Panel finds Canada's dairy trade conduct violated USMCA treaty

In a landmark decision, a dispute settlement panel brought under the U.S.-Mexico-Canada Agreement (USMCA) has found that Canada violated its commitment under the newly revised trade agreement by reserving most of its dairy tariff-rate quota for the exclusive use of Canadian processors.

United States Trade Representative Katherine Tai said the panel's decision means Canada must change the way it grants special access to its heavily-sheltered dairy market.

This is the first dispute settlement panel ever brought under the USMCA. The panel was established last spring at the bequest of Ambassador Tai after efforts to resolve the issue bilaterally with Canada failed. The panel reviewed measures adopted by the Government of Canada that undermine the ability of American dairy exporters to sell a wide range of products to Canadian consumers. 

U.S. Agriculture Secretary Tom Vilsack said the ruling was a big step for the U.S. dairy  sector towards realizing the full benefits of the USMCA and securing real access to the Canadian market for additional high-quality American dairy products such as milk, cheese and skim milk powder.

“In order for trade deals to be effective and have the trust of the American people, they must be enforced," Vilsack said. "It also signals to our trading partners that that the United States will stand firm against unjustified trade restrictions and continue fighting on behalf of our farmers and workers to ensure that we have full and fair access to foreign markets.”

U.S. dairy and trade organizations took issue with Canada's practice of reserving 80-85% of the volume of its dairy tariff rate quotas (TRQs) — specified quantities on 14 different categories of dairy products from skim milk powder and milk to all types of cheese — that can cross the border at lower or zero tariffs, for import by Canadian processors.

The panel issued its confidential findings to the parties on Dec. 20 and released the 50-page report publicly on Tuesday. 

Tai told Reuters that the "historic win will 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."

Canada is expected to resolve the issue by a deadline of Feb. 3.

"We expect Canada to abide by its trade commitments so that the American dairy industry can fully access the Canadian markets just as USMCA promised," said Krysta Harden, president and CEO of U.S. Dairy Export Council. “While this is an essential victory, it is one step in a much longer journey. Our work to uphold the full benefits of USMCA continues, as we strive to reduce supply chain disruptions for our exports and ensure Mexico’s adherence to the dairy provisions of the USMCA, among other key matters.” 

TRQs are a system of tariffs negotiated between countries that allow a predetermined quantity of imports at a specified tariff rate, where that rate is often at or near zero. Any additional imports above that predetermined quantity are subject to significantly higher tariffs. In the case of U.S. dairy products, these additional Canadian tariffs typically price U.S. dairy products out of Canada’s market, making fair access to Canadian dairy TRQs vital to maximizing exports to that market.

When the Office of the U.S. Trade Representative (USTR) brought the case in May 2021 following persistent advocacy from U.S. dairy and trade organizations, it argued that Canada has maintained dairy TRQ measures that run counter to its market access obligations under USMCA.

USMCA specifically requires that Canada open its TRQ application process to anyone active in the Canadian food and agriculture sector. Yet USTR noted that Canada designates the bulk of the TRQs to Canadian dairy processors who have little incentive to import, does not provide fair or equitable procedures for administering the TRQs, and does not give retailers any access to the TRQs. These measures deny the ability of U.S. dairy farmers, workers, and exporters to utilize the TRQs and realize the full benefits of the USMCA. 

Edge Dairy Farmer Cooperative, one of the largest dairy co-ops in the country, applauded the work of U.S. trade officials in making the case that Canada is unfairly limiting export opportunities for America’s dairy farmers and processors.

“Edge is thankful for the persistent efforts of the Office of the U.S. Trade Representative in defending the USMCA’s provisions and ensuring our dairy farmers see the full benefits of the agreement," said Edge President Brody Stapel. "When NAFTA was renegotiated and the USMCA was implemented, we were hopeful the new agreement would bring opportunities to our dairy farmer members, but that is only possible if both sides play by the rules. We are pleased to see that dispute settlement mechanisms put in place through the agreement are working, and hope that our trusted trading partner and neighbor will right the ship and come into compliance.”