This cow might be mad, specially if it's in Scotland. (AP Photo/E.B. McGovern)

EDITOR’S NOTE: This story was originally published on Saturday, Sept. 29. It has been updated from its original form in light of Sunday’s agreement.

***

Negotiators have hammered out a bilateral trade agreement and Canada’s dairy industry has been caught in the middle.

The new deal changes Canada’s dairy classes — notably, it eliminates Class 7, a controversial class that was created in March 2017 in response to the United States’ domestic Class 4. The Americans have also received more access to this country’s dairy, egg and poultry markets. What they received is more than what Canada offered up under the Comprehensive and Progressive Trans Pacific Partnership (CPTPP).

The United States’ dairy industry is 11 times larger than Canada’s and it already has a very large dairy surplus with Canada.

On the surface, the dairy NAFTA file seems straightforward. However, dig deeper and the political challenge the Trudeau government faces now becomes clearer.

Jurisdiction could be an issue

Under the British North America Act of 1867, Canada’s founding piece of legislation, agriculture is a shared responsibility of the federal government and the provinces.

This shared power could lead to conflict over agriculture during this trade negotiation. While the federal government has the sole authority to negotiate a trade agreement, it’s often up to the provinces to enforce parts of the agreement.

Dairy is no exception. While Canada’s supply management system, which regulates the production of eggs, poultry and dairy, is a national system, each province has a provincial milk board that enforces the system.

Graham Lloyd, general manager and CEO for Dairy Farmers of Ontario, told iPolitics he’s asked federal officials about jurisdictional concerns. He told iPolitics he has yet to get an answer. “I’m unclear on how that works,” he said.

The elimination of Class 7, he said, “significantly prejudices processors’ investments.” They have spent millions modernizing plants, including major investments in technology.

Removing the class, he added, “fundamentally changes how the Canadian dairy system is functioning,”

NAFTA isn’t like other trade negotiations

Under Canada’s trade agreements with Europe and the Asia-Pacific, the federal government offered up a slice of the dairy market. Under the Comprehensive and Economic Trade Agreement (CETA) with the European Union, Canada granted new access for nearly 18,000 tonnes of cheese.

Meanwhile, under the yet-to-be implemented CPTPP agreement, Canada gave up access in all five supply-managed sectors: 3.25 per cent more access in Canada’s dairy market, 2.3 per cent more for eggs, 2.1 per cent for chicken, two per cent for turkeys, and 1.5 per cent for broiler hatching eggs — a concession that had largely been earmarked for American product under the TPP.

Dairy farmers have said that access combined with what Canada currently imports, including under CETA, means about 15 per cent of the domestic dairy market would be open to exports, once the CPTPP comes into effect.

Market access is a federal responsibility, which means making any concessions on that front is a federal decision alone.

With changes to Class 7, problems could emerge with the provinces. Technically, pricing is a provincial responsibility. Each province implements Canada’s milk classes, including passing the necessary legislation and regulations.

This also means each province is responsible for making any changes made to the milk-pricing classes and any of them could decide not to enact the changes — which could, in turn, put the domestic dairy system in crisis.

Any way you cut it, dairy is dicey

Prime Minister Justin Trudeau promised to defend Canada’s supply management system.

“We will not get rid of supply management,” the prime minister said in Oshawa, Ont., on Aug. 31, in his firmest defence of the system yet.

The prime minister’s language on the file is nearly identical to that used by the Harper government while the latter negotiated CETA and CPTPP, in which concessions were made with little political consequence.

However, under those agreements, the federal government didn’t agree to change supply management.

Trudeau will no longer be able to argue that the system’s pillars remain intact after conceding to the American demand to eliminate Class 7.

Nor, dairy farmers say, can he maintain he’s a defender of the system.

With a Quebec election on Monday, the new government, expected to be a minority, will play a considerable role as the majority (60 per cent) of Quebec’s agriculture industry falls under supply management. It is also influential politically, particularly in rural areas.

Liberal Leader Philippe Couillard has said Quebec will not accept a NAFTA that includes concessions on dairy. He’s also said he won’t present any deal to the legislature that the agricultural sector opposes, and has not ruled out legal action.

While officials were divided on whether the matter would end up in court, several told iPolitics the most obvious court challenge from Couillard would be one that argues provincial jurisdiction has been violated.

Ontario Premier Doug Ford and British Columbia Premier John Horgan have also said they do not want to see any concessions on dairy included in a new NAFTA. While neither premier has threatened to take the government to court, both are embroiled in court challenges against the federal government over other matters.

Then there is the 2019 federal election, where Quebec is expected to be a battleground. Several Liberal MPs — including at least two cabinet ministers — hail from ridings that have a high concentration of dairy, egg and poultry farms.

Quebec’s dairy dominance

Quebec is also a powerful player within Canada’s supply-management system. The province holds significant influence on the Canadian Milk Supply Management Committee (CMSMC), which meets four times a year “to review and consider the major production, economic and marketing factors affecting the dairy sector.”

The committee also sets the national milk-production target and is where the debate about creating Class 7 took place. It must also approve its elimination.

The CMSMC committee is chaired by the Canadian Dairy Commission (CDC). While the CDC has the ability to move a motion at CMSMC, sources say the federal government has traditionally tried to avoid telling the CDC what to do, given its arms-length status.

Quebec holds a significant amount of power at the committee, where its position on an issue is determined by whether a specific policy matter is supported by dairy processors and producers.

If either the province’s producers or its processors disagree with a matter at CMSMC, the Quebec government has traditionally opposed the motion presented at committee — an action, iPolitics has been told, that is almost like a veto.

Canada is bound by WTO

International frustrations about Canada’s supply-management system are not new. In 2002, the World Trade Organization (WTO) ruled Canada unfairly subsidized dairy products sold to the United States and New Zealand.

In December 2002, a WTO panel rejected Canada’s appeal against a ruling that the federal Commercial Export Milk program, which supplies milk to producers of dairy products, amounts to a banned export subsidy. The dispute involved mainly cheeses from Quebec and Ontario that, at the time, were worth more than $400 million annually.

While Canadian officials said they were disappointed with the decision, then-international trade minister Pierre Pettigrew told a reporter he would reach out to industry and the provinces to discuss how best to implement it.

The result, officials told iPolitics, is that Canada is very limited in its ability to export dairy products.

With files from Canadian Press