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### Viewing cable 04OTTAWA3159, THE CASE FOR RESTORING TRADE WITH CANADA

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04OTTAWA3159 | 2004-11-23 15:34 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa

`

    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

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