Corn producer organizations in the Canadian provinces of Ontario, Quebec and Manitoba have filed a complaint with the Canada Border Services Agency alleging injury by subsidized U.S. corn dumped on their markets. This action has rekindled a 20 year ongoing dispute that has not been addressed despite the economic integration of agriculture under the Canada-U.S. Free Trade Agreement (CUSTA) and its successor, NAFTA.

Canadian corn producers are naturally wary of their large neighbor to the south. In 2004 the U.S. produced a record large corn crop of 11.8 billion bushels on 73.6 million harvested acres. In contrast, in 2004 Canadian corn production was 348 million bushels from 2.65 million acres. Barley is also a major feed crop in Canada with more barley used for livestock feed than corn. Corn is produced mostly in the east and barley in the west.

Exports of corn from the U.S. to Canada are estimated at 95 million bushels for the marketing year that ended August 31 and are expected to be slightly higher this marketing year. Exports in the 2003/04 marketing year were 80 million bushels and were over 150 million bushels for each of the 2001/02 and 2002/03 marketing years.

The new case comes at a time when the Canadian government is already making noises about retaliating against U.S. trade policy. The softwood lumber case has drug on for 25 years, and the Canadian government believes the U.S. is not fulfilling its obligations under NAFTA. Bitterness remains over the two year closing of the U.S. market to Canadian beef. Canada and the EU have also won a WTO case on the U.S. Byrd amendment that directs antidumping duties to be paid to private companies. Brazils win in its WTO case against U.S. cotton subsidies has heightened interest in Canada for challenging the U.S. corn subsidy programs.

The Canadian corn growers actions have met with widespread disapproval by corn users in Canada. The Ontario Cattle Feeders Association has decried the action because it will drive up the price of feed and give U.S. opponents of Canadian beef entering the U.S. another excuse to block trade. Manitoba pork producers estimate that a countervailing duty could add $10 to the feed costs of a finished hog.

Integrated Grain Processors Co-operative has taken a similar position. They acknowledge corn producer concerns about subsidized imports, but note that any countervailing duties collected will be paid by Canadian corn buyers, not by American farmers or the U.S. Treasury. Higher priced corn would also slow the development of the Ontario ethanol industry in response to an ethanol mandate that begins in 2007.

At the heart of the issue is the fact that CUSTA and NAFTA were created to achieve economic efficiencies through market integration without (at the same time) changing traditional trade policies of the two countries. The situation is not unique to corn. The beef industries of Canada, Mexico and the U.S. were integrated without establishing a government regulatory framework for dealing with issues like BSE.

Experiences of the last 20 years under CUSTA and NAFTA have taught a few lessons. First, markets work. Capital and raw materials are attracted to where their use makes the most economic sense. Corn processing plants were built in eastern Canada and corn flows from the U.S. when local supplies are inadequate.

Second, traditional trade dispute policies are not appropriate for the level of economic integration developed under NAFTA. Integrated supply chains need stable, long-term relationships. Third, political leaders of both countries can either face the policy issues of economic integration up front or get caught in endless disputes when economic dynamics overwhelm policy inertia.

Ideas are beginning to surface on how to address these issues. In May of this year the Council on Foreign Relations released Building a North American Community developed by an independent task force from the U.S., Canada and Mexico. Suggestions included creating a North American economic space for a seamless market for trade. Addressing problems of price discrimination and subsidization by competitors in North America was high on the list of activities to undertake. They suggested a permanent tribunal for dispute resolution rather than the ad hoc panels used in NAFTA and a phased suspension in sectors of laws governing unfair trade practices for trade among the NAFTA countries.

The report also addressed the the tyranny of small differences on regulatory issues that impose large economic costs when processes, standards and outcomes are really quite similar. While each country should retain the right to impose and maintain unique regulations, a concerted effort must be made to encourage regulatory convergence. One approach would be a test once policy for biotechnology and pharmaceuticals rather than having all three countries repeat the tests. That same regulatory approach could be applied to most agricultural products.

As the Canadian corn case and the BSE experience have shown, the three countries have gone too far in market integration to live with the current trade policies and regulatory structures. They must either move forward by establishing new trade and regulatory mechanisms or slide backward as the economic benefits of market integration are lost in never ending disputes.