Dairy markets and NAFTA

NYT reports that dairy tariffs are the major sticking point in the NAFTA negotiations between the US and Canada.  In the aftermath of last summer's G7 summit, President Trump slammed the Canadians for their 270% tariff on blended dairy powder.  U.S. negotiator Robert Lighthizer said this week that he viewed Canadian concessions on dairy as essential.

From an economic perspective, I find all of this puzzling for three reasons.  First, neither the US or Canada has anything resembling a free market in dairy.  Both countries overpay dairy farmers to produce too much and then they have to figure out what to do with the surplus.  Consumers and taxpayers are losers in both countries.  If political leaders wanted to help consumers, they would aim at dairy price supports, not NAFTA.

Second, the US runs a dairy surplus with Canada.  According to Bloomberg, Canada imports twice as much dairy to the US as it exports.  You might wonder how this can happen with 270% tariffs.  The answer: the 270% applies only when the US exports more than its allotted quota.  Otherwise the tariff is 7.5 percent.  

Third, dairy is small change in the overall pattern of trade activity between the US and Canada.  The US exported $340.7 billion to Canada in 2017, of which $470 million was dairy.  Blowing up NAFTA over such a tiny sliver of the overall market makes little economic sense.  For the sake of comparison, automotive exports are $52 billion.

Trade agreements depend on political as well as economic arguments.  Keep in mind that the Canadians have elections in 2019.  Dairy farmers in Quebec are an influential group, so no one in the Canadian government is going to do anything to ruffle their feathers.  It is less clear to me what the political arguments are for the US insistence that something must be done on the openness of the Canadian dairy market.  And that's all I will say.