The dispute over Canada’s administration of dairy tariff rate quotas (TRQs) continues, with the potential for another dispute settlement panel and a call for retaliatory tariffs on the horizon.
On May 25, U.S. Trade Representative (USTR) Katherine Tai announced that the U.S. is triggering a second consultation under the U.S.-Mexico-Canada Agreement (USMCA) regarding Canadian trade practices deemed to be unfairly blocking key export opportunities for U.S. dairy farmers and processors. (The trade agreement is called the Canada-United States-Mexico Agreement, or CUSMA, in Canada).
In response to the USTR announcement, Mary Ng, minister of international trade, export promotion, small business and economic development for Canada, said she welcomed the consultation but will stand by Canada’s position to administer TRQs in support of its dairy supply management system.
Part of Canada’s defense of the TRQ system goes beyond dairy. In its statement outlining 2022-23 dairy year TRQ applications, Global Affairs Canada cited concerns over U.S. tax credits, proposed under the Build Back Better bill, on domestically produced electric vehicles.
No timeline on a dairy consultation had been set at Progressive Dairy’s deadline.
The dairy trade dispute between the two countries has escalated since January 2022, when a USMCA dispute resolution panel found that Canada’s dairy TRQ system violated the terms of USMCA.
A TRQ applies a preferential rate of duty to an “in-quota” quantity of imports and a different rate to imports above that in-quota quantity. Under the USMCA, Canada has the right to maintain TRQs on 14 types of dairy products. In 2020 and 2021, Canada reserved a percentage of the quota for processors and “further processors,” which U.S. officials charged was counter to Canada’s USMCA commitments.
According to Jeff Lyon, general manager of U.S. Midwest-based FarmFirst Dairy Cooperative, the initial dispute settlement panel found that across more than a dozen categories of dairy products covered in USMCA, 85%-100% of the lower tariff quota were reserved for Canadian processors, putting Canada in breach of its USMCA commitments.
A revised Canada TRQ proposal, issued in March, was rejected by the U.S. organizations. In mid-May, Canada announced policies affecting dairy TRQs for 2022-23, which U.S. dairy organizations also quickly rejected.
The U.S. organizations contend Canada’s updated TRQ system continues to block key stakeholders in the Canadian food and agriculture sector, including retailers, from accessing the TRQs, using an allocation method that provides inequitable advantages to Canadian dairy processors, and fails to employ good regulatory practices to encourage effective use of the TRQs allocated to a given company.
Through the course of the first dispute process, other issues regarding Canada’s policies have arisen, according to Brody Stapel, president of Edge Dairy Farmer Cooperative. Those issues include the requirement that dairy quota applicants be active during all 12 months of a reference period, which would block new applicants, and only allocating part of the TRQs for 2022.
U.S. dairy organizations have applauded the USTR’s latest announcement.
“USTR and USDA have shown dogged determination to uphold USMCA despite Ottawa’s clear refusal to engage in real reform to come into compliance with the agreement,” said Krysta Harden, president and CEO of U.S. Dairy Export Council (USDEC). “Dairy farmers and processors appreciate the clear bipartisan commitment from both the administration and Congress for enforcing the USMCA and insisting on getting the full export benefits the United States so painstakingly negotiated.
“If we allow Canada to simply ignore its clear obligations, it will set a dangerous and damaging precedent for future trade disputes that will reach far beyond the millions of jobs supported by the American dairy industry,” said Harden.
“Dairy farmers appreciate USTR’s continued dedication to aggressively pursuing the full market access expansion into the Canadian market that USMCA was intended to deliver,” said Jim Mulhern, president and CEO of National Milk Producers Federation (NMPF).
“Our farmers were meant to see major opportunities under USMCA – an estimated 50 percent increase annually in the value of exports. Unfortunately, we’re still waiting. We can’t get the high-quality cheese from our members here in the Upper Midwest onto Canadian grocery store shelves. A collaborative and robust trading relationship with our longtime partner is critical for both sides,” said Edge Dairy Cooperative’s Stapel.
“Trade and export opportunities with Canada are vital to the U.S. dairy industry,” said Jackie Klippenstein, senior vice president, government, industry and community relations at Dairy Farmers of America (DFA). “DFA, along with our farm families, greatly appreciate the ongoing diligence and leadership of the Office of the U.S. Trade Representative and the U.S. Department of Agriculture to hold Canada accountable and ensure compliance with the USMCA.”
“Canada cannot be permitted to blatantly disregard their trade obligations after having been found non-compliant by a neutral and expert panel, only to then ignore their obligations without consequence,” said Michael Dykes, president and CEO of the International Dairy Foods Association (IDFA), which represents U.S. dairy manufacturers and marketers.
Meanwhile, the Dairy Farmers of Canada (DFC) defended the Canadian government’s stance, saying the latest TRQ mechanism is “fully compliant with the CUSMA dispute settlement panel decision earlier this year which required Canada to revisit its model that had pools dedicated to processors.
“By allocating CUSMA TRQs to processors and distributors, Canada is meeting its trade obligations while ensuring a measure of predictability in dairy imports in a manner that supports supply management, a system based primarily on supplying the needs of Canadian consumers,” DFC said.
Going forward, IDFA, USDEC and NMPF have all advocated for retaliatory tariffs on Canadian goods exported to the U.S. if the issue is not resolved.
“USTR and USDA must be prepared to deploy the strongest-possible retaliatory measures envisioned under the USMCA should this ‘whack-a-mole’ approach continue,” Mulhern said.