| Summary: | Canadian dairy market has been highly protected by the Federal Government for
several decades. The current situation is the over-quota tariffs of dairy products are
extremely high. However, it is possible to anticipate that this high over-quota tariff will
be reduced in the future WTO negotiations. This paper tries to answer by how much tariff
can be cut and still maintain protection from imports for the domestic dairy industry. This
is also equivalent to test how much water in the tariff (WIT) for dairy products. The time
series dairy products wholesale prices data of Canada and the world are used in the
calculations. The methodologies are introduced in this paper to estimate WIT for four
dairy products including butter, skim milk powder, cheddar and fluid milk (2% fat). In
addition, I define the potential WIT and measure that by using adjusted Canadian
wholesale price (equaling US dairy processor’s market margin plus Canadian farm milk
cost). In addition, how much WIT and potential WIT in the coming decade (2008-2017)
are forecasted according to the predicted prices. The results show that there are large
amounts of water in the Canadian over-quota tariffs in the period of 1996-2017, they vary
across dairy products and over time.
Finally, the policy recommendations have been made on the question of how
much percent of the over-quota tariff can be reduced without increasing imports in the
coming decade when the international prices are stochastic but their development trends
are certain.
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