USTR Initiates First USMCA Dispute Panel Over Canadian Dairy Quotas

Trade Update • MAY 25, 2021

U.S. Trade Representative Katherine Tai today formally requested a dispute settlement panel to examine allegations from U.S. dairy producers that Canada is denying them fair access to the Canadian market as promised under the United States-Mexico-Canada Agreement.

The move represents an escalation of the first-ever trade enforcement action launched under the USMCA by the Trump administration last December. The two countries have since been engaged in a series of consultations that failed to reach a solution to the dispute.

Pressure has been mounting on the administration in recent weeks, with lawmakers and U.S. dairy industry groups urging it to request the establishment of a panel.

In a statement, USTR Tai said that enforcing the USMCA was a “top priority” for the Biden administration and that launching the panel “will ensure our dairy industry and its workers can seize new opportunities under the USMCA to market and sell U.S. products to Canadian consumers.”

U.S. Agriculture Secretary Tom Vilsack called it “an important step for American agriculture, and one that brings the U.S. dairy sector closer to realizing the full benefits of the USMCA.” He added that the action also “puts our other agricultural trading partners on notice that they must play by the rules.”

Quota Allocation in Dispute

Key to the dispute is how Canada distributes more than a dozen tariff-rate quotas — the quantities of certain dairy products, like milks, cheeses, powders, yogurt, and ice cream — that can be imported at lower duty levels under the country’s tightly controlled supply management system.

The U.S. alleges that Canada has allocated an unduly large share of those quotas to processors rather than producers, effectively denying U.S. farmers their fair share of the Canadian market.

“What Canada is doing is essentially dividing up the (quotas) … into different pools and saying, ‘Well, here’s a pool that only processors can access,’” USTR officials explained in a background briefing.

“We read the agreement — and we think it’s pretty plain on its face — that that’s not permitted. Canada disagrees, and so we’re going to argue that out before a panel.”

The U.S. International Trade Commission has reportedly analyzed the situation to determine the impact of Canada’s current TRQ allocation regime on U.S. dairy exports, but the USTR would not disclose the figure at the present time.

Canadian Reaction

International Trade Minister Mary Ng issued a press release saying Canada is “disappointed” in the USTR’s decision, and that the quota allocations are well within the bounds of the USMCA.

Ng pointed out that while Canada agreed to provide some additional market access to U.S. dairy producers, it also maintained the ability to successfully defend its supply management system and domestic industry.

The minister confidently insisted that Canada’s “policies are in full compliance with our [USMCA] TRQ obligations” and promised a vigorous defense of the government’s position during the dispute settlement process.

Next Steps

Under the timeline set out in USMCA Chapter 31, the panel’s establishment will be followed by a roughly month-long process to select three to five panelists and a chairperson that will be charged with preparing a report within the following 150-180 days (i.e., November-December).

In the meantime, the panel may receive written and oral submissions from the disputing Parties, any nonparticipating State-Party, and experts. The panel must offer the Parties at least one hearing and an opportunity to present their views orally.