With the two year anniversary of the discovery of BSE in Canada upon us and no resumption of live cattle flows to the U.S. in the foreseeable future, it is time to begin learning from the experience. Trade agreements lead to greater integration of industries to achieve efficiencies from specialization and economies of scale. A two year interruption of product flows would cause any trading relationship to strain to the breaking point.
Under NAFTA the U.S. became the hub of the North American beef industry. With the largest beef herd, the greatest availability of feed supplies, the largest beef processing capacity, an established inspection and regulatory process and export oriented companies, economics dictated that outcome. In 2002, the last complete year before the BSE disruptions, the U.S. had a total cattle herd of 97 million head and slaughtered 35.7 million, Canada had a 13 million head herd and slaughtered 3.3 million. Mexico had a herd of 20 million and slaughtered 8.0 million head. About 300,000 feeder cattle went to Canada from the U.S., and a million head of fed cattle came to the U.S. from Canada. About a million feeder cattle came from Mexico to the U.S.
Fed cattle moved to the U.S. from Canada for slaughter because fed cattle prices were higher in the U.S. With Canada being an exporter of beef to the U.S. and other countries, there was little economic incentive to add to processing capacity in Canada when excess capacity was available in the U.S.
The closing of the U.S.-Canadian border immediately after discovery of BSE in Canada disrupted the trading relationships, but certainly was not a fatal blow. The uncertainties surrounding BSE naturally makes government officials cautious. Allowing the border to remain closed for two year with little hope of reopening on the horizon has been devastating. Canadians estimate total losses as high as $7 billion.
After slaughtering 3.3 million head in 2002, Canadians slaughtered 3.7 million in 2003, which included seven months of closed borders. In 2004 they slaughtered 4.3 million head, probably the maximum that could be handled with facilities existing when the border closed in May of 2003. Canadian slaughter in the first week of May 2005 is estimated at 88,000 head with expectations of slaughter at 110,000 head by November. Estimates for all of 2005 put slaughter at 4.9 million. By sometime in 2006 slaughter capacity could reach over 5 million head per year, enough to operate plants on a reasonable schedule and slaughter all of the cattle produced in Canada.
This would clearly doom some U.S. slaughter plants that are reportedly running at 40 to 60 percent of capacity. From the second quarter of 2003 to the first quarter of 2005 meat packing employment was down about 6,000, almost 4 percent, according to data from the U.S. Bureau of Labor Statistics. Employment will likely continue to decline in the months ahead.
With new slaughter capacity built in Canada, it will probably take 20 years for the facilities to wear out and several years of sustained financial losses to convince processors to reduce output. Since the U.S. market is open to processed beef from Canada for animals less than 30 months old, sustained losses are not likely to happen, particularly since processors like Cargill and Tyson own plants in both countries.
While people can complain about what has happened, the reality is that the die is already cast. Canadian producers have decided they will not be as integrated into a North American beef industry as they were two years ago. They won’t wait for U.S. courts to rule on the USDA regulations. The industries will be less efficient on both sides of the border.
Other integrated North American agricultural industries do not have to suffer the same fate. Four words describe the possibilities.
Harmonization occurs when two or more countries enact common policies and policy instruments for an industry. Convergence encourages countries to move closer in policies and regulations. Compatibility involves the development of policies and programs that mitigate conflicts. Mutual recognition allows for the suspension of regulations on imported products as long as other countries’ regulations are deemed to accomplish the same goal as domestic regulations.
Harmonization is the most efficient, but the most difficult to achieve. It is probably not a workable goal in the short run. At a minimum, industries need to work on compatible policies and programs to limit the potential for conflicts. Early conflict resolution reduces the opportunity for issues to end up in politics and courts. This can lead to mutual recognition where countries are allowed to have different policies, but get the same results. Mutual recognition can develop a degree of comfortableness that leads toward a path of convergence.
Working out industry differences between Canada and the U.S. is not a new idea. Forty years ago in 1965 the U.S. and Canada reached an agreement for the automobile industry so that operations could exist in both countries and serve both markets with no loss of economic efficiencies.
The greatest learning is often the result of the most pain. The partial disintegration of the North American beef industry has been painful. Now is the time for the learning process to begin for other industries.