The Grain Trade in Contemporary Canada-U.S. Relations

Abstract

Background Canada and the United States share the largest trading relationship between two sovereign nations that has ever existed. Much of current volume in trade has been the result of the tremendous growth subsequent to the 1989 Canada-U.S. Free Trade Agreement (CUFTA). Despite these very large commercial ties across many sectors, and the existence of NAFTA and World Trade Organization (WTO) agreements that outline rules for trade, trade in the grain sector has, nonetheless, been a frequent source of disputes. Increased grain exports from Western Canada into the U.S. have led to numerous disputes in which the U.S. government has legally challenged this Canadian access to its market. This paper analyzes the economic and legal factors that have contributed to these recent grain trade disputes and, further, it speculates as to whether these factors will continue to create pressure for grain disputes. To these ends, it will begin with a brief review of the recent changes in the legal framework for Canada-U.S. trade as a result of CUFTA, NAFTA, and WTO trade agreements, and a description of some of the visible changes in the marketplace, including changes in the grain trade flows that have occurred in the last decade through the merger of firms. This will be followed by an analysis of the economic forces that have affected the Canada-United States grain trade and a description of some of the concerns of the U.S. industry with respect to grain exports from Canada. The final section of the paper contains our assessment of the likelihood of future grain trade disputes. For many years there were significant barriers to trade in grains between Canada and the United States. Canada protected its domestic market for wheat, oats, and barley with the use of import licenses administered by the Canadian Wheat Board (CWB). This protection allowed the CWB to operate the two-price policy, where CWB sales to domestic processors were generally maintained well above world prices. Until 1989, the United States had an import tariff of $0.21 per bushel ($8/t) on grain and canola that had not obtained GRAS (generally regarded as safe for human food consumption) status from the U.S. Food and Drug Administration (U.S. International Trade Commission). These measures virtually eliminated profitable arbitrage opportunities for Canada-U.S. grain trade. In January 1989, the Canada-U.S. Free Trade Agreement made a new attempt to integrate the North American grain market. It contained a formula to allow for removal of the Canadian import licenses and the U.S. import tariff on grains, eliminated export subsidies between the two grain markets, reduced Canada's grain transportation subsidy to some U.S. destinations, and obliged the Canadian Wheat Board (CWB) not to sell grain into the U.S. below cost. The most noteworthy aspect of CUFTA was that, for the first time, an international legal institution was created for the resolution of trade disputes between Canada and the U.S.: the Chapter 18 Binational Panel system. This new element of the legal trade framework was soon tested in the durum case we will turn to presently, but the system functioned effectively to bring a rules-based solution to a trade irritant. The application of the rule of law in an international setting, where power politics previously determined the outcome, was a welcome development for trade liberalization. Since the agreement came into force, the United States has imported significant amounts of bread wheat, durum wheat, feed wheat, barley, oats, canola, and flaxseed. As shown in Figure 1, Canadian grain exports to the United States have risen steadily to exceed four million tonnes in the 1996-97 crop year. What is most striking about the number is that both CWB grains (wheat and barley) and non-CWB grains (oats, canola, and flaxseed) have increased significantly since the CUFTA. The domestic sale of milling wheat, durum, and malting barley in Canada and the U. …