The Trudeau administration is declaring a “absolute victory” in its latest trade fight with the US over dairy imports.
The Canadian government’s allocation of tariff-free dairy import licenses, according to American dairy farmers, denies them full access to the 3.5 percent share of Canada’s market that they believed they’d won under the updated North American free trade agreement.
A panel of experts appointed under the now-renamed Canada-United States-Mexico Agreement (CUSMA) delivered its draft conclusions in October and its final report on November 10. It was decided that it would not be made public until Friday morning of the American Thanksgiving holiday weekend.
International Trade Minister Mary Ng and Agriculture and Agri-Food Minister Lawrence MacAulay said in a joint statement that the report’s conclusions were “clearly in favour of Canada.”
“The government of Canada will continue to preserve and defend Canada’s supply management system, which supports producers by providing the opportunity to receive fair returns for their labour and investments, brings stability for processors and benefits consumers by providing them with a steady supply of high-quality products,” the two governments said in a joint statement. “The government of Canada will also continue to work with processors and retailers to stabilize food prices.”
“I am very disappointed,” US Trade Representative Katherine Tai said in a statement released Friday morning.
“Despite the findings of this report, the United States remains deeply concerned about Canada’s implementation of the dairy market access commitments it made in the agreement.” While the US won a prior USMCA battle over Canada’s dairy TRQ [tariff rate quota] distribution procedures, Canada’s updated rules have “yet to solve the problem for US dairy farmers,” according to the statement.
“We will continue to work to address this issue with Canada, and we will not hesitate to use all available tools to enforce our trade agreements and ensure that U.S. workers, farmers, manufacturers and exporters receive the full benefits of the USMCA.”
According to Tai’s statement, Friday’s report is the second set of conclusions from a CUSMA dispute panel on the same core flaws.
The first panel, formed in response to protests from the US dairy sector, released a report in early 2022 that did not fully resolve the two nations’ long-standing disagreements over their very different dairy businesses.
In a highly regulated and largely limited industry, Canada’s dairy business works under a tight producer quota system. Meanwhile, American farmers operate without government constraints on how much they can produce — but are supported in various ways by public monies to help keep dairy products inexpensive.
A lady in a black gown talks at a microphone, surrounded by Canadian flags.
On August 22, 2023, Mary Ng, Minister of Export Promotion, International Trade, and Economic Development, talks to media. She noted in a joint statement with Agriculture and Agri-Food Minister Lawrence MacAulay that the CUSMA panel findings favored Canada. (The Canadian Press/Darren Calabrese)
Following the initial panel report, both Canada and the United States claimed victory in rival media releases.
While Canada rejoiced that the first panel upheld its right to protect its domestic market by imposing prohibitively high tariffs on imports, the panel also concluded that Canada’s administration of its tariff rate quota was inconsistent with the language negotiated and agreed to by both countries when the trade agreement was revised in the fall of 2018.
United States claims Canadian processors have much too much power.
Canada no longer assigns its restricted import licenses for tariff-free dairy products based on processor-specific pools, according to laws changed in May 2022.
However, this adjustment did not solve the main American criticism. The US claims that since the Canadian government selects who gets to import dairy duty-free, it may essentially allow Canada’s dairy processors pick which American goods will compete with their own.
Canada’s changes to its administrative methods did not put a stop to it, nor did they empower Canadian retailers to make their own judgments about what they wish to import and sell.
After the United States initiated a second consultation and complaint procedure under CUSMA, a second panel was formed early this year to address four issues:
Retailers in Canada are not eligible for TRQs.
Canada’s use of several indicators to compute market share for its many application categories (processors, further processors, or distributors).
Canada’s requirement that importers show monthly activity in their markets for each of a particular period’s 12 months.
The absence of a system in Canada for reclaiming and reallocating unused import permit volume in a timely and transparent way, allowing importers to fully use what is available.
The second panel’s assessment concluded that Canada’s procedures were not inconsistent with the trade agreement’s text. As a result, Canada is not obligated to make any more modifications after the release of this second report.
However, the panel’s conclusions were not unanimous.
CUSMA committees make judgments by majority vote. One member of the panel wrote a dissenting view in the report, arguing that Canada should not be able to prohibit shops and food service operators from applying for import quotas.
Mexico’s Mateo Diego-Fernández presided over this three-person panel of trade experts, which also comprised Americans Kathleen Claussen and Serge Fréchette from Canada.
If a nation considers the conclusions of a dispute panel are erroneous, there is no recourse under CUSMA.
Europe persuaded Canada to set aside quotas for retailers.
For years, American authorities have been carefully monitoring Canada’s supply management system for dairy, eggs, and poultry for any signs of noncompliance. Meanwhile, Canadian officials have constantly said that they welcome this scrutiny because they are confident in their ability to maintain their commitments.
The Dairy Processors Association of Canada congratulated the minister and government officials for “leading Canada’s defence” in these new proceedings, saying Friday’s judgment would “help provide the dairy sector with greater certainty and stability going forward.”
The president of the Dairy Farmers of Canada, David Wiens, issued a one-sentence statement saying, “We welcome the panel’s decision.”
When the European Union gained access to Canada’s limited cheese market under the Comprehensive Economic and Trade Agreement (CETA), it obliged Canada to put aside a part of the tariff-free import quota for retailers and another for new entrants to the Canadian market.
When CUSMA was signed, the Americans did not negotiate such wording. As a result, the permit allocation procedure for US imports was limited to local processors and established distributors, rather than prospective new rivals.
Canadian dairy processors effectively control what enters their market under both CUSMA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with Pacific Rim dairy exporters such as New Zealand. Through the dispute resolution mechanisms in their respective trade agreements, both the United States and New Zealand have targeted domestic dairy sector control.
A CPTPP dispute panel determined in September that New Zealand had been unable to fully access the part of Canada’s market to which it was entitled because Canada awarded import licenses solely to its own dairy processors. Canada was required to change its administration to conform with the terms of the agreement.
When CUSMA went into effect on July 1, 2020, it added a new need for a six-year review. CUSMA has a sunset provision that will terminate the trade agreement after 16 years unless both parties agree to extend it for another period.
This disagreement over whether American farmers are receiving the dairy market access they thought they had achieved might become a flashpoint during the mandated review.
“Although we are disappointed in the outcome of this second case, we brought it to refine and expand upon our win in the first case,” said U.S. Agriculture Secretary Tom Vilsack, who had worked in the dairy business before being recruited by the Biden administration. “We will continue to voice deep concerns about Canada’s system.”
“We remain focused on securing the market access we believe Canada committed to under the USMCA and we will continue exploring all avenues available to achieve that goal.”
