Protection, price discrimination and inefficient trade: The case for real tariffication

The recent WTO dispute settlement panel ruled that Canada's cui rent price pooling system for milk subsidizes exports in excess of Canada's 1994 GATT commitments. Policy reform must be undertaken. High domestic and low export prices are a combination favored by daily producers and will likely contin ue. We believe that the system will evolve toward a pure price discriminati on scheme, which would have the advantages of inducing lower exports and ra ising profits. We analyze trade liberalization by comparing tariff reductio ns to enlargements in minimum access commitments (MACs) when domestic produ ction is controlled by a profit-maximizing state enterprise, which may or m ay not control imports. Even if we fail to account for administrative probl ems of MACs (e.g., choice of importers, punishment for noncompliance), MACs are inferior to tariffs because they promote inefficient trade. A state tr ader that would import under free trade has a tendency to export more under MACs than under tariffs. Because we assume that MACs must be filled, expor ting is done to protect the high-price domestic market.