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US President Donald Trump welcomed Argentine President Mauricio Macri to the White House Thursday. As the two men sat together in the Oval Office, Trump said he would renegotiate the North American Free Trade Agreement with Canada and Mexico. (April 27) AP

Milk has moved to the forefront of President Trump’s escalating trade dispute with Canada.

With heightened lobbying from American milk farmers — many of them operating in key swing states — Trump has put the Canadian milk industry on notice this month that its protectionist measures will have to be scrapped. Canada counters that the U.S. is running a surplus in milk trade.

“Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!,” the president tweeted Tuesday. He also made similar comments in a speech in Wisconsin last week.

Emboldened by Trump’s attention, a group of lawmakers and the U.S. dairy industry stepped up their lobbying by sending letters to Trump and issuing comments throughout the week, culminating in the president's announcement Thursday that he will look to renegotiate the North American Free Trade agreement, a 23-year old free trade deal among the U.S., Canada and Mexico.

The dispute stems from recent changes made in Canada’s “supply management system” of its dairy industry, a system that controls supply, sets prices for milk products and places tariffs on imports that go beyond quotas.

Facing an excessive inventory of milk, Ontario, Canada’s largest province, last year lowered prices on some skim-milk ingredients, including ultra-filtered milk used in making cheese and yogurt. With lower prices of domestic ultra-filtered milk, Canadian processors began buying more from local suppliers, weakening demand for American imports.

Earlier this year, Canada said the lowering of skim-milk product prices would be extended on a longer-term basis and carried out nationwide. American dairy farmers in the border states, mostly in Wisconsin and New York, were recently told that their milk business would no longer be needed.

“We are concerned that these programs may violate Canada’s existing trade commitments to the United States by effectively discouraging U.S. dairy exports to Canada,” wrote a group of U.S. representatives  in a letter to Trump Wednesday.

Graham Lloyd, director of communications for Dairy Farmers of Ontario, which administered the pricing change last year, said “there have been no changes to import and export rules.”

“American processors are still free to export. And Canadian processors are still free to import,” he said.

In an interview with Bloomberg, Canadian Prime Minister Justin Trudeau also pointed out that the U.S. has a $400 million dairy surplus with Canada and agricultural protectionist measures are common worldwide. “It’s not Canada that’s the challenge here,” he said. “Let’s not pretend we’re in a global free market when it comes to agriculture.”

Still, the milk fight, while more obscure than other trade disputes facing American exporters, is emblematic of Trump’s intent to use any and all leverage in his quest to remake the trade regime and possibly renegotiate some NAFTA terms.

"I decided rather than terminating NAFTA, which would be a pretty big, you know, shock to the system, we will renegotiate,” Trump said Thursday while hosting the president of Argentina at the White House. “Now, if I'm unable to make a fair deal, if I'm unable to make a fair deal for the United States, meaning a fair deal for our workers and our companies, I will terminate NAFTA. But we're going to give renegotiation a good, strong shot."

Dave Salmonsen, chief trade lobbyist for the American Farm Bureau Federation, says NAFTA has been a generally effective trade agreement for the U.S. agriculture industry but the Canadian milk pricing policy remains an unresolved, sticky issue.

While much of the discussions about NAFTA's long-term effects have focused on U.S.-Mexico trade, the milk dispute shows that “not everything on the U.S.-Canada side is rosy,” says Jaime Castaneda, senior vice president of trade policy at the U.S. Dairy Export Council.

“In order to maintain the supply system, Canada doesn’t want any trade,” he says “I called Canadians and said, ‘Don’t be greedy.’ ”

“I think (Trump) is going to start a conversation. For us, that’s a major move forward,” Castaneda said.

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