USTR Sets Out Argument Against Canada’s Dairy TRQ Allocation
Trade Update • JULY 14, 2021
The Office of the United States Trade Representative on Monday made its first submission to the panel appointed to resolve the dispute over the way Canada administers dairy import quotas in accordance with the United States-Mexico-Canada Agreement.
U.S. trade officials and dairy industry advocates contend that an unreasonably large share of those quotas has been allocated to processors rather than producers and retailers, effectively denying U.S. farmers their fair share of the supply-managed Canadian market.
The USMCA defines a tariff-rate quota (TRQ) is “a mechanism that provides for the application of a preferential rate of customs duty to imports of a particular originating good up to a specified quantity (in-quota quantity), and at a different rate to imports of that good that exceed that quantity”. Canada maintains TRQs on more than a dozen different categories of dairy products that are administered through an import licensing system and must be allocated to eligible applicants.
As explained by the USTR, when allocating TRQ quota volume, before it even considers any applications for TRQ volume submitted by importers, Canada first divides the total quota volume into different portions, or pools, some of which are accessible only to processors or “further processors”. In a series of notices issued by Global Affairs Canada in this regard, either 85% of the TRQ had been allocated to “processors” or 80% to processors with another 10% allocated to “further processors.”
By limiting allocations to processors in this way, the USTR argues that Canada “eliminates quota that may be utilized by non-processors, such as retailers, to import higher-value products for retail sale and harms U.S. suppliers that seek to sell products directly to the Canadian retail market.”
“Reserving any portion of the quota, no matter how large, for processors before the procedure for dividing up the quota into portions based on applications is even administered plainly is biased and unduly favorable to processors and against other potential users of the quota,” the USTR says.
Interestingly, the European Union seems to have anticipated this kind of issue and included language into its trade with Canada that specified the importers must be 50% retailers and 50% new entrants. The U.S. did not get this kind of mandatory market share requirement included in the USMCA, however, which allowed Canada to proceed as it did.
Canada’s Alleged Inconsistencies with USMCA
The USTR maintains that Canada’s notices to importers reserving a quota allocation for processors, including further processors, and prohibiting retailers from accessing the quotas, are inconsistent with several provisions of the USMCA. Specifically, it argues that Canada is breaching its commitments in the following five ways:
- in Article 3.A.2.11(b) not to “limit access to an allocation [of a TRQ] to processors”;
- in Article 3.A.2.11(c) to ensure that in the administration of an allocated TRQ, “each allocation is made … to the maximum extent possible, in the quantities that the TRQ applicant requests”;
- in Articles 3.A.2.4(b) to “ensure that its procedures for administering its TRQs … are fair and equitable”;
- in 3.A.2.11(e) to ensure that in the administration of an allocated TRQ, “allocation to eligible applicants shall be conducted by equitable and transparent methods”; and
- in 3.A.2.6(a) (read together with Canada’s Schedule to Annex 2-B, Appendix 2, Section A, paragraph 3(c)) to not “introduce a new or additional condition, limit, or eligibility requirement on the utilization of a TRQ” that are “beyond those set out in [Canada’s] Schedule to Annex 2-B.”
Under the dispute resolution provisions of the USMCA, a three-person panel appointed earlier this month must present an initial report to the parties prior to December 2, 2021.
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