“It’s not about Trump and Trudeau,” Stephen Kelly, who served as the U.S. consul general in Quebec City and the deputy chief of mission in Ottawa, told me. “This has been an irritant for many years.”
Decades, in fact—and not just for the United States, whose dairy farmers would like access to the Canadian market, but also their counterparts in New Zealand and elsewhere. New Zealand had opposed Canada’s entry into the Trans-Pacific Partnership over the supply-management system, but Stephen Harper, the Canadian prime minister at the time, agreed to dismantle the system in exchange for TPP membership. When the U.S. withdrew from the TPP, one of Trump’s first decisions as president, Canada withdrew that concession—other countries withdrew their concessions, as well—in the hopes that it could be put back on the table in the future if the U.S. rejoins the pact and demands compromises from the others.
The Canadians aren’t entirely opposed to negotiating on the dairy industry if they are getting something in return: In its Comprehensive Economic and Trade Agreement with the European Union, Canada agreed to import European cheese without tariffs. From Canada’s point of view, it is worth it for nearly tariff-free access to the 28-member bloc that is the world’s largest economy.
“In a multilateral context, there was more to trade off. Now the problem is that Trump is dealing with this in a bilateral context where trade barriers are generally very low,” Christopher Sands, the director of the Center for Canadian Studies at Johns Hopkins University’s School for Advanced International Studies, told me. “Most tariffs are down to zero anyway. So, there’s not much for the U.S. to give in return for the change.”
It doesn’t help that the U.S. subsidizes its own dairy industry heavily—up to $22 billion in 2015, according to one study. “The Canadians say, ‘Hey, wait a minute. You subsidize milk, too,’” Kelly, who is now a research scholar at the Sanford School of Public Policy at Duke University, said. “You’ve got all sorts of support programs for milk.”
In other words, Canada props up its dairy industry through quotas that cap the amount produced, and imposes heavy tariffs on imports. The U.S. subsidizes its dairy industry, resulting in lower costs for U.S. consumers, but a supply glut.
“From a geopolitical point of view, the trouble with supply management is it's kind of in your face: ‘You cannot enter our market. You foreigners cannot enter our markets unless you pay tariffs of like 200 percent,’” Kelly said. “Whereas subsidies are more insidious. They … probably are anti-trade in some sense, but they’re not as glaring. … We do it more subtly.”
Those subsidies exist in the U.S. for the same reason Canada has a supply-management system: domestic politics.
Harper’s conservative government could make a concession on the TPP because, Sands said, his party had almost no parliamentary seats in Quebec, the province with the greatest concentration of dairy farmers; he was dealing with a budget surplus with which he could simply provide the farmers with cash payments; and, in return, he could offer Canadian dairy farmers access to foreign markets. Trudeau, on the other hand, doesn’t have these advantages: Quebec provides Trudeau his second-biggest bloc of seats, including his own, making him politically vulnerable if he infuriates dairy farmers. He has no obvious olive branch to offer the dairy industry. Perhaps most importantly, he's in a budget deficit.