If the U.S., Canada and Mexico are to achieve the full benefits of NAFTA, trade policy disputes, regardless of which country they originate in, must be resolved based on economic analysis that recognizes the reality of trade flows among the countries. On May 3, 2006 the Canadian International Trade Tribunal released the reasons for its April 18 finding that imports of U.S. corn had not injured Canadian corn producers. The economic reasoning of the Tribunal could serve as a model for analyzing other trade issues.
The inquiry was done in response to the final determination by the Canadian Border Services Agency on March 15 that corn imports from the U.S. were dumped on the Canadian market and U.S. production was subsidized. The Tribunal’s responsibility was to determine whether the subsidizing and dumping of imported U.S. corn had caused or threatened to cause “material injury” to the domestic corn industry. Since the Tribunal found no injury, it then had to assess the potential for future injury.
The Tribunal considered the volume of U.S. corn imports and whether there had been a significant increase in the volume of imports of corn, either in absolute terms or relative to Canadian production or consumption of corn. During the time period of the analysis corn imports declined from a high of 131 million bushels in the 2001-02 crop marketing year to 75 million bushels in 2003-04. In 2004-05 imports increased to 87 million bushels. Imports of corn declined again in the first quarter of 2005-06 compared to the same period in 2004-05, from 28 million bushels to 17 million bushels. In 2001-02, imported corn was 40 percent of domestic corn production. The ratio declined to 20 percent by 2003-04, and increased to 25 percent in 2004-05.
The Tribunal concluded that corn prices in the U.S. determine corn prices in Canada, “The Tribunal finds that domestic sellers of grain corn cannot obtain a price that exceeds the delivered price of grain corn from the United States. Indeed, over that price level, a practically unlimited supply of U.S. grain corn becomes available to buyers in Canada.” They referenced the fact that local Canadian corn prices are set versus corn prices at the Chicago Board of Trade and price differences reflect the cost of U.S. currency, transportation from seller to buyer, and an adjustment for local supply and demand conditions. The Tribunal did find that the price gap between the domestic weighted average sales price and the weighted average selling/purchase price of imports was fairly stable at approximately $0.29 per bushel during 2001-02 to 2003-04. In 2004-05, this price gap increased to $0.56 per bushel, almost double that of the previous three crop years. There was no evidence provided to the Tribunal to explain the widening of the price gap.
The value of the Canadian dollar has strengthened against the U.S. dollar in recent years, but the Canadian corn producers argued that the currency exchange rate impact did not explain the injury from dumping and subsidizing. The Tribunal found that the selling price of imported corn after accounting for the appreciation of the Canadian dollar had not declined significantly and did not have a significant negative influence on the selling price of domestic corn.
In analyzing the impact of market prices on Canadian producers, the Tribunal found that corn acreage had declined, but that was partly offset by increased yield per acre. Sales revenue did decline from $845 million in 2003-04 to $627 million in 2004-05. Of the $218 million decline, $75 million resulted from lower production. An additional $60 million of the decline was caused by appreciation of the Canadian dollar, with another $60 million due to the widening price gap between imported and domestic corn. That left only $24 million of the decline in revenue attributable to the decrease in the price of imported corn beyond the appreciation of the Canadian dollar. The Tribunal concluded that injury in the form of a loss in sales revenue of $24 million, 3 percent of revenue in 2003-04, was not material in magnitude.
Once the Tribunal had concluded that there was no material injury in the past, they had to assess the potential for injury over the next 18-24 months. They considered the impact of three U.S. subsidy programs: direct and counter-cyclical payments; nonrecourse marketing assistance loans and loan deficiency payments; and federal crop insurance for the remainder of the 2002 farm bill. The Tribunal also considered USDA projections for corn acreage, yield, production, consumption, ending stocks and farm prices in the United States and the potential for increased imports. They concluded there would not be increases in U.S. production or ending stocks that would cause increased corn imports from the U.S. The Tribunal noted that significant quantities of corn would be available for export to Canada and Canadian market prices would continue to be set by conditions in the U.S.
Since the analysis was completed by the Tribunal, conditions in the U.S. market have confirmed the view that supplies of U.S. corn are not likely to contribute to declines in Canadian corn market prices over the next two years. The USDA March planting intentions report showed fewer corn acres are expected to be planted in 2006. Export markets other than Canada have continued to strengthen and ethanol use of corn has continued to increase.
This ruling will not end the debate in Canada concerning U.S. farm policy, but does recognize that the Canadian corn market is greatly influenced by the U.S. corn market regardless of policy or market conditions. The Tribunal addressed the economics of the issues and left the political posturing to other groups.