Margarine wars could escalate with Western embargo – Our refusal to allow coloured spread is a violation of trade obligations

On Thursday, Economic Development Minister Raymond Bachand meets his counterparts responsible for internal trade. Most probably, the Quebec representative will have to explain why our province continues to prohibit the sale of coloured margarine. No other jurisdiction in the world does as we do.

Quebec’s regulation restricting the sale of coloured margarine is perhaps one of the hoariest and most intractable domestic trade issues in Canada – and one of the most absurd, irrational and embarrassing as well.

The original idea behind the restriction of coloured margarine is that consumers will be fooled into thinking that it is butter, even if the product is conspicuously labelled “margarine.” Everyone, including the Quebec government, now agrees that Quebec consumers don’t need to be protected from the danger of coloured margarine. The real reason for the restriction is plainly to protect Quebec dairy farmers.

In 1997, the Quebec government proposed a regulatory amendment to remove the restriction on coloured margarine to meet Quebec’s obligations under the Agreement on Internal Trade. The AIT is a domestic trade agreement signed by all Canadian governments in 1994 to establish an open, efficient and stable domestic market.

In addition to meeting its AIT obligations, Quebec said that removing the colour restriction would benefit the provincial economy and that it was no longer necessary to protect consumers.

But then it withdrew the amendment.

Why? Because during the run-up to the 1998 provincial election, our government decided that the colour restriction is necessary to protect Quebec dairy producers, who had asked the government to keep it in place.

Courts, including the Supreme Court of Canada, agree that Quebec has the constitutional right to protect its dairy producers. Jurisdiction is not the issue. But there is also no doubt that our coloured-margarine restriction violates our interprovincial trade obligations.

In June 2005, an AIT trade panel decided that the margarine-colour restriction is a barrier to trade and that Quebec must remove its restriction no later than September 1, 2005.

Until now it has been easy for Quebec to ignore its AIT obligations and the panel ruling. There have been no consequences either for the government or for Quebec’s dairy producers.

But that might soon change.

The AIT allows provinces to retaliate if a government fails to implement a panel finding within a year after a ruling is made. The AIT says that the retaliation should be of “equivalent effect” and can be continued until Quebec removes its restrictions.

The Vegetable Oil Industry of Canada estimates that Quebec’s restrictions on coloured margarine costs their industry $25 million annually. Alberta, Saskatchewan and Manitoba, the provinces that made the AIT complaint, could put an embargo on dairy and other products from Quebec to the tune of $25 million a year until we remove the restrictions.

The AIT is a reciprocal undertaking. When Quebec signed the AIT, we gained access to other provincial markets by giving access to our own. The Quebec government knows very well that if it withdraws a benefit, the other parties have the right to withdraw a compensatory benefit from Quebec.

Quebec dairy producers have a disproportionate share of the national dairy market – courtesy of Canada’s dairy supply-management system. We now have to decide if we want to protect our dairy industry from competition by punishing farmers and processors in other provinces, or if we want to continue to benefit from open trade by accepting the obligations that come with the AIT.

The proper policy for Quebec is to eliminate the colour restriction on margarine. This restriction reduces consumer choice for no good reason. Quebec’s dairy producers don’t need more protection. They need less. The dairy industry needs to be competitive and innovative. Let’s encourage increased sales of dairy products by producing what consumers want to buy, but not by shielding ourselves from margarine through regulation.

The Quebec government wants to be seen to as committed to open trade. Why not show it by putting an end to this anachronistic regulation on margarine?

Robert Knox is an associate researcher at the Montreal Economic Institute.