Trade deal concessions threaten jobs at Kingston, Ont., baby formula plant

The revised North American trade agreement restricts shipments of a product Canada isn't even exporting at the moment: infant formula.

Why on earth would the U.S. demand that?

As with so many of the strategic priorities of the Trump administration, it's all about China.

A $225-million investment by Chinese baby food manufacturer Feihe was poised to boost employment in Kingston, Ont., creating about 200 direct jobs and potentially 1,000 more indirectly.

The end of China's one-child policy increases the demand for safe and reliable supplies of baby food in China, where breastfeeding is less common than in North America.

The quality and price controls offered by Canada's supply management system were appealing to the Chinese, who planned to use Canadian skim milk products to makenew brands. About85 per cent of the Canadian-made formula was intended for exportback to China.

Construction on a 28,000-square-metre plant began last year, and while the project has hadsome delays, it still plannedto start manufacturinginfant formula first from cow's milk, later from goat's milk starting in 2020.

By then, Canada's revised trade deal with the U.S. might be ratified and in effect. And concessions made in the U.S.MexicoCanada Agreement appear to thwartFeihe's businessplan.

Export thresholdslower than factory's plans

Two aspects of the new USMCAtext could affect the viability of the new Kingston facility.

The agriculture annex in the new deal sets export restrictions on infant formula.

Canada agreed that, in the first year after the agreement takes hold, it canexport a maximum 13,333tonnesof formula without penalty. In USMCA'ssecond year, that threshold rises to 40,000 tonnes, and increases only 1.2 per cent annually after that.

Each kilogram of product Canada exports beyond those limits gets hit withan export charge of $4.25, significantly increasing product costs.

Documents obtained in 2017 by CBCNews under the Access to Information Act included a presentation from the Canadian Dairy Commission that suggested Feihe intended to manufacture 60,000 tonnesof infant food every year in Kingston.

While 10,000 tonnes of that was planned to be a goat's milk product that would not be subject to the USMCA limits, the rest would be made from cow's milk supplied by the Dairy Farmers of Ontario. USMCAprovisionswill apply to any formula"containing more than 10 per centon a dry weight basis of cow milk solids."

While the export limits set for the automotive industry elsewhere in the USMCA were comfortably above current and anticipated future production levels, the thresholds in this part of the deal appeared below the plannedcapacity of the Kingston plant suggested in its original plans.

On Friday, Agriculture and Agri-FoodMinister Lawrence MacAulay's office reached out to CBCNews to say that Canadian negotiators "spoke directly"with the Kingston Economic Development Corporation and "others with direct knowledge of the proposed facility's operations."

Their understanding was that Feihe isplanning to divide its formula evenly between its two lines:30,000tonnes from cow's milkand 30,000 tonnes from goat's milk.

"Should the facility continue with those plans," spokesperson Katie Hawkins wrote,the 40,000tonnes of allowable dairy-based formula exports "would provide enough room for the facility to operate as planned."

At the time,Feihe'sinvestment was announced, local goat farmers had the capacity to produce only a fraction of the milk that would be required to split the plant's production 50-50 between cow and goat formula, although more farmers were being encouraged to get into the goat business to meet the factory's needs.

Canada wanted to attract investment for a baby formula facility becauseit uses skim milk from cows as an ingredient.

Healthy consumer appetites for butter leaveprovincialmilk marketing boards with a surplus of skim. Baby formula looked like asmartuse for it, and Canada didn'thave any significant infant formula production before Feihearrived.

Expandingthis plant, or buildinga second infant formula plant somewhere else in Canada, look likeless attractive business propositions underthis new trade deal.

Class 7 demise affects formula business

The Americans also demanded, and got, an end to Canada's recentdairy ingredient pricing strategy in the USMCA.

Farmers and dairy processors had struck an agreement to make theirindustry more competitive by making it more affordablefor Canadian food manufacturers to use skim milk ingredients from Canada instead of the low-cost imported diafilteredor ultrafilteredmilk protein products enteringCanada tariff-free through a customs loophole.

A new pricing category in Ontario, followed by a national pricing change across Canada (referred to as "class 7"), set alower price for dairy ingredients like skim milk that was comparable to the going rate internationally.

In return for not losing business to the U.S. products, farmers agreed to take a hit and receive a lower price than whatCanada's supply management system would otherwise have set for their milk.

The Dairy Farmers of Ontario told CBCNews in 2017 that the milk destined for the Kingston facility would be provided based on this loweringredient price.

But in NAFTA2.0, Canada agreed to end its ingredient strategy, pleasing both American farmers and the Trump administration, which had turned Canadian dairy pricinginto a political cause clbre.

Once ratified, the USMCAwill dictatea priceformula for "non-fat solids used to manufacture milk protein concentrates, skim milk powderand infant formula."

Thatformula is based on anonfat dry milk price set by the U.S. Department of Agriculture, as opposed to some kind of global average calculatedby a neutral third party.

Feihe not commenting

Taken together, these two concessions on Canada's part would appear to undermine the business plan originally laid out by FeiheInternational, now incorporated for its Ontario operation as Feihe Canada Royal Milk.

"The United States is a major supplier of infant formula to the North American and export markets and sought these commitments to ensure effective disciplines on any potential Canadian exports of this product," government spokesperson Hawkins wrotein an email.

CBCNews reached out to Feihefor reaction to the new trade deal's provisions. Spokesperson Yang Zhiwenwrote back, saying only that "we are reviewing the new agreement and at this moment we don't have [any] comment."

When Feihe incorporated in Canada, it became eligible for the same government funding programs available to domestic dairy processors. Documents obtained by CBCNews last year suggestedFeihewas eligible for two federal programs, including a matching investment fund offering non-repayable contributions to companies that innovate.

No dollar amounts were specified in the non-redacted portion of the documents, making it difficult to estimate how much the Canadian taxpayer already hascontributed to building Feihe's facility.

The province of Ontario also invested $24 million in the Kingston plant throughits Jobs and Prosperity Fund.

Future liability?

Canada signeda foreign investment protection agreement with China in 2012. Itincludes a form of dispute settlement forinvestors to be used if agovernment acts in an arbitrary or otherwise unfairfashion that harmsa corporation's investment.

It's unknown whether the facts of this situation warrantlitigation under this investment treaty, so it remains to be seen whether taxpayers could face an additional cost from a successful lawsuit against the government of Canada.

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It remains unclear whether Canadian negotiators ever spokedirectly with Feihe.

Xinhua, the Chinese news agency, reported Wednesday that Foreign Affairs Minister ChrystiaFreelandspoke to Chinese Foreign Minister Wang Yi to brief him on the new USMCA.

According to the Chinese report,Freelandtold her counterpartthat "any free trade agreement should be open, inclusive but not exclusive, and that the USMCA should not harm the rights and interests of other countries."