This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 04 OTTAWA 003159
SIPDIS
SENSITIVE
STATE FOR EB/TPP/BTA AND WHA/CAN - HOLST
DEPT PASS USTR FOR MELLE AND CHANDLER
USDA FAS/OA/ETERPSTRA, LDAY, FAS/ITP/PSHEIKH, PSIMMONS
AND FAS/DLP/WETZEL
USDOC FOR 4322/ITA/MAC/WH
USDOC PASS ITC - JENNINGS
TREASURY FOR IMI
E.O. 12958: N/A
TAGS: ECON ETRD EAGR CA
SUBJECT: THE CASE FOR RESTORING TRADE WITH CANADA
IN BEEF AND LIVESTOCK
1. (U) This cable is sensitive, but unclassified. This
cable was prepared jointly by Ottawa's Economic and
Foreign Agricultural Service staff.
SUMMARY
-------
2. (U) This message describes the economic costs which are
estimated to stem from continued trade restrictions put in
place to control BSE on the U.S.-Canada border. These costs
are so manifold that we do not attempt to quantify them,
though the order of magnitude must certainly be multiple
billions of dollars per year. They include:
-- Direct subsidy costs.
-- Efficiency costs, not just in beef and livestock
industries but throughout the economy.
-- Possible eventual trade remedy cases.
-- Distortion of consumers' buying habits.
-- Environmental costs.
-- Harm to third-country exporters.
-- Delayed or derailed trade negotiations.
-- Increased competition between U.S. and Canadian
exporters in third country markets.
3. (U) In addition to these economic costs, continued
trade disruption is exacting political costs for U.S.
interests in Canada. END SUMMARY.
INTRODUCTION
------------
4. (U) In May 2003, the U.S. Department of Agriculture
stopped imports of Canadian cattle and beef products
after an animal in Canada tested positive for bovine
spongiform encephalopathy (BSE). Although resumed
trade in some products such as boxed beef in the fall
of 2003 alleviated some of the worst economic losses,
this trade - which is valued in billions of dollars -
remains severely disrupted, not just across the U.S.-
Canada border but also with third markets (Japan,
Korea, Mexico).
5. (U) Cattle is a big industry which had evolved into
a highly integrated cross-border sector before the BSE
event stopped trade literally overnight. We know much
about the gains from trade; BSE gives us a salient case
study of the losses from stopping trade. The
integration of the U.S. and Canadian economies since
1940 generated vast benefits, even if the analysis is
limited to specific sectors. When markets are suddenly
disintegrated, even in a single sector, we can expect
correspondingly large damage. Because Canada's economy
is smaller, the damage may be somewhat more obvious on
this side of the border, but this does not mean that
the U.S. is not being hurt on a comparable scale.
"REPOSITIONING" THE CANADIAN LIVESTOCK INDUSTRY
--------------------------------------------- --
6. (U) In general, prior to 2003 Canada exported live
cattle to the U.S. where the cattle were slaughtered
and processed. An immediate result of the border's
closing was that livestock inventories built up rapidly
in Canada. After more than a year went by without full
reopening of the border, Canadian attention turned
toward expanding slaughtering and processing capacity
within Canada - in order to help cull this inventory
but, more importantly, to reduce dependence on cross-
border trade and thus insure against possible future
restrictions.
7. (U) On September 10, 2004, Canada's federal
government announced a multi-faceted strategy to
"reposition" the industry, including up to C$488
million (about US$400 million) in federal funding. The
goal of this repositioning project is to develop
independent slaughterhouse and processing capacity for
Canadian live cattle indefinitely excluded from their
traditional export market. Provincial governments have
announced related measures (e.g. Manitoba committed
C$11.5 million to a new slaughter plant). Further
measures are being considered.
8. (U) These are painful decisions for Canadian
governments, who generally are committed to market
mechanisms and would far prefer to see the border
reopened. The longer BSE-induced trade restrictions
remain in place, the more deeply Canadian players will
commit themselves to the "repositioning" strategy. And
to the extent that it is implemented, this will distort
the structure of the whole North American industry and
raise its costs.
9. (U) Economists foresee several obvious kinds of harm
flowing from this strategy:
-- Direct costs to governments (who pay the subsidies).
Canadian governments have spent the past two decades
reining in their deficits and reducing economic
intervention of just this kind. Indeed, we might
encourage other countries to emulate their performance.
Now, suddenly, they are held responsible for bailing
out an industry that was globally competitive just
eighteen months ago.
-- Efficiency costs to the beef industry, whose
"repositioned" continental pattern is sure to be less
efficient than the one that existed pre-BSE.
-- Efficiency costs to the rest of Canada's economy,
which will be taxed to pay for the strategy and/or will
pay higher prices for beef and related products.
10. (SBU) In the long term, these subsidies may well
have long-term disruptive effects on the bilateral
relationship if competing U.S. producers file
countervailing duty petitions. GOC policymakers, who
are veterans of repeated bilateral disputes over live
swine and pork, are acutely aware of such risks and
would prefer not to run them. Nevertheless, the
dramatic impact of the BSE event on their cattle and
beef industries and the communities depending on them
make some kind of support program both economically and
politically necessary.
LOSS OF SUPPLY TO U.S. MEAT AND DAIRY INDUSTRIES
--------------------------------------------- ---
11. (U) The BSE restrictions of May 2003 removed
Canadian animals from the supply stream available to
U.S. slaughter and processing plants. In 2002 Canadian
animals provided 32 percent of U.S. beef imports and
nearly four percent of U.S. beef consumption. The U.S.
meat industry's supply options are narrower and
presumably, its costs higher than they would be if
trade had remained unrestricted. Similarly, Canada was
a major source of replacement heifers to U.S. dairy
herds, so the stoppage of trade reduces their
competitiveness as well.
SURGE IN U.S. VEAL IMPORTS
--------------------------
12. (U) BSE restrictions stopped Canada's access to
U.S. markets for live veal calves, but not for veal
meat. As a result, Canadian processing plants
increased their veal output and Canada's exports of
veal meat to the United States approximately doubled.
U.S. veal calf slaughter appears to have decreased as a
result. We are not surprised to hear that U.S.
producers are now contemplating trade remedy action
against Canadian veal.
RESTAURANTS AND CONSUMERS
-------------------------
13. (U) Upscale Canadian restaurants and consumers
normally buy U.S. prime beef in preference to Canadian
product. These imports were interrupted for several
months after December 2003, during which a "Buy
Canadian Beef" campaign took root. While imports of
these cuts of meat have resumed, elements of the "Buy
Canadian" campaign have continued in order to support
the hard-hit domestic industry, reduce its dependence
on U.S. markets, and bring pressure on U.S. players to
reopen trade completely.
LOSS OF CANADIAN MARKET FOR U.S. PUREBREDS
------------------------------------------
14. (U) Under normal commercial conditions, U.S.
purebred beef breeders are important vendors at
Canadian livestock shows. BSE control measures
prevented these breeders from bringing their animals to
Canadian trade events, to the detriment of their
business.
RENDERING INDUSTRY RECYCLING SERVICES
-------------------------------------
15. (U) The rendering industry, which turns animal by-
products and used cooking oils into saleable goods,
also normally provides services to farmers and other
businesses in the form of free disposal of animal
carcasses and oils. We understand that the oversupply
of animals due to the trade stoppage has interrupted or
terminated these services, imposing new costs on
farmers, landfills and the environment.
SECONDARY TRADE EFFECTS
-----------------------
16. (U) Prior to May 2003, the healthy beef trade
situation in North America led Canada to allow
significant supplementary imports from third countries,
above its "tariff rate quota" (TRQ). The stoppage of
trade due to BSE forced Canada to stop allowing these
imports, harming exporters in non-NAFTA countries such
as Australia.
17. (U) Prior to 2003 Canada had restricted imports of
U.S. live cattle due to veterinary concern over an
infection called "bluetongue," but a successful pilot
project was operating which exempted imports of U.S.
feeder cattle under certain conditions. In 2003-2004,
U.S. and Canadian negotiators significantly increased
year-round access for U.S. feeder cattle by eliminating
the testing and treatment requirements for cattle
imported from the United States. This would have
significantly benefited U.S. cattle exporters.
Unfortunately, this progress was derailed by the
imposition of control measures for BSE - even though
BSE is, in objective scientific terms, a less likely
risk to animals or humans than bluetongue.
17. (U) Finally, the restriction of cross-border trade
has forced Canadian beef exporters and GOC trade
officials to scour third countries for new markets for
Canadian beef and livestock. Any success in this
effort is likely to be found in markets where U.S. meat
is already sold -- to the detriment of U.S. beef and
livestock exporters.
18. (SBU) COMMENT: Continued delays in reopening the
border are exacting large economic costs. In the long
run, however, the political costs may be even higher.
The BSE crisis has hit hard in some of the regions of
Canada that are most traditionally pro-U.S., and where
there has been broad support for U.S. political and
security agendas. Pro-U.S. individuals and politicians
in these areas are clearly feeling a sense of betrayal,
as a number of MPs have pointed out to us.
CELLUCCI