Dairy Highlights Challenges to TPP Closure

The Trans-Pacific Partnership (TPP) negotiations did not close in Hawaii last month partly due to disagreements over dairy access.  Why did bargaining across 12 countries get so bogged down over milk and cheese market access?  What does the dairy dispute tell us about problems ahead?

Agriculture has historically been protected more than industrial goods, since nearly every country has particularly sensitivities around farming, farmers, and food.  The global trade regime under the GATT/WTO has made only modest inroads into agricultural trade so far, mostly by limiting tariffs in some sectors. 

The protection of agriculture has continued in various free trade agreements (FTAs) signed between WTO members, as Jo-Ann Crawford demonstrated by looking at 162 tariff schedules.  The countries in the sample varied in the extent of market liberalization for agricultural goods; however, overall, agricultural commitments made in trade agreements regularly omitted or excluded tariff lines.  The most frequent products carved out of FTAs include sugar (HS Chapter 17), miscellaneous edible preparations like coffee and tea (Chapter 21), beverages (Chapter 22), cereals (Chapter 10), dairy (Chapter 4), and meat (Chapter 2). 

This strategy for handling sensitive agricultural sectors—by simply excluding the items from market liberalization at all—was not supposed to take place in the TPP.  From the earliest days of discussions, officials took pains to announce that the TPP would contain “no exceptions.” 

Hence, even tough issues like dairy, sugar, meat and cereals (like rice and wheat) have had to be on the table for negotiations.  It will perhaps not surprise anyone to learn that these sectors, however, have been some of the very last items to be dealt with in the TPP. 

Canada apparently did not put forward an offer on dairy until just days ahead of Hawaii.  The original offer appears to have been a liquid milk equivalent tariff quota for all dairy products.  This gets rather complicated, but in short it meant that the partners could have access to a certain portion of Canada’s dairy market at lower tariff rates.  Once the quantitative cap was filled, everything after that would be charged (much) higher tariff rates.

Under a liquid milk equivalent scheme, all products made with milk, including cheeses, butter and all sorts of milk items would be interchangeable—in other words, partners could ship whatever form of dairy added up to the equivalent amount of liquid milk at lower tariffs up to the filling of the cap.  It could be that the entire cap could be filled with butter, leaving no room for cheese exporters, or the reverse. 

This is a deeply problematic outcome, however, for dairy exporters, as it is extremely difficult to determine what sort of outcomes farmers might receive in practice.  Quota systems are widely used in dairy and can sometimes be completely filled within a matter of weeks.  A sort of “blanket” quota would be even harder to judge since there could be no way to determine what portion of the quota other member countries might be able to fill or when.

Canada’s revised offer appears to have split up quotas for major subsectors of dairy.  This is an improvement, but still remains problematic.

The reason for Canadian delay in offering anything at all on dairy relates to specific domestic challenges.  Canada has a long-standing set of policies in place for dairy (and poultry) to protect the market against encroachment by (mostly) American dairy farmers. 

Under supply-management, the government has sheltered the dairy sector behind extremely high tariff walls (more than 300 percent, in some cases) and limited import quotas.  The system also includes complicated marketing boards that determine domestic prices, and controls on supply through the use of quotas per farmer for production. 

The net results of this system are a lucrative source of revenue for dairy farmers and extremely high dairy prices for Canadian consumers.  Efforts to dismantle or dramatically revise the system in the past have been complicated by the fact that the bulk of the 13,000 dairy farms in Canada are geographically concentrated in two important voting provinces.  While consumers would presumably benefit from cheaper products, like consumers worldwide, the average Canadian is not likely to rise up and lobby hard in favor of reduced dairy and poultry prices. 

Despite the soaring rhetoric of the TPP as a new kind of trade agreement better suited to the 21st century, dairy reforms in Canada will likely remain grounded firmly in the past.  Whatever happens, reform is likely to be limited, with changes to dairy phased in slowly over long time horizons.

Canada is not the only country, of course, with complex systems of support in place for dairy production.  Japan’s butter market follows a similar pattern—the government controls import volumes and prices and uses high tariff walls.  The result is that Japanese consumers pay more than triple the international price for butter and even experience shortages.

Like in Canada, however, consumers are not carrying protest signs around the trade ministry begging for lower butter prices. 

In the absence of visible support from consumers, officials are mostly getting an earful now from potentially disadvantaged firms.  It might be expected that industries that rely on dairy as an input, including all sorts of food manufacturers, bakeries, restaurants, and so forth would be working hard to convince governments that cheaper products could also be beneficial.  While some of this is undoubtedly taking place, their efforts are likely modest. 

Even firms that could be clear winners can be withholding visible support.  Many argue that, in the absence of a text that clearly lays out the extent and scope of changes that are coming, they cannot say anything at all. 

But once the agreement is finished and revealed, whatever (likely modest) changes are included for dairy are likely to provoke backlash from entrenched interests that benefit from current schemes.  Expect to hear loud calls for maintaining systems that “benefit small, family farms” and “produce high quality, safe food products” and “ensure adequate domestic supplies of dairy and dairy products.” 

Such complaints will be made even though: domestic farms remain set to continue to dominate markets; many farms could carve out an advantage in exporting; TPP products are of similar or equal quality; and supplies of products like butter, milk powder and cheeses are likely to increase.

Groups that feel under threat will not likely sit quietly.  Simply having the text available will not settle the issues.  

In the face of what can appear to be overwhelming support for the status quo, officials and political leaders can go wobbly.  They can backtrack on commitments for market opening and threaten to undo or torpedo the entire deal. 

A similar scenario will happen in various other sectors of agriculture and elsewhere.  Revealing the specifics of the compromises made in each of the 12 member countries is likely to set off vigorous debates.  Firms and industries that have decided to sit on the sidelines until the text is released may be joining the battle much too late. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The Collapse of the TPP: Unpacking the Disaster

No deal.  

What happened?  I was so optimistic that they would get things done for the Trans-Pacific Partnership (TPP) negotiations this week in Hawaii.  I ignored the (excellent) advice of my professor and issued predictions of success on a fast-moving target.  We even had a booklet ready to go on the benefits of the agreement for businesses.  My planned blog post for this week had us drinking champagne by now. 

But no champagne (or sparkling wine) is going to be popped open for most people after the collapse of negotiations in Hawaii.  The bottles will go back on ice for a very long time—at least early 2017.

Why?  Because Hawaii really did represent the last, best chance for a deal in the near term.  Ministers have apparently decided to reconvene on the sidelines of APEC in November to try again. 

The cold logic of deadlines, however, shows that a deal reached in November is not going to be helpful.  Recall that once the officials agree on a draft text, this is not the end.  Instead, internal procedures in the United States (and others) means a delay of at least 90 days prior to final signatures on the agreement.  Entry into force is even further off.

Even if ministers solve the current impasse in the TPP in November, then, the deal would be ready (best case) in February or March for presentation to Congress.  Congress has to agree under new TPA rules before the President can sign the agreement.  Congress will also be voting on all the implementing legislation necessary for the agreement to come into force for the United States. 

There is no way that Congress will want to take a politically suicidal vote in favor of trade in March 2016 with an election looming.  Hence, the deal is stuck until after the elections (November 2016) or even until after the new president is installed in January 2017.  Even then, passage cannot be assured.

So what happened on the ground in Hawaii?  There will be much finger pointing and recriminations in the wake of the talks.

If I had to put my own finger on it, the immediate cause of collapse can be traced to Canada’s refusal to discuss dairy in any meaningful way until the final 3 days of negotiations.  This was, as I have previously noted, a high risk strategy. 

I assume officials gambled that, if they waited until the bitter end, everyone else would be so willing to get a deal done that they would take whatever poor offer Canada made on dairy liberalization. 

The gamble could be taken, in part, because negotiations over dairy are infinitely more complex and time-consuming than equivalent difficulties in other sectors.  For instance, another problematic issue for ministers in Hawaii concerned the patent length for biologic medicines.  But the fight over patent length, while serious for participants, could at least be sorted quickly.  The number was gong to be 12, 8, 7 or 5 years of protection.  The choice might be hard, but once made, the final figure could be quickly slotted into the waiting text.

Dairy, by contrast, is not just the tariff concessions or tariff rate quotas (even more complicated) for fresh milk.  The number of lines of dairy products runs into the hundreds or thousands.  It includes all sorts of varieties of milk—fresh, powdered, canned, UHT, etc.  It includes milk products of all sorts.  Plus butter and cheese.  Cheese is, of course, not just one kind of cheese, but cheddar and Swiss and creamed. 

In short, getting an agreement on dairy is not simple and, logistically, cannot be sorted in 3 days or even a week. 

It is not like this was a new or unexpected problem either.  Canada was originally prevented from joining the negotiations in 2010 over concerns by the other TPP members that Canada would not be willing to discuss dairy or anything related to their domestic supply management system.  However, Canadian officials insisted they were prepared to move ahead with meaningful changes. 

In Hawaii, Canada apparently offered a flat quota for liquid milk equivalents—ie, anything that could be made (including fresh milk) with a certain quantity of milk would qualify.  Once the quota was filled, no additional access at TPP tariff rates would be granted.

There is not enough room in this blog post to detail all the reasons this is a horrible plan for anyone hoping to obtain meaningful access the Canadian dairy market.  Perhaps a future post will go into dairy in greater detail.

For now, accept that once the Americans saw the Canadian plan, they promptly withdrew their own offers to partners for additional dairy access into the United States.  After all, American dairy farmers were presumed to be willing to support the TPP if—and only if—any potential losses could be offset by greater sales elsewhere and particularly into Canada.  If Canada was not going to be a new, important market, then it was not worthwhile to offer up concessions to others to access the American market either.

I can only imagine the reaction in New Zealand.  Their primary interest in the entire agreement has been to receive additional dairy access.  Although the Kiwi market is dynamic and competitive in many areas, more than 30 percent of their economy remains tied to milk and dairy exports.  With these markets effectively shutting before their eyes in Hawaii, officials must have watched in total disbelief. 

In addition, Australia also had troubles with the dairy offer (and American offers on sugar).  With the U.S. dairy deal off the table, the Aussies promptly withdrew any support for changing the patent length protections on biologics (a key deliverable for the Americans). 

Mexico, which has been defending its special access to the NAFTA markets all along in various sectors, suddenly came forward to object to rules of origin (ROOs) around autos.  The current NAFTA provisions call for 65 percent content from NAFTA countries.  These rules have helped make Mexico into an automotive powerhouse and the possibility of lowering the percentage of content required in the TPP led to strong Mexican objections.  

With the unraveling of autos and the contested dairy elements of the agreement, various other complaints from different TPP members must have risen to a crescendo.   Reconciling these interests has always been a heavy lift.  But once officials realized that key outcomes were being pulled off the table by others in the end, the stampede to protect your own markets and not be left exposed must have been unstoppable. 

I thought they would delay the finish for another 24 hours.  Instead, with everything in such flux, officials just called off the whole thing to fight another day.  I would bet that many said—with domestic elections in Canada finished in October—the dairy stuff could be addressed by the next meeting.

The key problem with such a strategy, as I just pointed out, is that this delay is not simply from July to November.  It could be a delay of 18 months or more.  People in the coming days will undoubtedly be pointing to the global trade talks that have dragged on for more than a decade with no agreement (despite their own deadline of July 31) to even get a plan in place to discuss a path forward. 

The TPP now finds itself in very uncertain territory.  The only salvation I can imagine is to finally invite the South Koreans to join the talks.  If you aren’t going to be done for ages, you might as well expand the party.  If Korea comes in, perhaps Taiwan will also make a renewed push for entry. 

At least then officials have new excuse for delays in closing a trade agreement that has been underway for what frankly feels like forever.

***Talking Trade is a blog post written by (a deeply depressed) Deborah Elms, Executive Director, Asian Trade Centre, Singapore***