Trudeau government claims victory in latest trade dispute with U.S. over dairy

The Trudeau government is celebrating what it's calling an absolute victory in its latest trade dispute with the United States over dairy imports.

American dairy farmers argued that the way the Canadian government allocates its tariff-free dairy import permits denies them full access to the 3.5 per cent share of Canada's market they thought they'd gained in the revised North American free trade agreement.

A panel of experts, convened under the auspices of the now-renamed Canada-United States-Mexico Agreement (CUSMA), issued its draft findings in October and its final report on Nov. 10. The countries agreed it wouldn't be made public until the Friday morning of the American Thanksgiving long weekend.

In a joint statement, International Trade Minister Mary Ng and Agriculture and Agri-Food Minister Lawrence MacAulay described the report's findings as "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 joint statement said. "The government of Canada will also continue to work with processors and retailers to stabilize food prices."

"I am very disappointed," United States Trade Representative Katherine Tai said in her own statement Friday morning. 

"Despite the conclusions of this report, the United States continues to have serious concerns about how Canada is implementing the dairy market access commitments it made in the agreement. While the United States won a previous USMCA dispute on Canada's dairy TRQ [tariff rate quota] allocation measures, Canada's revised policies have still not fixed the problem for U.S dairy farmers," the statement said.

"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."

As Tai's statement suggests, Friday's report is the second set of findings from a CUSMA dispute panel on fundamentally the same issues.

The first panel, convened after U.S. dairy industry complaints, issued a report early in 2022 that didn't really settle the longstanding tensions between the two countries over their radically different dairy industries.

Canada's dairy sector operates under a strict producer quota system in a highly regulated and relatively closed market. American farmers, meanwhile, operate without government restrictions on how much they can supply — but are subsidized by taxpayer funds in other ways to help keep dairy products affordable.

In competing media releases, both Canada and the U.S. claimed victory after that first panel report.

While Canada celebrated the fact that the first panel upheld its right to protect its domestic market by applying prohibitively steep tariffs to restrict imports, that panel also concluded that the way Canada administered 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.

U.S. claims Canadian processors have too much control

Under policies revised in May 2022, Canada no longer allocates its limited import permits for tariff–free dairy products according to processor-specific pools.

That change didn't address the chief American complaint, however. The U.S. argues that because the Canadian government decides who has the right to import dairy tariff-free, it's able to effectively let Canada's dairy processors decide which American products will compete with their own.

Canada tweaking its administrative practices didn't really put a stop to that, or allow Canadian stores to make their own decisions about what they want to import and sell.

After the U.S. triggered a second consultation and complaint process under CUSMA, a second panel was convened earlier this year to consider four issues:

• Canada's exclusion of retailers from TRQ eligibility.

• Canada's use of different metrics to calculate the market share for its different categories of applicants (processors, further processors, or distributors).

• Canada's requirement that importers demonstrate monthly activity in their markets for each of the 12 months of a specified period.

• Canada's lack of a mechanism for returning and reallocating unused import permit volume in a timely and transparent manner so that importers fully use what's available.

The second panel's report did not find Canada's practices were inconsistent with the language in the trade deal. So Canada is not required to make any further changes after this second report.

The panel's findings were not unanimous, however.

CUSMA panels operate on the basis of majority decisions. Friday's report includes a dissenting opinion written by one member of the panel who argued that Canada should not be allowed to exclude retailers and food service operators from being eligible to apply for import quota.

Mateo Diego–Fernández of Mexico chaired this three-person panel of trade experts, which also included American Kathleen Claussen and Canadian Serge Fréchette.

CUSMA does not have an appeal mechanism if a country believes the findings of a dispute panel are flawed.

Europe got Canada to earmark quota for retailers

For years now, Canada's supply management system for dairy, eggs and poultry has been closely monitored by American officials for any sign of non-compliance. Canadian officials, meanwhile, consistently say they welcome this scrutiny because they're confident they're upholding their agreements.

The Dairy Processors Association of Canada thanked the minister and the government officials "leading Canada's defence" in these latest proceedings and said Friday's decision will "help provide the dairy sector with greater certainty and stability going forward."

David Wiens, president of the Dairy Farmers of Canada, released a one-sentence reaction: "We welcome the decision of the panel."

When the European Union obtained access to Canada's restricted cheese market in the Comprehensive Economic and Trade Agreement (CETA), it required Canada to earmark a share of the tariff-free import quota for retailers, with another portion set aside for new entrants to the Canadian market.

The Americans did not negotiate this kind of language when CUSMA was signed. That allowed the permit allocation process for U.S. imports to include only domestic processors and existing distributors, not potential new competitors.

Under both CUSMA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with Pacific Rim dairy exporters like New Zealand, Canadian dairy processors effectively control what enters their market. Both the U.S. and New Zealand have taken aim at this domestic dairy industry control through the dispute settlement processes in their respective trade agreements.

In September, a CPTPP dispute panel found that New Zealand had been unable to fully access the share of Canada's market it was entitled to because Canada allocated import permits only to its own dairy processors. Canada was ordered to adjust its administration to comply with the language in that deal.

When CUSMA came into force on July 1, 2020, it included a new requirement for a review in six years. CUSMA has a sunset clause that will end the trade deal after 16 years unless each party commits to renewing it for another term.

This dispute over whether American farmers are getting the dairy market access they believed they'd negotiated may be a flashpoint during that mandatory review.

"Although we are disappointed in the outcome of this second case, we brought this case to refine and expand upon our win in the first case," said U.S. Agriculture Secretary Tom Vilsack, who was an executive in the U.S. dairy industry prior to his appointment 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."