If the rumours prove correct, Canadians should brace for more cheques to dairy farmers and more milk dumping

U.S. President Donald Trump’s latest tariff threat has pushed Canada back to the negotiating table. An additional 50 per cent tariff on specified Canadian goods, scheduled to take effect Aug. 19, appears to have caught Ottawa flat-footed.

The federal government is now scrambling to limit the damage to several industries, including roughly $1.5 billion in agri-food trade involving Canadian alcoholic beverages, whisky and dairy products.

Start with the provincial bans on American alcohol. Perhaps they were intended to create negotiating leverage, but consumers faced fewer choices and less competitive pressure on prices, while purchases shifted to Canadian brands or non-American imports.

That is not what economic leverage looks like. Real leverage comes from assets other countries need: energy, critical minerals, transportation infrastructure, market access and regulatory cooperation. Restricting consumer choice and suppressing competition is political theatre masquerading as economic strategy.

The dairy file is more complicated and potentially far more consequential.

Late last week, The Globe and Mail reported that Ottawa was considering concessions involving greater access for American dairy proteins. Depending on how such a commitment is structured, it could place the government on a collision course with Bill C-202, the law Parliament adopted in 2025 to prevent future trade agreements from increasing tariff-rate quotas or reducing over-quota tariffs for supply-managed products. Those quotas determine how much foreign dairy can enter Canada at lower tariff rates.

Although Bill C-202 received support across the political spectrum, that unanimity did not make it sound policy. The legislation effectively told the dairy industry that future governments would protect supply management from further trade concessions, reducing one of the few remaining incentives to prepare for greater competition, invest in processing capacity and develop a serious long-term strategy.

Now the Americans may be testing just how firm that protection really is.

Ottawa should not grant additional access to American dairy proteins simply to get through the current trade dispute. If concessions are necessary, they should be part of a broader Canadian plan to make the dairy sector more competitive and less vulnerable.

Those who believe American dairy products could never penetrate the Canadian market are missing the point. The Americans are not necessarily trying to sell cartons of milk to Canadian households; they want to sell proteins to Canadian processors. Companies such as Saputo, Agropur and Lactalis could use those lower-cost ingredients in cheese and other manufactured products.

Processors could save money, but consumers would have no guarantee of seeing those savings at the grocery store while Canadian dairy farmers could face reduced demand as processors substitute American proteins for Canadian ones.

Canada has been down this road before.

During the controversy over diafiltered milk proteins, from roughly 2015 to 2018, American proteins entered Canada tariff-free as protein ingredients but could then be treated as milk by Canadian processors. This lowered processors’ ingredient costs while displacing some Canadian milk.

Canada responded with milk Classes 6 and 7, allowing domestic proteins to compete at lower prices. The United States objected, and Canada eventually eliminated those classes during negotiations for the Canada-United States-Mexico Agreement (CUSMA).

Ottawa then compensated dairy farmers.

And that is where we could be heading again. Canada protects the system, eventually makes concessions when trade pressure becomes too great, compensates producers and leaves the underlying problems for another day.

The costs are not trivial. Ottawa has committed more than $4.8 billion in compensation and support for supply-managed sectors affected by market access granted under CUSMA, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

There is another problem. Canada already struggles with surplus non-fat milk solids, and additional American proteins could reduce demand for Canadian milk proteins even further, creating more pressure to dispose of milk Canadian farmers have already produced.

Ottawa could find itself in a very awkward position. Barely a year after Parliament passed Bill C-202, the government may have to accommodate American demands anyway, leaving Canadian dairy farmers with fewer market opportunities while taxpayers are asked once again to compensate them.

None of this means supply management needs to be abolished. But protecting the system is not the same thing as strengthening it.

Canada needs greater transparency, independent reporting on milk disposal, more investment in domestic processing and gradual modernization of quota policy.

Bill C-202 was supposed to protect Canadian dairy from future trade concessions, but trying to legislate away trade pressure was never a substitute for reform.

The choice is not between abolishing supply management tomorrow and preserving it unchanged forever. Canada can reform the system on its own terms, or wait until pressure from Washington leaves it with fewer choices.

Dr. Sylvain Charlebois is senior director of the Agri-Food Analytics Lab at Dalhousie University, co-host of The Food Professor Podcast and visiting scholar at McGill University.