An investigation of the dairy subsector impacts of a free trade agreement between Canada and the United States

The 1988 FTA did not extend to the dairy industries. They remain isolated from each other, and the rest of the world, by restrictions on product flow. This study examines the flow of dairy products and raw milk in the absence of these restrictions.;Economic integration has not been empirically examined for agriculture. Previous studies of the FTA ignore dairy, or aggregate it to an agricultural sector. Received dairy policy analyses measure economic gains to two agents, consumers and producers, which exchange a single product, raw milk.;This study models a three-stage dairy subsector: production, processing and retailing. These stages cover ten United States and three Canadian regions. Fluid and manufacturing grade milk, and five dairy products, are modeled. Change in social surplus is subdivided amongst the agents, products and regions. Changes in intraindustry production and specialization are measured. From product flow, trade creation and trade diversion are measured.;Existing elasticity estimates and 1988 data are used to characterize market parameters in a quadratic program model of spatial equilibrium. Solutions for FTA and world free trade scenarios are presented as percentage departures from a modeled status quo. A measure of regional comparative advantage is derived from the status quo solutions.;The FTA in dairy will benefit Canada, but if the FTA is extended to multilateral free trade in dairy, Canada will lose and the United States will gain. Impacts are generally greater in Canada, due to its smaller, and more distorted, dairy markets. Product flow at all stages radically shifts from east-west to north-south under the FTA. Gains accrue to consumers and retailers. Producers in most regions lose under the FTA and free trade, the extent depending on the end use of their milk. Regional specialization shows some agreement with microeconomic measures of comparative advantage. The trade diversion effects of the FTA outweigh its trade creation effects.