Centre de Recherche en
économie de l'Environnement, de
l'Agroalimentaire, des Transport et
de l'Énergie (CREATE)
“Compositional Standards, Import
Licences and Market Structure:
The Case of Canadian Cheese Imports
Marie-Hélène Felt
Carleton University, Ph.D candidate
Bruno Larue
Canada Research Chair in International Agri-food Trade
CREATE, Université Laval
Jean-Philippe Gervais
Formerly Professor at North Carolina State University
IATRC, December 12, 2011
Background
 New regulations with regards to cheese produced in Canada
and imported:
 Set a minimum % of the casein derived from fluid milk rather than from
other milk products.
 Constrains the whey protein to casein ratio of cheese not exceed that of
milk.
 Import licenses are needed in addition to import permits.

WTO notification in June 2007; Adoption by the Canadian
Parliament in December 2007; Implementation in December 2008;
Legal challenge-Superior Court in October 2009;-Appeal in
February 2011; Supreme Court decision NOT to hear the case in
November 2011.
The New Compositional Standards
Types of cheese
Ratio casein from fluid milk /
casein from all sources used
by the industry prior to the
imposition of compositional
standards
60%
Ratio fixed by
new
compositional
standards
Cheddar and cheddar-type cheeses (Brick, Canadian
Munster, Canadian Brick, Colby, Farmer’s, Jack, Monterey
(Monterey Jack), Mozzarella (Scamorza), Part skim
Mozzarella, Part skim Pizza cheese, Pizza cheese,Skim Milk
cheese and any other variety ,.
70%
83%
Specific speciality cheeses (Asiago, Baby Edam, Baby
Gouda, Blue, Butterkäse, Bra, Brie, Caciocavallo,
Camembert, Danbo, Edam, Elbo, Emmental, Swiss, Esrom,
Feta, Fontina, Fynbo, Gouda, Gournay, Gruyère, Havarti,
Kasseri , Limburger , Maribo, Montasio , Muenster,
Neufchâtel, Parmesan, Provolone , Romano, St. Jorge,
Saint-Paulin, Samsoë, Tilsiter, Tybo, Harzkase)
80%
Pizza Mozzarella cheese
Part Skim Pizza Mozzarella cheese
63%
100% Old
cheddar
95%
Who complained?
Domestically: Saputo, Kraft, Parmalat, but not
Agropur;
Internationally: Australia, the European Union ,
New Zealand, Switzerland and the United
States….
but France has similar standards!
The Canadian cheese industry…

Operates under a supply management policy; 37% of
Canada’s milk production is allocated to cheese
manufacturing;

Milk protein ingredients are imported;

Is dominated by four large processors: Saputo, Kraft,
Agropur and Parmalat, but there is a fringe of small
specialty cheese manufacturers, especially in Quebec;

Imports are regulated by a TRQ with 2/3 of the quota
allocated to the EU;

Importers need an import permit and an import licence and
are subject to a « use it or lose it » clause.
Canada’s cheese imports
Canada cheese imports are subject to a TRQ of 20,412 tons since 1995.
USA
HS 0406.10
Fresh
1% of total cheese imports
Cream cheese (55%)
USA
HS 0406.20
Grated/Powdered
6% of total cheese
imports
USA
HS 0406.30
Processed
6% of total
cheese imports
Switzerland
HS 0406.40
Blue
6% of total
cheese imports
Denmark
HS 0406.90
Other
81% of total
cheese imports
France
France
Italy
Italy
France
UK
USA
Italy
Denmark
Netherlands
USA
France
Italy
Switzerland
Greece
Germany
Netherlands
Germany
Netherlands
Netherlands
France
United Kingdom
Denmark
Italy
Switzerland
HS 0406
Building on old ideas about TRQs
and quantitative measures
 Larue, Gervais and Pouliot (2007, 2008) : TRQ setting under
domestic price target and domestic monopoly;
 Larue, Lapan and Gervais (2010) : TRQ as a « rent shifting »
strategic policy instrument – Selling (dearly) domestic access;
 Grossman (1980), Greaney (1996), Cunha and Santos (1996),
Pouliot and Larue (2012): TRQs and other domestic
content/market sharing agreements can have perverse
effects/ « use it or lose it » vs sleeping on import licences;
Theoretical Modelling Strategy
Leontief cheesemaking technology:
qi
Ci
min
qi
i
wm
i
m, i x
wx
i
Assumption: The standards bind on one or
more firms and quality is unaffected
Modelling theoretical strategy
Consumers have quasi-linear
preferences:
U
Z
A1 X 1
A2 X 2 0.5 X 12
X 22
There are 3 types of firms: m1 firms produce type 1 cheese ,
m2 firms that produce type 2 cheese and
n importing firms that have a « use it or lose it »
quota constraint.
X1X 2
Domestic firms have Cournot conjectures
and know that import licences will be filled
A
1
j
A
2
j
jB
( A1
A
1
A1 (m1 1)q
A2
A
1 1
mq
n 1
n 1
A2 ) ( r1 r2 ) m1 (1
B
1
A
2 2
q
B
1
q
mq
nQ c1
A
2
(m2 1)q
)q1A (2n 1)(1
)q1B m2 (1
0
nQ c2
0
)q2A (n (1
) 1)Q
Analytical solutions are messy and not insightful, but comparative
statics give simple and neat results.
Theoretical results:

Proposition 1: If the compositional standard binds only
on foreign producers of type 1 cheese, consumption of
type 1(2) cheese falls (increases), and total quantity of
domestic cheese produced can decrease/stay the
same/increase as m1 m2
If output expansion occurs in the less competitive segment and the
contraction occurs in the most competitive segment, then the
standard that binds only on imports actually triggers an overall
reduction in domestic cheese production.
Theoretical results:
Proposition 2: The standard can decrease/keep constant/increase
the domestic demand for milk if :
m1
m2
B
B
1
B
m1m2 1
2
The standard can backfire on dairy farmers even when it binds
only on foreigners!
Theoretical results
 Proposition 3: The value of trade can increase/stay
constant/decrease in response to the imposition of a
compositional standard that binds only on type 1 cheese
exporters. If r1 r2 , the value of trade can only increase with
a standard-induced increase in r1. If r1 r2
, then the
value of trade increases, stay the same or decreases as
B
r1
B
q
.1 where B
1 r1
0
r1 r2
1
r1 q1B
Theoretical results:
 Proposition 4: If the compositional standard binds only on
domestic type 1 cheese manufacturers, then: type 1 cheese
consumption decreases, type 2 cheese consumption and milk
demand can decrease/stay constant/increase and domestic
cheese production decreases.
n
 For type 2 cheese consumption, the result hinges on:
m2
 For milk demand, the result depends on: 1 2n m2 1 n n
m2
n n
1
2
Theoretical results:
 Proposition 5: The value of trade can increase/stay the
same/decrease if the standard binds only on domestic type 1
cheese manufacturers as r r .
1
2
Empirical Methodology
 Structural change test on import unit values;
 Problem: the compositional standards were implemented
recently;
 Andrews (2003) S-test is designed to find a break near the end
of the sample;
 Bai and Perron (1998, 2003): breaks are endogenously
determined.
Structural change in unit values of Canadian cheese
imports by HS6 category from all sources:
Bai and Perron
structural break test
Cheese type
Origin
Italy
December
(2,3,4,5)
2001**
(1)
December 2001*
Estimation period resulting
from Bai and Perron break test
Jan 2002 –May 2011
Jan 1997 –May 2011
040610
Fresh cheese
(1)
United States
040620
Grated-Powdered
cheese
Endogenous estimation
of break date(s) on the
full initial sample
Andrews structural break test
May 2010***
(2)
February 2010**
Jan 1997 –May 2010
Test results: All
potential break date
from June 2007 to
May 2011 are tested
March 2010**
Nov 2009-June
2010**
June 2007, Oct
2007***
May 2007,JulySept 2007, Nov
2007**
United States
Stability
Jan 1997 –May 2011
Stability
France
Jan 1997 –May 2011
Stability
Oct 2002-May 2011
Oct-Nov 2010*
Jan 1997 –May 2011
Jan 1997 –May 2011
Jan 1997 –May 2011
Jan 1997 –May 2011
February 2009*
March-May 2008*
Stability
Stability
Feb-April 2011**
Nov 2010-Jan
2011*
Stability
040630
Processed cheese
Switzerland
040640
Blue-veined cheese
United States
Denmark
France
France
Stability
September
(2,3,4,5)
2002***
February 2002 and
(1)
September 2002**
Stability
Stability
Stability
Stability
040690
Other cheese
Italy
Stability
Jan 1997 –May 2011
Switzerland
Stability
Jan 1997 –May 2011
Conclusion
 The standards ‘ effects depend on domestic industry’s
structure and substitution demand parameter. The « use-it or
lose it » changes the reaction functions of firms and can
induce peculiar effects;
 EU’s share of the Canadian market is protected ; growth in
exports volume is limited, but compositional/quality
upgrading effects are beneficial to the EU;
 Milk protein ingredients imports from NZ are down.
 Consequences on R&D effort and future innovation?
Thank You!
Merci !
Bruno Larue
Canada Research Chair in International Agri-food Trade