International Trade in Dairy Products:  Protection versus Competition – Law School Policy Review & Kautilya Society

Prof (Dr.) Kenneth Holland

Prof. Holland is a Professor of Law and Dean (Academics, Research and International Affairs) at O.P. Jindal Global University.

The world’s large producers of dairy commodities are divided into two camps.  The first regards milk production as an industry with large potential to meet international demand through exports.  The second views dairy farmers and processors as a segment of the local economy that must be protected against international competition and whose primary function is to meet domestic demand.  The United States, Australia and New Zealand fall in the first category and India and Canada in the second.  The pressure on New Delhi and Ottawa to gain access to foreign markets for their manufacturers, service providers and agricultural producers, however, is making it increasingly difficult to shield the domestic dairy industry from competition, since international trade is reciprocal.  In addition to simple economic protection, India and Canada have cultural arguments for restricting competition from imports.   Trade in milk products illustrates some of the most interesting trends in geopolitics and the challenge that globalization poses for traditional societies.  India and Canada strive to insulate their dairy farmers from foreign competition, even though each country is a member of the World Trade Organization (WTO).  In 1995 WTO members implemented the Agreement on Agriculture, designed to “reform government policies that distort markets and restrict trade” with the aim of reducing subsidies and trade barriers to make markets in agricultural commodities “fairer and more competitive.”  International trade is conducted not only in fluid milk but in many derivatives, including evaporated and condensed milk, cream, butter, butterfat, cheese, milk powder, infant formula, ghee, yogurt, ice cream, whey, casein, lactose, and milk albumin.  Although demand for fluid milk is declining in advanced countries, the demand for derivatives, including nonfat dry milk-skim milk powder, dry whey products, cheese and butterfat is rising.

India is both the largest producer and consumer of milk in the world.  Only a small fraction is exported.  Imports are negligible and subject to high tariffs.  The industry is highly regulated.  Milk has been a primary element of the Indian diet for more than 3000 years.  Dairy products are featured in Hinduism, Indian cuisine and traditional medicine.  The largest source of milk is the water buffalo, with cows second.  Traditionally, milk was produced by small households for family consumption.  In 1969 the National Dairy Development Board launched Operation Flood to increase milk production through the organization of dairy cooperatives.  As a result, India surpassed the United States as the world’s top milk producer in 1997.  More than four percent of India’s gross domestic product and 20 percent of agricultural production are generated by the dairy industry. 

The pressure on India to open its dairy market to greater imports led to the failure of the negotiations surrounding India’s membership in the Regional Comprehensive Economic Partnership (RCEP).  RCEP is a free-trade agreement which came into effect in 2022 among the Asian-Pacific countries of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand and Vietnam.  One of the reasons for India’s withdrawal from the negotiations was fear of the impact that cheap milk imports from Australia and New Zealand would have on its domestic dairy sector.  India feared that RCEP would force it to remove its 35% tariff on foreign dairy products.  Many economists argue that India’s failure to join RCEP led it to miss out on becoming part of an emerging global value chain and gaining access to the world’s fastest growing market, thus losing opportunities for foreign direct investment in exporting industries.  India also erects non-tariff barriers to the import of milk and milk products, such as requiring importers to have a Veterinary Health Certificate.

In its ongoing negotiations to reach a comprehensive free trade agreement (FTA) with Australia, the government of India is seeking to keep out dairy items, as it did with RCEP, and will only allow import of food products from Australia that are not produced in India.  The Comprehensive Economic Cooperation Agreement has been stuck in negotiations since 2011, with dairy being a sticking point.  In 2021 bilateral trade between India and Australia was $27.5 billion but India says the potential is nearly $50 billion if an agreement could be reached.  Dairy Australia and Grain Trade Australia say India’s current market access commitments do not meet their expectations.  The Indian dairy industry opposes any concessions to the United States under any trade agreement that would allow the import of milk and other dairy products.  The industry argues that Indian dairy farmers could not compete against the heavily subsidized American dairy producers and that competition would jeopardize 11 million jobs in rural India. 

Canada also has reasons for protecting its dairy farmers and processors from foreign competition.  Dairy farms are concentrated in two of the country’s 10 provinces—Ontario and Quebec.  Dairy farming is the most productive sector of Quebec agriculture.  Quebec’s agricultural economy depends far more on dairy production than that of any other province.  To guarantee a minimum price for milk, Canada pursues a policy of supply management, in place since 1972, which has three components—price guarantees, production quotas and bans on imports.  High tariffs, of as much as 300 percent, are placed on imports.  As a result, milk prices in Canada are more than 30 percent higher than the global average.  Nevertheless, both the Conservative and Liberal Parties are strong defenders of supply management, even though it is contradictory to free market principles.  As in India, the formation of dairy cooperatives in the 1960s played a critical role in stabilizing milk production in Canada.  The cooperatives enabled dairy farmers to work together to set prices for their milk and laid the ground for the introduction of supply management. 

As in India, there are cultural reasons for protecting dairy farmers and processors in Canada.  Quebec is the only province with a majority of French speakers, who strive to maintain their unique identity within largely English-speaking Canada.  The prominent place that dairy farming holds in rural Quebec means that all Quebec political parties and the federal Liberal Party strongly support supply management as the best means of protecting small dairy farms from competition from the United States, Australia and New Zealand. 

The practice of excluding foreign competition has led to friction with the major milk exporting countries, especially the United States and New Zealand.  Canada has opened the door to complaints by joining FTAs, most of which contain dispute resolution mechanisms.  More than 30 percent of Canada’s economy is generated by export of goods and services.  Canada, therefore, vigorously pursues free trade agreements with its trading partners and is the only Group of Seven member that has an FTA with every G7 country.  Ottawa’s trading partners, however, insist on access to the Canadian market for their goods, including dairy products.  President Donald Trump declared the North American Free Trade Agreement (NAFTA) “a total disaster” after meeting with Wisconsin dairy farmers who complained about Canada’s unfair trade practices.  Thus, in 2017 representatives from Canada, Mexico and the United States began renegotiating the trade deal.  The terms of the new United States-Mexico-Canada (USMCA) agreement were announced in September 2018.  The pact opened 3.6% of Canada’s dairy market to the United States.  The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a 2018 FTA with Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, opened 3.1% of Canada’s dairy sector to foreign competition and the 2017 Comprehensive Economic and Trade Agreement (CETA) with the European Union (EU) gave European producers access to 1.4% of the Canadian dairy industry.  Once all three agreements are fully implemented, around 18% of milk products consumed in Canada will come from abroad. Quebec and Ontario dairy farmers strongly opposed all three trade deals and accused the government of Pierre Trudeau of sacrificing the dairy industry in the renegotiation of NAFTA for the benefit of the automobile industry, which depends for its survival on access to the huge American market.  Dairy farmers and processors have been called “the most powerful lobbying organization” in Canada.

Both Australia and New Zealand, major milk producers, abandoned supply management in 2000 and 2001, respectively, and have since become major exporters of dairy products.  Australia is the fourth largest dairy exporter in the world, accounting for five percent of global trade in dairy, behind New Zealand, the European Union and the United States.  Australia exports approximately one-third of its milk production annually.  FTAs, such as the CPTPP, are critical for the growth of dairy exports from Australia.  China consumes nearly a third of Australia’s traded dairy products.  There is little governmental regulation of dairy farming and processing, so the price for milk received by Australian dairy farmers is determined by the international market. 

About 95 percent of milk produced in New Zealand is exported.  Dairy accounts for one-fifth of all merchandise exports.  New Zealand is the world’s largest exporter of milk worldwide, followed by Germany, the United States and the Netherlands.  Like Australia, New Zealand pursues a low-regulation, market-oriented policy toward agriculture, with low tariffs on imports.  Unlike the United States, New Zealand does not provide any subsidies for the dairy sector.  For New Zealand, as for Australia, free trade agreements are the key to gaining access to foreign markets.  It currently has twelve FTAs.  New Zealand’s major markets for milk exports are Australia (21%), China (16%), United States (9%), Japan (7%), South Korea (3%), and United Kingdom (3%).  By pursuing a protectionist policy regarding dairy farming, India is handicapped in producing surplus milk and exporting dairy products to large and fast-growing Asian markets, including China, Japan and South Korea. 

Ten years ago the United States was a net importer of dairy products but decided to follow the lead of Australia and New Zealand by meeting the needs of both domestic and foreign markets.  In 2022 the United States exported $9.5 billion worth of dairy products, 18% of total production, to 141 countries.  The United States Department of Agriculture regulates the dairy industry and provides revenue protection to dairy farmers to insure against unexpected declines in the quarterly revenue from milk sales.  Like Canada, the United States sets minimum prices paid by milk processors for milk from dairy farmers.  The federal government’s Dairy Export Incentive Program (DEIP) provides price subsidies for commercial dairy product exports. The subsidies provided to dairy farmers by the federal government insure that the United States produces huge surpluses of milk, cheese, and butter.  In April 2022 the U.S. stockpile of surplus cheese was 1.48 billion pounds.  The government, therefore, works hard to promote exports of milk products.  The American government uses free trade deals like the United States-Mexico-Canada (USMCA) agreement to find new markets for milk and its derivatives.   Canada avoids surpluses by limiting the amount of milk that can be produced each year through the supply management system.  Like India, the amount of milk produced in Canada largely matches the domestic demand, leaving little for export. 

Canada’s trade partners have challenged the denial of market access in the dairy sector several times.  The United States launched its first complaint under NAFTA in 1995, a dispute that Canada won.  In 1997 the United States and New Zealand filed a complaint in the WTO alleging that Canada was subsidizing the export of its milk products.  Both the WTO dispute panel and Appellate Body ruled in favor of the complainants.  In 2021 the Biden administration filed a complaint under USMCA against Canada for the way in which it allocated the quota for U.S. dairy imports.  The dispute resolution panel ruled that Canada’s practice of reserving Tariff Rate Quotas (TRQs) for imports for the sole use of Canadian processors discriminated against U.S. dairy farmers and processors, pointing out that Canadian processors have little incentive to import American milk, cheese or butter.  The Trudeau government, however, refused to comply with the panel’s decision.  In May 2022 the United States Trade Representative (USTR) requested dispute settlement consultations with Canada under USMCA to address dairy restrictions by Canada contrary to its commitments under the agreement.  The failure of the Trudeau government to meet its commitments under USMCA, say critics, reflects the influence of the dairy industry and the pressure it brings to bear on the Canadian government and the importance of rural constituencies in Quebec and eastern Ontario to both the Liberal and Conservative Parties.  The USTR requested a second panel to be appointed under USMCA to address the non-compliance.  The parties held consultations on January 2023, which, however failed to resolve the matter.  The second panel’s decision is expected before the end of the year.

Australia and New Zealand, signatories of CPTPP, took notice of the USMCA panel’s decision and vowed to work with the United States to force Canada to open its dairy market.  In May 2022 New Zealand filed a complaint against Canada under the CPTPP for denying New Zealand exporters of milk products access to the Canadian market.  New Zealand estimates the lost market access due to Canada’s failure to meet its obligations under the CPTPP to be $68 million over the first two years and to continue to grow as the negotiated quotas for dairy products increase.  In November 2022 New Zealand requested that a panel be appointed under the CPTPP’s dispute settlement provisions to resolve its complaint.

Canada provides a lesson for India as it seeks to expand its exports by signing free trade agreements.  Protectionism is costly.  India must give up much economic benefit in order to protect its dairy farmers and processors from foreign competition, as its withdrawal from the RCEP negotiations demonstrates.  An alternative to protectionism for both Canada and India is provided by Australia and New Zealand, which 20 years ago abandoned protection in favor of competition.  The result is that they are now among the four largest exporters of dairy products in the world, many of whose largest markets are in Asia, on India’s doorstep. Rising income levels in many countries are pushing demand for dairy products.  India could continue to expand its export of skimmed milk powder and export for the first time fluid milk by addressing the barriers, including quality and hygiene issues.  As the world’s largest milk producer and with production growing by six percent a year, India has an even greater potential than Canada to emulate Australia and New Zealand by embracing free trade in dairy products.  Geopolitical friction between Canberra and Wellington, on the one hand, and Beijing, on the other, provides an opportunity for India to penetrate the growing market for dairy products in China.

Barath Arjun, an undergraduate student at NLSIU, provided research assistance for this article.