The Fraser Institute/Media Release: US Not Protectionist on Mad Cow, Canada to Benefit from Industry Changes.

VANCOUVER, British Columbia -- The US government did not break trade law during the recent mad cow crisis, but applied international rules creatively to minimize trade distortions to the cross-border beef and cattle industry, according to 'Mad Cow: A Case Study in Canadian-American Relations', released today by The Fraser Institute.

"The complaint frequently heard by Canadians that the American process to re-open the border amounted to a stealth form of protectionism is not borne out by the record," said author Alexander Moens, senior fellow at The Fraser Institute and professor of political science at Simon Fraser University.

This new paper examines the trade, regulatory, and political relationship between Canada and the United States through the lens of a single case study.

The Canadian export market in cattle and beef products was built on the Canada-United States Free Trade Agreement and the subsequent North American Free Trade Agreement. These accords removed quotas and tariffs from trade in cattle and beef products. As a result, Canadian exports of cattle to the US grew from .5 million head in 1988 to over 1.5 million in 2002 and beef exports grew from 200,000 metric tons to over 1 million.

"Free trade has been very good for the Canadian industry. Canada and the United States had established a free, transparent, and competitive market in beef and live cattle," said Moens.

In May 2003, the discovery of the first indigenous Canadian case of Bovine Spongiform Encephalopathy (BSE), commonly called mad cow disease caused a major disruption in a multi-billion dollar industry and threatened to unravel this successful integration.

The sudden border closure as a result of that case dealt a devastating blow to Canada's cattle industry, and especially to the three Prairie provinces, which contain over 80 percent of Canada's cow and calf producers and feedlot operators. Alberta has about 50 percent of this industry. In December 2003 the US discovered its first BSE case from a cow imported from Canada and as a result Canada lost its beef export market.

Both Canada and the United States suffered multi-billion dollar losses from the crisis, but given the difference in market size, the losses had a much greater impact in Canada. Exact cost estimates for the Canadian industry are difficult to make, but total losses in farm cash receipts for cattle and calves are believed to be in the CDN$6 to $7 billion range in the 2003-2005 period.

American beef exports losses amount to US $5 billion over the same time period.

Careful rule-making on the part of the US Department of Agriculture has paid off for Canada. Since the US announced its decision to partially re-open the border, three more Canadian BSE cases have been found but have not affected trade.

"The fact that nearly half a million cattle under 30 months were exported to the US in the second half of 2005 suggests that the Canadian-American trade in cattle and beef will likely return to its high levels before the BSE crisis struck," Moens noted.

Moens recommends that what remains of the subsidies introduced during this crisis to Canadian cow and calf producers, feedlots, and other incentives given to the meatpacking industry should be phased out quickly, as they may give rise to American trade action or complicate the USDA's re-opening of the border to older cattle. New federal or provincial subsidies to the industry for disposing of "specified risk materials" should be avoided for the same reason.

He also points out that diversifying Canadian beef exports from North America to Asia is difficult and offers limited opportunities. Under NAFTA, Canada and Mexico both have free access to the American beef market (unlike the non-NAFTA countries which face quotas) and this market will again prove to be the most profitable one for Canada.

From 2003 to 2006, both Canada and the US added regulations on meatpacking and animal feed. Canada's regulations are stricter and produce more risk reduction for BSE than the US regulations. Given that contaminated feed and infected cows originating from Alberta still pose a small risk to free trade, it is important for Canada to keep this edge. Canada should follow this development with confidence-building measures such as joint USDA-Canadian Food Inspection Agency monitoring and inspection of Canadian facilities. Canada should ensure that the compliance rate of its feed mills consistently exceeds US rates.

Canada should also apply its efforts to developing a stronger NAFTA working relationship. Working closely with the USDA on practical harmonization steps is a key interest for Canada. Given the renewed closure of the Japanese market to US exporters after a December 2005 incident in which specified risk materials were found in a US shipment to Japan, the US is also keen to establish a stable regulatory regime.

"There are good prospects that in 2006, the US will propose a rule to open the border to Canadian cattle and beef over 30 months, effectively bringing the market back to its free, transparent, and competitive position," concluded Moens.

Established in 1974, The Fraser Institute is an independent public policy organization with offices in Vancouver, Calgary, and Toronto. The media release and study (in PDF) are available at www.fraserinstitute.ca.