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Tariffs from Mexico, Canada will strike US dairy

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Tariffs from Mexico, Canada will strike US dairy

The U.S. dairy industry is headed for a rough summer as Mexico and Canada prepare to slam products including cheese and yogurt with retaliatory tariffs in July.

Responding to the Trump administration's tariffs on imports of steel and aluminum, Mexico slapped a 15% tariff on U.S. cheese on June 5 and will raise that tariff to 25% on July 5. Canada's upcoming 10% retaliatory tariffs for its inclusion on the U.S. tariff list also target American dairy-related exports.

On top of that, talks surrounding the North American Free Trade Agreement remain at an impasse as the July 1 Mexican presidential election approaches, making a deal in the current Republican-led Congress near impossible. Should those talks fail, the duty-free access for American dairy products shipped into Mexico could be lost.

The U.S. sent $1.31 billion of dairy exports to its southern neighbor in 2017, making Mexico the largest overall dairy export market for the United States. Cheese accounted for $391 million of the total. The United States exported $636 million of dairy products to Canada in 2017, making it the third-largest American dairy export destination after Southeast Asia, according to the U.S. Dairy Export Council.

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On June 26, the U.S. Dairy Export Council, National Milk Producers Federation, International Dairy Foods Association and more than 60 other dairy groups and cheese producers wrote a letter to President Donald Trump warning that the European Union, which recently secured a trade deal with Mexico, could swoop in and take some of that market share.

The letter, signed by companies such as Sargento Foods Inc. and Land O'Lakes Inc., urged the Trump administration to resolve its trade issues with Mexico before the new 25% tariffs kick into effect.

"Our share of the Mexican market is in grave jeopardy," the letter read. "These tariffs ... will diminish foreign demand for high-quality U.S. dairy products that are produced across the country and support nearly 3 million American jobs."

Jim Mulhern, president and CEO of the National Milk Producers Federation, said Mexico's initial 15% tariff on cheese has already affected the industry.

"After rising during the spring, dairy futures markets and the farm-level milk price outlook for the rest of 2018 have deteriorated significantly in recent weeks, in reaction to the prospects of lost dairy export sales,” Mulhern said in a June 26 statement.

Canada's 10% tariffs on dairy-related products, including pizza and yogurt, go into effect July 1.

Under World Trade Organization rules, U.S. dairy exports to Canada are subject to a tariff-free quota, with any shipments over that limit subject to high tariff rates, including 245.5% for cheese, 277% for ice cream, 298.5% for butter, and between 201.5% and 295.5% for milk and cream powders.

Despite the high Canadian tariffs on some dairy exports, the U.S. ran a $159 million dairy trade surplus with its northern neighbor in the year ended April 30, according to Panjiva Research, a division of S&P Global Market Intelligence. The two countries traded $548 million worth of dairy products over that span. But Trump and industry groups still argue that the tariffs impede their ability to increase trade.

"The higher tariffs prevent imports from coming into Canada," Jaime Castaneda, U.S. Dairy Export Council's senior vice president of trade policy, said in an interview.

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"Canada's dairy supply management is a clear irritant, and Trump is not wrong to complain about it," said Christopher Sands, director of the Center for Canadian Studies at Johns Hopkins University's School of Advanced International Studies, in an interview. "The issue is a marginal one for the United States economy. I expected it might be the issue on which the United States lets Canada have a win, since supply management is an expensive folly and all but guarantees Canada's dairy sector remains uncompetitive and vulnerable."

According to Panjiva, the largest U.S. dairy export to Canada during the year ended April 30 was cheese at $65 million, followed by butter at $54 million, whey protein at $53 million and eggs at $49 million.

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The dairy industry is also concerned that the U.S. could soon withdraw from North American Free Trade Agreement or that the deal could be terminated, both of which would further complicate relations between the three countries, which have been far apart on issues including U.S. proposals on a sunset clause and automobile rules of origin. The G-7 talks earlier in June between the U.S., Canada and the other coalition members did not go well by any measure, ending in acrimony and casting more doubt over the prospects for NAFTA negotiations.

"Either duties would go up or, and possibly more likely, quotas would be tightened," said Chris Rogers, research director for Panjiva Research.

Both Canada and Mexico in March were given temporary exemptions from the Trump administration's 25% tariff on steel imports and 10% tariff on aluminum imports pending a successful outcome of NAFTA talks. But those talks deteriorated, and no deal was reached this spring as hoped.