Canada Loses USMCA Dispute Over Unfair Treatment of Dairy Quotas

Trade Update • JANUARY 5, 2021

U.S. Trade Representative Katherine Tai announced on Tuesday that the U.S. had prevailed in the first-ever panel decision under the United States-Mexico-Canada Agreement, which ruled that Ottawa had unfairly implemented promised quota changes that were intended to provide increased access to the Canadian dairy market.

In a 50-page public version of its Final Report, the independent three-member panel appointed last summer agreed with the U.S. claim that Canada is breaching its USMCA commitments by reserving more than 80% of the volume of its dairy tariff rate quotas (i.e., specified quantities of ice cream, cheese and other dairy products that can be imported at lower or zero tariffs) for the exclusive use of Canadian processors.

More specifically, the panel said that “Canada’s practice of reserving TRQ pools exclusively for the use of processors is inconsistent with Canada’s commitment in Article 3.A.2.11(b) of the Treaty not to ‘limit access to an allocation to processors.’” In this regard, the panel stressed “that Canada’s administrative discretion in allocating the TRQs is not at issue here. Rather it is the exclusive reservation of access to the TRQs that violates the Treaty.”

U.S. Trade Representative Katherine Tai said 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’s Reaction

Putting a positive spin on the outcome, Mary Ng and Marie-Claude Bibeau, the ministers of International Trade and Agriculture, issued a joint statement saying they were “pleased with the dispute settlement panel’s report, which ruled overwhelmingly in favour of Canada and its dairy industry.”

Framing it as a win, the ministers also pointed out that “the panel expressly recognizes the legitimacy of Canada’s supply management system” and confirms “that Canada has the discretion to manage its TRQ allocation policies under CUSMA in a manner that supports Canada’s supply management system.”

In fact, none of these issues were contested in the dispute, which focused solely on Canada’s unfair practice of limiting access to a particular allocation in violation of USMCA Article 3.A.2.11(b), the so-called “Processor Clause.”

Next Steps

Under the USMCA dispute settlement rules, Canada now has 45 days from the Dec. 20th confidential report (i.e., Feb. 3, 2022) to comply with the Panel’s findings. Otherwise, the U.S. would be entitled to take remedial action such as punitive tariffs or other penalties.

In their statement, the two ministers said they had “taken note” of the panel’s finding and would “work closely with the Canadian dairy industry” as it “proceeds with the next steps in the process.”

“Canada takes its commitments and obligations under international agreements seriously,” the ministers said, while also vowing to protect Canada’s supply management system and promising they would “continue to stand up for its dairy industry, farmers and workers and the communities they support.”