This study examines how domestic price discrimination between fluid and manufacturing milk influences dairy trade. Two types of dairy models are used for the study. The first one is a stylized mathematical model which is used to explore the relative trade effects of domestic price discrimination accompanied with revenue pooling mechanism versus border measures in dairy product markets. The second one is a partial equilibrium, multiple-region model of dairy policy and trade which is used to see the empirical implication of domestic price discrimination for six major dairy producers (Australia, Canada, European Union, Japan, New Zealand and the United States).
The analytical results identify the trading status as the key to determine the relative trade effects. While domestic price discrimination is always less trade distorting than border measures in a net importer case, the relative trade distortiveness depends on the export volume in a net exporter case. The theoretical possibility that domestic price discrimination is more trade distorting than border measures is found when the ratio of dairy export to domestic manufacturing milk consumption is very high. The results also indicate that while the both support measures increase dairy export, domestic price discrimination may place greater economic burden on fluid milk consumers and less economic burden on tax payers than border measures. In addition, the results imply that domestic price discrimination schemes can be effective trade protective measures for Canada, Japan and the United States, where the schemes are currently being implemented.
Although domestic price discrimination could be consistent with the current WTO rules to support dairy farmers, it could be a trade distorting measure and act as a hidden export subsidy, as this study shows.