New supply management law won't save the system from Trump, experts say

A new law meant to protect supply management might not be enough to shield the system in trade talks with a Trump administration bent on eliminating it, trade experts say.

"It's certainly more difficult to strike a deal with the United States now with the passage of this bill that basically forces Canada to negotiate with one hand tied behind its back," said William Pellerin, a trade lawyer and partner at the firm McMillan LLP.

"Now that we've removed the digital service tax, dairy and supply management is probably the No. 1 trade irritant that we have with the United States. That remains very much unresolved."

When U.S. President Donald Trump briefly paused trade talks with Canada on June 27 over the digital services tax — shortly before Ottawa capitulated by dropping the tax — he zeroed in on Canada's system of supply management.

In a social media post, Trump called Canada a "very difficult country to TRADE with, including the fact that they have charged our Farmers as much as 400% Tariffs, for years, on Dairy Products."

Canada can charge about 250 per cent tariffs on U.S. dairy imports over a set quota established by the Canada-U.S.-Mexico Agreement (CUSMA). The International Dairy Foods Association, which represents the U.S. dairy industry, said in March that the U.S. has never come close to reaching those quotas, though the association also said that's because of other barriers Canada has erected.

When Bill C-202 passed through Parliament last month, Bloc Quebecois MPs hailed it as a clear win protecting Quebec farmers from American trade demands.

The Bloc's bill, which received royal assent on June 26, prevents the foreign affairs minister from making commitments in trade negotiations to either increase the tariff rate quota or reduce tariffs for imports over a set threshold.

On its face, that rule would prevent Canadian trade negotiators from offering to drop the import barriers that shield dairy and egg producers in Canada from price shocks. But while the law appears to rule out using supply management as a bargaining chip in trade talks with the U.S., it doesn't completely constrain the government.

Pellerin said that if Prime Minister Mark Carney is seeking a way around C-202, he might start by looking into conducting the trade talks personally, instead of leaving them to Foreign Affairs Minister Anita Anand.

Carney dismissed the need for the new law during the recent election but vowed to keep supply management off the table in negotiations with the U.S.

WATCH | PM says scrapping digital services tax is part of negotiations:

Prime Minister Mark Carney said on Monday that scrapping the digital services tax was one part of the bigger trade negotiation with the U.S., though the White House said Carney ‘caved’ when trade talks were cancelled. Talks have since resumed.

Pellerin said the government could also address the trade irritant by expanding the number of players who can access dairy quotas beyond "processors."

"[C-202] doesn't expressly talk about changing or modifying who would be able to access the quota," he said.

Expanding access to quota, he said, would likely "lead to companies like grocery stores being able to import U.S. cheeses, and that would probably please the United States to a significant degree."

Carleton University associate professor Philippe Lagassé, an expert on Parliament and the Crown, said the new law doesn't extend past something called the "royal prerogative" — the ability of the executive branch of government to carry out certain actions in, for example, the conduct of foreign affairs. That suggests the government isn't constrained by the law, he said.

"I have doubts that the royal prerogative has been displaced by the law. There is no specific language binding the Crown and it would appear to run contrary to the wider intent of the [law that it modifies]," he said by email.

"That said, if the government believes that the law is binding, then it effectively is. As defenders of the bill insisted, it gives the government leverage in negotiation by giving the impression that Parliament has bound it on this issue."

He said a trade treaty requires enabling legislation, so a new bill could remove the supply management constraints.

"The bill adds an extra step and some constraints, but doesn't prevent supply management from eventually being removed or weakened," he said.

Trade lawyer Mark Warner, a principal at MAAW Law, said Canada could simply dispense with the law through Parliament if it decides it needs to make concessions to, for example, preserve the auto industry.

"The argument for me that the government of Canada sits down with another country, particularly the United States, and says, 'We can't negotiate that because Parliament has passed a bill,' — I have to tell you, I've never met an American trade official or lawyer who would take that seriously," Warner said.

"My sense of this is it would just go through Parliament, unless you think other opposition parties would bring down the government over it."

While supply management has long been a target for U.S. trade negotiators, the idea of killing it has been a non-starter in Canadian politics for at least as long.

Warner said any attempt to do away with it would be swiftly met with litigation, Charter challenges and provinces stepping up to fill a federal void.

"The real cost of that sort of thing is political, so if you try to take it away, people are screaming and they're blocking the highways and they are calling you names, and the Bloc is blocking anything through Parliament — you pay a cost that way," he said.

But a compromise on supply management might not be that far-fetched.

"The system itself won't be dismantled. I don't think that's anywhere near happening in the coming years and even decades," said Pellerin.

"But I think that there are changes that could be made, particularly through the trade agreements, including by way of kind of further quotas. Further reduction in the tariffs for outside quota amounts and also in terms of who can actually bring in product."

The United States trade representative raised specific concerns about supply management in the spring, citing quota rules established under the CUSMA trade pact that are not being applied as the U.S. expected and ongoing frustration with the pricing of certain types of milk products.

Former Canadian diplomat Louise Blais said that if Canada were to "respect the spirit" of CUSMA as the Americans understand it, the problem might actually solve itself.

"We jump to the conclusion that it's dismantlement or nothing else, but in fact, there's a middle ground," she said.