State Trading in Wheat: Perceptions and Reality in Canada-U.S. Relations

Abstract

Introduction There are few topics that incite more emotion in Canada-U.S. economic discussions than the issue of unfair trade. Trade between the two countries has always been important because of its size and, in the past, major trading agreements such as the Auto Pact resulted in the development of a large-scale integrated North American industry. Given this, the trade in agricultural products has been limited because of tariffs and because the two countries compete for many products. Recent agreements such as the CUFTA and NAFTA have lowered the tariff and nontariff barriers between the countries but trade irritants, especially in agriculture, remain. Looking broadly, in the United States the existence and operations of the Canadian Wheat Board (CWB) raise a number of questions as to the fairness of Canadian trade in wheat (durum and bread wheat) and barley. In Canada, the operations of the Commodity Credit Corporation (CCC) and the presence of the Export Enhancement Program (EEP) make Canadians question whether the U.S. is a fair trader in grains. The problem is accentuated by the proximity of the two countries and because the grain-growing regions of both countries are separated by a border that is easily crossed. If the surplus grain regions were farther apart, such as those of North America and Europe, the problems would likely be of a different nature. Part of the impetus for the grain dispute lies with the institutional differences in Canada and the U.S.; each country's institutions were born and grew out of different policy paths taken by the countries in developing their grain sectors. In the latter part of the nineteenth and early-twentieth century, the grain industry in both countries operated as an open and free market. At the end of the last century, regulations in Canada were being put in place that affirmed Canada as a grain-exporting nation. The Crow's Nest Pass Agreement (1897) in effect froze the freight rate on the export of grain from the prairies and, by the end of World War Two, the CWB was in place. By 1945-49 it was clear that Canadian farmers would be exporters of wheat and that the national market would always be small. In the U.S., the focus was on the domestic market. The government introduced a number of programs to support farmers but left the grain trade to the private sector. The U.S. started its loan rate and target price, crop insurance systems, and other programs as an attempt to support farmers in the domestic market (Tweeten 1970). While the two countries started from a different trade orientation, today they compete in the export market. The institutions developed over time are different because of their historical roots, but today they clash. The important difference between the two countries lies not only in the institutions but also in the policies that the countries have adopted to deal with the grain trade. In view of this, the purpose of this paper is three-fold. First, we review some of the definitions of state trading and examine how state traders could affect trade between countries. Second, we review the recent history leading up to the U.S.-Canada wheat conflict and, finally, we discuss the perceptions of the key industry and government players about the wheat conflict and State Trading Enterprises (STEs). Definition, Theory, and Magnitude of State Trading in Wheat State trading is a broad term that has been used to cover many different kinds of government intervention in trade. The perception, and thus the definition, of state trading will vary between its purpose and effect. State traders can be defined by their policy objectives or through their influence on trade. Although it is primarily the effect of STEs, specifically their potential to distort trade, that raises concern amongst trading partners, it is the policy purposes of STEs that will be of key importance to their domestic masters. If the state is involved in some way in trade, it can be assumed that there is some direct or indirect policy objective that the state is attempting to fulfill. …