This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 OTTAWA 003159 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/TPP/BTA AND WHA/CAN - HOLST 
 
DEPT PASS USTR FOR MELLE AND CHANDLER 
 
USDA FAS/OA/ETERPSTRA, LDAY, FAS/ITP/PSHEIKH, PSIMMONS 
AND FAS/DLP/WETZEL 
 
USDOC FOR 4322/ITA/MAC/WH 
 
USDOC PASS ITC - JENNINGS 
 
TREASURY FOR IMI 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EAGR CA
SUBJECT:  THE CASE FOR RESTORING TRADE WITH CANADA 
          IN BEEF AND LIVESTOCK 
 
¶1. (U) This cable is sensitive, but unclassified.  This 
cable was prepared jointly by Ottawa's Economic and 
Foreign Agricultural Service staff. 
 
SUMMARY 
------- 
 
¶2.   (U) This message describes the economic costs which are 
estimated to stem from continued trade restrictions put in 
place to control BSE on the U.S.-Canada border.  These costs 
are so manifold that we do not attempt to quantify them, 
though the order of magnitude must certainly be multiple 
billions of dollars per year.  They include: 
 
-- Direct subsidy costs. 
 
-- Efficiency costs, not just in beef and livestock 
industries but throughout the economy. 
 
-- Possible eventual trade remedy cases. 
 
-- Distortion of consumers' buying habits. 
 
-- Environmental costs. 
 
-- Harm to third-country exporters. 
 
-- Delayed or derailed trade negotiations. 
 
-- Increased competition between U.S. and Canadian 
exporters in third country markets. 
 
¶3. (U) In addition to these economic costs, continued 
trade disruption is exacting political costs for U.S. 
interests in Canada.  END SUMMARY. 
 
INTRODUCTION 
------------ 
 
¶4. (U) In May 2003, the U.S. Department of Agriculture 
stopped imports of Canadian cattle and beef products 
after an animal in Canada tested positive for bovine 
spongiform encephalopathy (BSE).  Although resumed 
trade in some products such as boxed beef in the fall 
of 2003 alleviated some of the worst economic losses, 
this trade - which is valued in billions of dollars - 
remains severely disrupted, not just across the U.S.- 
Canada border but also with third markets (Japan, 
Korea, Mexico). 
 
¶5. (U) Cattle is a big industry which had evolved into 
a highly integrated cross-border sector before the BSE 
event stopped trade literally overnight.  We know much 
about the gains from trade; BSE gives us a salient case 
study of the losses from stopping trade.  The 
integration of the U.S. and Canadian economies since 
1940 generated vast benefits, even if the analysis is 
limited to specific sectors.  When markets are suddenly 
disintegrated, even in a single sector, we can expect 
correspondingly large damage.  Because Canada's economy 
is smaller, the damage may be somewhat more obvious on 
this side of the border, but this does not mean that 
the U.S. is not being hurt on a comparable scale. 
 
"REPOSITIONING" THE CANADIAN LIVESTOCK INDUSTRY 
--------------------------------------------- -- 
 
 
¶6. (U) In general, prior to 2003 Canada exported live 
cattle to the U.S. where the cattle were slaughtered 
and processed.  An immediate result of the border's 
closing was that livestock inventories built up rapidly 
in Canada.  After more than a year went by without full 
reopening of the border, Canadian attention turned 
toward expanding slaughtering and processing capacity 
within Canada - in order to help cull this inventory 
but, more importantly, to reduce dependence on cross- 
border trade and thus insure against possible future 
restrictions. 
¶7. (U) On September 10, 2004, Canada's federal 
government announced a multi-faceted strategy to 
"reposition" the industry, including up to C$488 
million (about US$400 million) in federal funding.  The 
goal of this repositioning project is to develop 
independent slaughterhouse and processing capacity for 
Canadian live cattle indefinitely excluded from their 
traditional export market.  Provincial governments have 
announced related measures (e.g. Manitoba committed 
C$11.5 million to a new slaughter plant).  Further 
measures are being considered. 
 
¶8. (U) These are painful decisions for Canadian 
governments, who generally are committed to market 
mechanisms and would far prefer to see the border 
reopened.  The longer BSE-induced trade restrictions 
remain in place, the more deeply Canadian players will 
commit themselves to the "repositioning" strategy.  And 
to the extent that it is implemented, this will distort 
the structure of the whole North American industry and 
raise its costs. 
 
¶9. (U) Economists foresee several obvious kinds of harm 
flowing from this strategy: 
 
-- Direct costs to governments (who pay the subsidies). 
Canadian governments have spent the past two decades 
reining in their deficits and reducing economic 
intervention of just this kind.  Indeed, we might 
encourage other countries to emulate their performance. 
Now, suddenly, they are held responsible for bailing 
out an industry that was globally competitive just 
eighteen months ago. 
 
-- Efficiency costs to the beef industry, whose 
"repositioned" continental pattern is sure to be less 
efficient than the one that existed pre-BSE. 
 
-- Efficiency costs to the rest of Canada's economy, 
which will be taxed to pay for the strategy and/or will 
pay higher prices for beef and related products. 
 
¶10. (SBU) In the long term, these subsidies may well 
have long-term disruptive effects on the bilateral 
relationship if competing U.S. producers file 
countervailing duty petitions.  GOC policymakers, who 
are veterans of repeated bilateral disputes over live 
swine and pork, are acutely aware of such risks and 
would prefer not to run them.  Nevertheless, the 
dramatic impact of the BSE event on their cattle and 
beef industries and the communities depending on them 
make some kind of support program both economically and 
politically necessary. 
 
LOSS OF SUPPLY TO U.S. MEAT AND DAIRY INDUSTRIES 
--------------------------------------------- --- 
 
¶11. (U) The BSE restrictions of May 2003 removed 
Canadian animals from the supply stream available to 
U.S. slaughter and processing plants.  In 2002 Canadian 
animals provided 32 percent of U.S. beef imports and 
nearly four percent of U.S. beef consumption.  The U.S. 
meat industry's supply options are narrower and 
presumably, its costs higher than they would be if 
trade had remained unrestricted.  Similarly, Canada was 
a major source of replacement heifers to U.S. dairy 
herds, so the stoppage of trade reduces their 
competitiveness as well. 
 
SURGE IN U.S. VEAL IMPORTS 
-------------------------- 
 
¶12. (U) BSE restrictions stopped Canada's access to 
U.S. markets for live veal calves, but not for veal 
meat.  As a result, Canadian processing plants 
increased their veal output and Canada's exports of 
veal meat to the United States approximately doubled. 
U.S. veal calf slaughter appears to have decreased as a 
result.  We are not surprised to hear that U.S. 
producers are now contemplating trade remedy action 
against Canadian veal. 
 
 
RESTAURANTS AND CONSUMERS 
------------------------- 
 
¶13. (U) Upscale Canadian restaurants and consumers 
normally buy U.S. prime beef in preference to Canadian 
product.  These imports were interrupted for several 
months after December 2003, during which a "Buy 
Canadian Beef" campaign took root.  While imports of 
these cuts of meat have resumed, elements of the "Buy 
Canadian" campaign have continued in order to support 
the hard-hit domestic industry, reduce its dependence 
on U.S. markets, and bring pressure on U.S. players to 
reopen trade completely. 
 
LOSS OF CANADIAN MARKET FOR U.S. PUREBREDS 
------------------------------------------ 
 
¶14. (U) Under normal commercial conditions, U.S. 
purebred beef breeders are important vendors at 
Canadian livestock shows.  BSE control measures 
prevented these breeders from bringing their animals to 
Canadian trade events, to the detriment of their 
business. 
 
 
RENDERING INDUSTRY RECYCLING SERVICES 
------------------------------------- 
 
¶15. (U) The rendering industry, which turns animal by- 
products and used cooking oils into saleable goods, 
also normally provides services to farmers and other 
businesses in the form of free disposal of animal 
carcasses and oils.  We understand that the oversupply 
of animals due to the trade stoppage has interrupted or 
terminated these services, imposing new costs on 
farmers, landfills and the environment. 
 
SECONDARY TRADE EFFECTS 
----------------------- 
 
¶16. (U) Prior to May 2003, the healthy beef trade 
situation in North America led Canada to allow 
significant supplementary imports from third countries, 
above its "tariff rate quota" (TRQ).  The stoppage of 
trade due to BSE forced Canada to stop allowing these 
imports, harming exporters in non-NAFTA countries such 
as Australia. 
 
¶17. (U) Prior to 2003 Canada had restricted imports of 
U.S. live cattle due to veterinary concern over an 
infection called "bluetongue," but a successful pilot 
project was operating which exempted imports of U.S. 
feeder cattle under certain conditions.  In 2003-2004, 
U.S. and Canadian negotiators significantly increased 
year-round access for U.S. feeder cattle by eliminating 
the testing and treatment requirements for cattle 
imported from the United States.  This would have 
significantly benefited U.S. cattle exporters. 
Unfortunately, this progress was derailed by the 
imposition of control measures for BSE - even though 
BSE is, in objective scientific terms, a less likely 
risk to animals or humans than bluetongue. 
 
¶17. (U) Finally, the restriction of cross-border trade 
has forced Canadian beef exporters and GOC trade 
officials to scour third countries for new markets for 
Canadian beef and livestock.  Any success in this 
effort is likely to be found in markets where U.S. meat 
is already sold -- to the detriment of U.S. beef and 
livestock exporters. 
 
¶18. (SBU) COMMENT: Continued delays in reopening the 
border are exacting large economic costs.  In the long 
run, however, the political costs may be even higher. 
The BSE crisis has hit hard in some of the regions of 
Canada that are most traditionally pro-U.S., and where 
there has been broad support for U.S. political and 
security agendas.  Pro-U.S. individuals and politicians 
in these areas are clearly feeling a sense of betrayal, 
as a number of MPs have pointed out to us. 
 
CELLUCCI