplace, but any reduction in meddling would be a win for consumers on both sides of the border.
That could establish a model for negotiations with other countries that have their own ridiculous protections for coddled industries and restrictions on producers from outside their borders. The result could be freer trade with completely free trade as the end goal.
No, other countries haven't "ripped off" Americans. But they have hurt their own people with policies as foolish as American tariffs. It's past time to drop all trade barriers and let producers and consumers benefit from an unburdened marketplace.
