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The impact of trade reform on the research and development incentives for Canadian dairy producers Campbell, Zoe

Abstract

Canada has long been a proponent of free trade while at the same time defending the current supply management system that protects the dairy industry from import competition. In the most recent Doha Development Round of talks amongst nations belonging to the World Trade Organization, the validity of Canada's protectionist position has been questioned and it is conceivable that Canada may have to make significant changes in the dairy industry to allow more liberal trade policies to be enacted. The key purpose of this study is to find out how free trade will affect the research and development (R&D) incentives of Canadian dairy farmers. On one hand they may be induced to perform more R&D due to competition effects in order to lower costs and achieve a competitive advantage over the main competitor, the United States. On the other hand they may be induced to perform less R&D due to the spillover effect, which allows the Canadian R&D efforts to be used by the United States at no additional cost. It is found that the outcome of these two opposing forces depends on the market scale effect. If Canada is a net importer when the border opens the spillover effect may dominate and Canadian dairy producers may invest less into R&D than under the current protectionist policies. These results however will switch if Canada is found to be the net exporters. The results also depend on the level of the quota currently in place. If the current quota is chosen at a quantity relatively close to the amount supplied at the monopolistic level, a free trade regime may promote R&D efforts more so than supply management. On the other hand, if the current quota level in Canada is closer to the quantity that would be supplied in a competitive industry, Canadian dairy producers may invest less heavily in R&D efforts under a free trade regime than a supply management system.

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Attribution-NonCommercial-NoDerivatives 4.0 International

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