USMCA: Auto Sector Can Adapt, but Dairy Industry Will Take a Hit

July 7, 2020 Updated: July 8, 2020

The ink was barely dry on the finalized United States-Mexico-Canada Agreement when it came into effect July 1, leaving Canadian industry struggling to change gears. While the automotive sector expects it can adapt, the dairy industry faces much greater uncertainty.

“The real benefit of the USMCA was continuing to secure access to the U.S. market for products that they’re building here in Canada, because 85 percent of the production essentially goes down into the U.S. market,” said David Adams, president of the Global Automakers of Canada.

The new trade agreement guarantees that Canada can export 2.6 million passenger vehicles south every year, tariff-free. This leaves room for growth, as Canadian plants have shipped less than 2 million in recent years. The agreement also raises North American content requirements from 62.5 percent to 75 percent and guarantees that 40 percent of automobile content must be made by workers earning US$16 per hour or more.

Auto companies hope they don’t grind their gears as they shift to the new requirements. The full details of USMCA regulations weren’t published until early June. Full comprehension of the trade deal will take time—as will full compliance.

“While you can look at things on paper and think that you understand them, unless you have some concrete examples of how things work that’s a little bit more of a challenge,” Adams said.

“That’s something that governments will continue to work on so they can provide greater clarity for the agreement and the regulations to be applied.”

The provisions for the auto industry earned the USMCA praise from unions rarely heard regarding multilateral trade deals. “Frankly, the deal we have with the United States, we are, I would argue, in better shape than we have been in the past 25 years,” Unifor president Jerry Dias said in a past statement.

While the road ahead for the auto industry is blocked by fog and has a bit of an incline, for the dairy industry it’s full of potholes and might leave some vehicles in the ditch.

The USMCA opens 3.59 percent of Canada’s dairy market to American competition—making it the latest trade deal to erode Canada’s supply management system, says Jacques Lefebvre, CEO of the Dairy Farmers of Canada.

Combined with World Trade Organization decisions and trade deals with Europe and the Pacific region, Canada will lose 18 percent of its domestic milk production by 2024.

“It is too early to fully assess the immediate impact on individual farms,” Lefebvre said in an email. “As with any business that would lose 18 percent of its market over a short period, some will undoubtedly consider their options.”

The federal government announced $1.75 billion in compensation to dairy farmers for prior trade deals, and Lefebvre expects more money due to USMCA.

“The federal government has committed to compensate farmers ‘fully and fairly’ to mitigate the transfer of parts of our domestic milk production to foreign producers in successive trade agreements. We intend to hold government to its word,” he said.

Dairy processors have their own problems. USMCA eliminated a pricing system that restricted American imports of skim milk powder, milk protein isolates, and infant formula. The new agreement also caps Canada’s exports of those same products into the United States.

The implementation of the deal on July 1 added a $100 million cost to processors since their annual quota year didn’t end until July 31. Don Plett, leader of the Opposition in the Senate, stated in April that Conservatives’ support for the USMCA was conditional on an Aug. 1 start date.

“This date marks the beginning of the dairy calendar year, and had this date been respected, it would have allowed dairy industry to save about $100 million,” said Plett’s statement, noting that the early ratification of the deal “betrayed” dairy producers.

Going forward, lost market access due to the USMCA will cost processors $140 million annually and dairy farmers $190 million annually. The industry will forfeit an additional $50 million annually due to export caps on milk powder, proteins, and infant formula.

“The dairy industry is in a mess,” says Sylvain Charlebois, professor of food distribution and policy at Dalhousie University in Halifax.

“There is a lot of tension between processors and producers right now. And of course, producers are complaining about prices dropping everywhere. And processors believe that prices are still too high and it hasn’t allowed them to compete.”

Charlebois says new technology allows milk to remain unspoiled for a whole year, but a system that resists change hampers opportunities for farmers.

“When you talk to dairy farmers themselves, they’re absolutely terrified. They know what’s going on, they’re not idiots. Dairy farmers are pretty smart people, they know something is wrong. But boards are politicized and they will do everything they can to protect the status quo.”

Charlebois says trade changes and the pandemic only exposed and worsened existing problems.

“The dairy industry has always failed to prepare itself appropriately for the real world, for an open economy,” he said. “They just don’t want to compete and they want to stay home and continue to do what they’re doing, and that’s no longer sustainable.”