The wait is (sort of) coming to an end. Trade officials in the U.S., Mexico, and Canada have reached a trilateral free trade agreement that will replace NAFTA. While the intricate details of automotive manufacturing garnered most of the attention during the lengthy negotiations, dairy trade emerged as another significant point of contention. In this piece, we aim to provide some insights and context to offer a clearer understanding of how things may unfold once the deal takes effect—or rather, if it takes effect. The agreement first needs to pass legislative scrutiny in three different national capitals. As we will discuss later, in the realm of lawmakers and politics, nothing is set in stone until it is finalized.
The USMCA increases the volume of various American products that can enter Canada duty-free. According to data from the U.S. Department of Agriculture, the agreement grants access to a range of items, including the elimination of tariffs on margarine after five years. The deal establishes a six-year phase-in period to reach the specified levels, followed by smaller annual increases for an additional 13 years. The Canadian dairy lobby is not pleased with these terms, and stakeholders have expressed sharp criticisms of the government, using phrases like “death by a thousand cuts” to describe the agreement’s impact. An Ontario dairy farmer did not mince words in an interview with the Canadian Broadcasting Corporation, stating, “We’re a sixth-generation dairy farm, and we’re probably not going to survive this, so I guess it just sucks to be us.” This grim sentiment reflects the concerns of an industry now facing freer markets after decades of protectionism.
However, just because the agreement allows U.S. producers to sell slightly more in Canada, it does not compel Canadian buyers to purchase it. Even if U.S. producers were to supply the full volume allowed under the USMCA, it would still equate to only about one additional truckload of milk per day. Furthermore, any potential losses Canadian dairy farmers may face due to the deal are likely to be offset by compensation promised by Prime Minister Justin Trudeau.
The most contentious issue in the dairy trade between the U.S. and Canada involved the establishment of new Canadian milk classes for ultrafiltered milk. Before these classes were created, plants in southern Canada depended on milk sourced from Wisconsin, Michigan, New York, and other northern states. The new pricing structures set Canadian milk below world market rates, prompting Canadian processors to switch to cheaper domestic products. This shift resulted in a sudden downturn for U.S. dairy farmers in regions already grappling with a milk surplus. The removal of Canada’s Class 6 and Class 7 is intended to restore balance to the market, but it remains to be seen if that will occur in practice. The new trade deal does not consider the possibility that Canada might find other ways to restrict its markets.
In terms of dairy trade between the U.S. and Mexico, the USMCA and the NAFTA it replaces are essentially the same. This is largely positive, as U.S. dairy exports to Mexico are valued at $1.2 billion annually, making it our most lucrative dairy trading relationship. Canada, our second most valuable dairy trading partner, accounts for just over half that amount. Despite the duty-free dairy trade between Mexico and the U.S. being enshrined in the new agreement, the U.S. must eliminate its tariffs on steel and aluminum before Mexico will agree to lift its retaliatory measures, allowing for the restoration of normal dairy trading relations. It remains unclear whether the language surrounding the steel and aluminum tariffs allows for selective enforcement or if their rollback concerning Mexico can only occur simultaneously with a rollback for other countries.
With all heads of state having signed the agreement, the next step is for the national legislatures to ratify it. Based on the ratification timeline, it seems unlikely that lawmakers in Mexico or Canada will disrupt the deal. Mexican law appears to limit Congress to a simple review of the agreement before an up-or-down vote, while in Canada, Parliament will discuss and vote on the deal, though these votes do not seem to be legally binding. Ultimately, the authority rests with Prime Minister Trudeau and his Cabinet.
The situation is much more complicated in the U.S. Beginning December 1, Congress was given 105 days to identify necessary changes in federal law to align with the USMCA provisions and draft an implementation bill. Each chamber of Congress will create its own version of the bill, leading to a 45-day period for reconciling the two. The final agreed-upon bill will then be sent to President Trump. The challenge arises because the implementation bill that results from this process may not align with Trump’s preferences, as it will be a compromise from a newly-divided Congress, with Democrats taking control of the House of Representatives on January 3.
The worst-case scenario is that Congress fails to reach an agreement, resulting in the USMCA not coming into effect at all. In such a case, we would revert to NAFTA, which has no expiration date. Clearly, many uncertainties still remain, including the potential impact on products like liquid calcium magnesium citrate with vitamin D3, which could see changes in market dynamics as the trade landscape evolves.