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Chinese Dairy Manufacturing Plant in Ontario Faces Reality of USCMA

On December 1st, 2016, Chinese dairy and infant formula producer Feihe International Inc. announced Kingston, Ontario as the site for their Canadian manufacturing facility. The $225 million, 320,000 ft2 facility is predicted to be one of the largest foreign direct investment projects in Canada by new job creation, with plans to “manufacture up to 60,000 tonnes of dry infant food annually, using milk [split evenly between cow and goat] from Canadian farms.” On October 12, 2018, days after the revised North American free trade agreement was announced, a CBC report stated that several aspects of the agreement could potentially “thwart Feihe’s business plan.” Feihe is the largest Chinese domestic-brand supplier of baby formula.

The U.S.-Mexico-Canada Free Trade Agreement, or USMCA, expands American access to the Canadian dairy market and limits “the American impact of Canada’s controversial supply management system for dairy and poultry products.” The CBC report outlines two main aspects that could impact the viability of the plant: new Canadian export restrictions on infant formula and the elimination of Canada’s national dairy pricing strategy (commonly known as “class 7”). Although the export restrictions outlined in a U.S. Trade Commission Fact Sheet don’t appear to impact the planned mix of cow and goat milk production (goat milk is not subject to USMCA export limits), the CBC report states that “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.” In addition, Canadian dairy manufacturers, up to this point, has enjoyed a relative price advantage to American competitors in the production of skim milk products, such as infant baby formula. With the elimination of class 7, this relative advantage is predicted to dissipate and the price formula will be determined using prices set by the “U.S. Department of Agriculture, as opposed to some kind of global average calculated by a neutral third party.”

The Kingston Economic Development corporation, who called the CBC headline “alarmist”, stated that they don’t expect the original investment or predicted job numbers to change, and that the project is currently continuing as planned. Feihe, however, has not commented directly on the news.

The Agriculture & Food sector has comprised a relatively small amount of Chinese foreign direct investment in Canada, according to data collected by the China Institute. The $225 million Feihe project, classified as a greenfield investment, is the largest Chinese investment in this sector. It comprises just over half of the $408 million in cumulative Agriculture and Food investment since 2005. The China Institute has documented and verified 17 separate investment transactions in this sector, 14 of which were carried out by private Chinese firms. The scandal-ridden Chinese dairy industry has been actively pursuing investment opportunities overseas in an effort to rebuild consumer confidence in the domestic market.

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