In the midst of what appears to be a full-blown trade war between Canada and the US over steel and aluminum, and with Donald Trump taking his first steps on Canadian soil for the G7 summit, a familiar bugbear reappeared to haunt the negotiations.

Donald J. Trump (@realDonaldTrump) Canada charges the U.S. a 270% tariff on Dairy Products! They didn’t tell you that, did they? Not fair to our farmers!

Whatever understanding Canada and the US may (or may not) have come to on their high-value trade in lumber or auto parts, they remain implacably opposed on the comparatively minor matter of milk.

Play Video 1:12 Justin Trudeau's G7 comments that angered Donald Trump – video

Trump has attacked Canada’s protected dairy industry before, calling it a “disgrace” and blaming it for widespread hardship among US farmers. Although the entire trade in dairy products between the two countries is worth less than US$600m, ideological division has sharpened the ongoing dispute. His negotiators have demanded the dismantlement of Canada’s openly dirigiste system of supply management in agriculture – a complicated nexus of production quotas and import tariffs designed to ensure Canadian dairy, egg and poultry farmers receive fair prices for their products.

In what free-trading Americans like to call Soviet Canuckistan, the dairy industry is thriving like never before

But the Canadians are no less determined to retain one of the last vestiges of their otherwise-abandoned collectivist traditions. Canadian cows are sacred, and the farmers who care for them enjoy outsized influence in national politics. Expert observers have said that Justin Trudeau’s government would abandon the treaty altogether before sacrificing supply management.

“It’s just too sensitive for the Canadians,” Kevin Carmichael, a senior fellow at the Centre for International Governance Innovation in Waterloo, recently told CNBC news.

Even so, the Trudeau government recently alarmed Canadian farmers by signalling a willingness to give on the issue in the face of insistent US demands. The dispute has acquired new urgency as the US dairy industry continues to suffer from a deep crisis of persistent overproduction, with farmers sinking into insolvency as farm-gate milk prices stick stubbornly below the cost of production. Last year, US farmers dumped almost 100m gallons of surplus milk. Recently, a surge in dairy-farmer suicides has caused national alarm, drawing attention to what the New York Times called “the widespread hopelessness afflicting the industry”.

Representing a state suffering especially hard from farm failures and suicides, the US Senate minority leader, Chuck Schumer, recently echoed his Republican president in blaming Canada for the debacle. “Canada, when it comes to dairy, acts like China when it comes to trade,” Schumer told hard-pressed farmers in upstate New York. “They’re unfair. They put up barriers. They treat us bad.”

Canadians and Americans are family. Donald Trump is testing even that | Bruce Heyman Read more

Meanwhile, just across the St Lawrence river in what free-trading Americans like to call Soviet Canuckistan, the dairy industry is thriving like never before – and like none other in the developed world. Family farms milking an average of 80 cows each have prospered under a heavily regulated system that supports prices at sustainable levels by restricting domestic overproduction and keeping imports at bay. In 2016, Canadian farmers received an average price of C$0.79 a litre for milk, compared with C$0.49 on average for US farmers.

The result is that dairying remains a key economic support of traditional rural life throughout central Canada. As critics of the system like to point out, hoping to inspire resentment among consumers annoyed by the price of milk, Canadian dairy farmers enjoy incomes 60% above average in the country. But to supporters, the uniquely prosperous, protected Canadian dairy industry stands as a model alternative to the increasingly disruptive and unpopular dynamic of unrestricted free trade in all things.

Supply management enjoys strong government support in no small part because the policy obviates the need to subsidize farmers directly in the manner of the US and the EU – the two greatest culprits behind the current world dairy glut.

“The system works so incredibly well,” said Bruce Muirhead, associate vice-president and professor of history at the University of Waterloo. “And the big thing about supply management is that it doesn’t cost the government a cent. Consumers pay the full cost of production.”

Domestic critics have called supply management a grotesque distortion of free-market principles, complaining that the comparatively high price of Canadian milk sacrifices the interests of consumers in favour of producers and victimizes the poor. But no consumer or social policy group has taken up the cause, and all six parties currently represented in the House of Commons unanimously support supply management.

As do Canadian consumers: an Ipsos poll this year by the Dairy Farmers of Canada reported that 75% of Canadians support even greater government efforts to defend the industry in the face of current US demands.

As the trade minister, Chrystia Freeland, has pointed out, trade data flatly contradicts the claim that Canadian supply management is ravaging US dairyland – either because it unfairly restricts imports or because it dumps a subsidized surplus in US markets. In 2016, Canada imported dairy products from the US worth five times more than the small amount it exported there. “I would call that a pretty good deal,” she told the House of Commons.

Canadian farmers point out that despite the tariffs that protect them, imports make up 10% of the country’s dairy consumption. By contrast, the US restricts dairy imports to 3% of domestic consumption. “That just screams hypocrisy to me,” Muirhead said. “I don’t understand how they can get away with these positions.”

As a recent visitor to Wisconsin, “America’s Dairyland”, where low prices are forcing the closure of hundreds of dairy farms a year, Muirhead said he encountered no resentment against Canada among local farmers. “The president of the Wisconsin Farmers Union told me that what they really wanted was a supply-managed system like ours,” he said.

Dairy deregulation has spread hardship wherever it has been implemented, Muirhead added. “Every single objective indicator says that in the case of dairy you cannot have a system that operates without production controls,” he said. “If you try, you’re basically consigning your farmers to a life of penury – or worse.”

Canada successfully defended the system in its first free trade agreement with the US, and several subsequent ones. But with the full wrath of Trump now focused squarely on the country’s protected farmers, this stubborn remnant of Canadian exceptionalism has never been more fragile.