Equilibrium & Sustainability

US dairy industry claims victory over Canada in trade pact dispute

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The United States has claimed victory over Canada in its first dispute under the new North American trade agreement after an international panel found that Canada gave preferential treatment to its own dairy industry.

Members of the cross-border panel agreed with U.S. assertions that Canada breached the United States-Mexico-Canada Agreement (USMCA) by earmarking most of its lower and zero-tariff dairy import quotas for domestic processors.

“Enforcing our trade agreements and making sure they benefit American workers and farmers is a top priority for the Biden-Harris Administration,” U.S. Trade Representative Katherine Tai said in a statement Tuesday.

The fight stems from a dispute over so-called dairy “tariff-rate quotas” (TRQs), mechanisms to allow low or no duties on imports of a particular good — in this case, certain dairy products. Any imports beyond the quota are subject to higher tariffs.

The U.S. accused Canada of violating the quotas by restricting most of them to Canadian dairy processors. That leaves U.S. producers — mostly dairy farmers — often priced out of Canada’s market, according to the National Milk Producers Federation. Canada, meanwhile, says its policies are critical to the stability of its own dairy sector.

The panel’s report found that across more than a dozen categories of dairy products, 85 to 100 percent of the lower tariff rates were reserved for Canadian processors. The rest were available on a first-come, first-serve basis for others active in the Canadian food or agriculture sector.

The panel’s Dec. 20 decision, released Tuesday, determined that Canada was in breach of its USMCA Treaty commitments and gave Canada 45 days to comply with the panel’s findings. Presiding over the panel was Uruguayan diplomat Elbio Rosselli, according to The Wall Street Journal.

Canada’s dairy market includes six main players, the report noted: producers or dairy farmers, processors, further processors, distributors, food service and retailers.

The report defined Canada’s 14 dairy categories as milk, cream, skim milk powder, butter and cream powder, industrial cheeses, cheeses of all types, milk powders, concentrated or condensed milk, yogurt and buttermilk, powdered buttermilk, whey powder, products consisting of natural milk constituents, ice cream and ice cream mixes, and other dairy. 

For all 14 categories, access to 80 percent or more of the low-tariff quota was reserved for processors, while for 10 of the categories, an additional 10-20 percent was reserved for further processors. The report defined processors as facilities that convert raw milk into consumer products, while further processors incorporate dairy ingredients into other products.

The U.S. argued in the report that Canada’s decision to limit low-tariff access to processors has resulted in the exclusion of the “producer group” — which includes U.S. dairy farmers.

Canada is the third-largest export destination for U.S. dairy products, amounting to $478 million worth of exports from January–October 2021, the Office of the U.S. Trade Representative said.

While the office did not make clear how much the U.S. stood to gain if Canada altered its practices, The Wall Street Journal cited the International Trade Commission, which estimated that the implementation of the USMCA would boost U.S. dairy exports to Canada by $227 million.

The panel ultimately determined that Canada’s practices were “inconsistent” with an article in the USMCA Treaty.

“No one other than processors has access to, or can apply for, these allocations,” the report stated. “Hence access is limited to processors, which is not permitted by the Treaty.”

The Office of the U.S. Trade Representative declared Tuesday it had “prevailed” in the dispute.

“This historic win will help eliminate unjustified trade restrictions on American dairy products, and will ensure that the U.S. dairy industry and its workers get the full benefit of the USMCA to market and sell U.S. products to Canadian consumers,” Tai, the Biden administration’s trade representative, said in her office’s press statement.

The National Milk Producers Federation and the U.S. Dairy Export Council also lauded the resolution.

Jim Mulhern, president and CEO of the federation, praised the move in a letter Wednesday, stressing that “dairy farmers are on track to gain greater, well-deserved access to Canada’s dairy market.” 

“The United States and Canada negotiated specific market access terms covering a wide variety of dairy products, but instead of playing by those mutually agreed upon rules, Canada ignored its commitments,” Mulhern said in another statement the day before. “As a result, U.S. dairy farmers and exporters have been unable to make full use of USMCA’s benefits.” 

Canada also claimed victory following the settlement, asserting that the panel “ruled overwhelmingly in favor of Canada and its dairy industry.”

“In particular, it is important to note that the panel expressly recognizes the legitimacy of Canada’s supply management system,” Mary Ng, Canada’s Minister of International Trade, Export Promotion, Small Business and Economic Development, and Marie-Claude Bibeau, Canada’s Minister of Agriculture and Agri-Food, said in a joint statement.

“The panel also confirms that Canada has the discretion to manage its TRQ allocation policies under CUSMA in a manner that supports Canada’s supply management system,” they added.

The two ministers stressed, however, that they have “taken note of the panel’s finding” regarding the reservation of the lower-tariff quotas. They acknowledged the 45-day timeline, defined as Feb. 3, and emphasized that Canada’s dairy industry remains a vital pillar in the country’s economy. 

“Our government, as it proceeds with the next steps in the process, will continue to work closely with the Canadian dairy industry,” the ministers said, noting that Canada takes its international obligations seriously, including those with the U.S., its “closest trading partner.” 

“The Government of Canada will continue to stand up for its dairy industry, farmers and workers and the communities they support, and it will continue to preserve, protect and defend the supply management system,” the ministers added.

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