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U.S. dairy lobby increases pressure on Canada, NAFTA fight looms

By David Ljunggren and Rod Nickel

OTTAWA/WINNIPEG, July 17 (Reuters) - The U.S. dairy lobby is
ratcheting up the pressure on Canada as talks to renegotiate
NAFTA draw closer, demanding concessions the Canadian government
looks unwilling to grant, according to people familiar with the
file.

The result could be a brawl that sours efforts to modernize
the North American Free Trade Agreement, under which Canada
sends most of its exports to the United States. Mexico is the
pact's third member.

U.S. farmers have long chafed about supply management, the
term for Canada's system of tariffs and quotas to keep domestic
prices high and imports low. A 2016 deal that allowed Canadian
farmers to sell milk proteins to domestic processors at a
discount, curbing the flow of American imports, further raised
their ire.

Jaime Castaneda, senior vice-president for the U.S. Dairy
Export Council, said the influential lobby group will pursue
fresh challenges through the World Trade Organization unless
Canada stops the proteins sale.

"If we can't resolve this through negotiations, I believe my
members will be very clear that everything is on the table," he
said in a phone interview.

A WTO panel ruled in 2002 that Canada breached its trade
obligations through illegal subsidies to its dairy industry,
siding with the United States. The U.S. and Canada reached a
settlement in 2003.

Castaneda said challenges against the protein sales could
eventually result in rulings that force Canada to ditch supply
management.

In June, U.S. agriculture secretary Sonny Perdue said he
would prefer to address dairy irritants before NAFTA talks begin
and said supply management was fine as long as though it did not
harm the U.S. industry.

But on July 14 he appeared to toughen his stance, saying
through a spokeswoman he felt "all options should be on the
table" in the NAFTA talks and that dairy remained a concern.

Although dairy was originally excluded from the original
1994 deal, the United States may push for it to be part of the
talks on a new pact.

"I don't see why it wouldn't be, when you're looking at an
overall trading relationship ... there is no doubt in my mind
that it would be on the table," said one person familiar with
Washington's approach.

Despite the more strident U.S. line, Prime Minister Justin
Trudeau's government has little interest in compromise.

"We are fully trade compliant and trade in dairy products
massively favors the United States," said a Canadian government
source.

Canada's dairy sector includes C$6 billion ($4.8 billion) in
annual farmer milk sales.

Fearing the domestic industry's lobbying muscle, Canadian
politicians of all stripes mostly treat dairy as a sacred cow.

In May, dairy farmers helped ensure the defeat of a
Conservative party leader candidate who advocated eliminating
supply management.

"Dairy farmers are a force to be reckoned with. I think
(politicians) will do well to listen to our concerns," said
Manitoba dairy farmer David Wiens, an executive of the
influential Dairy Farmers of Canada.

Dairy is one of several commodities, including lumber and
wine, that have sparked complaints by the Trump administration
leading into NAFTA talks. U.S. President Donald Trump said in
April he would stand up for domestic dairy farmers against what
he called unfair Canadian practices.

The American side also wants Canada to start cutting tariffs
to allow more imports. As part of the talks on a proposed
12-nation Pacific trade treaty in 2015, Canada agreed to open up
3.25 percent annually of its dairy supply.

That treaty was still-born and any talk of concessions is
now off the table.

"The industry is not prepared to give any additional access
to the Canadian market," said Yves Leduc, head of government
relations at the Dairy Farmers of Canada lobby group.

(Writing by David Ljunggren; Editing by Nick Zieminski)

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