Trade-agreement compensation in supply-managed industries

Recent Canadian preferential trade agreements (PTAs) include increased market access for imports of supply-managed products (dairy and poultry). Such agreements are typically expected to create trade flows and increase supply of relatively low-priced products in Canada. Industry groups representing Canadian producers and processors of supply-managed products negotiated to receive approximately C$5 billion in payments from the federal government as compensation for the prospects of facing more international competition and reduced domestic sales. We discuss partial-equilibrium simulation models that are commonly used by academics and governments to project market effects of new trade agreements, and conceptually illustrate how different assumptions about import supply conditions generate different projected market outcomes. We focus on the quota fill rates of new access commitments—most studies, including those used to inform government policies on compensation payments, assume imports increase in an amount equal to new commitments. This is often not the case, including with recent Canadian trade agreements. We apply a conceptual framework to Canada's supply-management industry by re-simulating a quantitative model of the Canadian dairy industry with updated information on implementation and quota fill rates. Projected market effects of trade agreements under the assumption of full import quotas are markedly different from projections that account for unfilled quotas. We discuss the political economy and welfare implications of compensation payments in light of our analysis.