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A trade deal is no excuse to milk taxpayers

There can be little doubt that Canada is better off in the Trans-Pacific Partnership trade agreement than outside it, but my, what a price we paid for entry, and how we missed an opportunity for meaningful reform of supply management, especially in the dairy sector.

The highlight from Monday's announcement of successful talks was not the gains or concessions that came out of gruelling negotiations with trading partners, but was rather the Canadian government's offer of a $4.3-billion subsidy, over 15 years, to dairy farmers and other supply-managed industries for "income and quota value guarantees."

If there was a major trade-off for Canada in the talks, it was not with Japan and the United States on automobiles and auto parts, or with New Zealand and Australia on market access for milk and cheese. It was between Ottawa and the vote-baiting dairy farmers of Quebec and Ontario.

Canadian taxpayers will compensate current dairy, chicken and egg farmers up to $4.3-billion for the loss of 3.5 percentage points of domestic market share under the TPP deal. Their incomes will be protected 100-per-cent, for a minimum of 10 years, and quota values would be protected for a similar period. Unlike the Canada-European Union trade deal, compensation under the TPP would not be contingent on proven losses in the sector.

It makes sense to include trade-adjustment support for industries adversely affected by free-trade agreements. But the best kind of support is the kind that helps companies become more globally competitive, and helps workers transition to other industries.

This package offered by Ottawa appears to focus instead on income support and maintaining the value of the quotas – which in effect encourage farmers to remain in an already uncompetitive industry. There is some support for export-market development but, at $15-million, it pales in comparison with the much-larger package of direct subsidies to farmers.

The point of a free-trade agreement, after all, is to encourage a shift in resources from less competitive to more competitive industries, thus boosting economic welfare for the country as a whole, including consumers as well as exporters. Opening a sector to foreign competition, and then promptly protecting incumbents in that sector through subsidies, negates the benefits of freer trade.

One hopes that the modest opening of the Canadian dairy market to imports will mean lower prices for milk and cheese at grocery stores. But consumers should not be quick to celebrate, given that they will effectively have to repay those discounts through their taxes to cover the subsidy transfers to the industry.

Keep in mind that none of our trading partners forced the compensation package on Canada. This was an own goal that has more to do with electoral calculus than economic logic. Offering a generous compensation package to dairy farmers in Quebec and Ontario is politically savvy, since neither the NDP nor the Liberals would want to offend those constituencies by arguing against compensation.

But it is a missed opportunity in public policy that we will come to regret. The TPP should have been Canada's golden opportunity to seriously reform supply management; instead we have entrenched the system, which already costs the economy about $28-billion a year, according to the Conference Board of Canada. Absent the noise of an election campaign, it may have been possible to accede to the TPP with a generous adjustment package for dairy and poultry farmers that focused on competitiveness rather than protection. Perhaps there will be an opportunity when the next government has to deal with implementation of the agreement. However, the current agreement – with its assurance of protecting the "three pillars of supply management" – will not make it easy for any new administration to strike a fresh path.

So shed no tears for dairy and poultry farmers in Canada. So far, their industry has emerged as a winner in the TPP outcome, with consumers once again on the other side of the ledger. And whichever party wins the ridings where the dairy vote is important, remember that it came at a very big price indeed.

Contributed to Globe and Mail