US Wins Dispute on Canadian Dairy TRQs
A Canadian practice of reserving at least 85% of dairy quotas for Canadian processors is counter to the USMCA, a panel ruled. The panel's decision was made public Jan. 4. Canada has until Feb. 3 to reform its tariff rate quota allocations. The Office of the U.S. Trade Representative noted that from January through October last year, the U.S. exported $478 million worth of dairy products to Canada.
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Canada reserved large portions of the quota for its processors because it guarantees a financial return to its dairy farms by limiting the amount of both domestic production and imports to match Canadian demand, and processors are part of that supply management system.
The International Dairy Foods Association said the end result was that quotas went unfilled; on average, just 68% were filled in the second year after the new NAFTA was signed. Its CEO said it welcomed the panel's findings, and thanked the administration's commitment to enforcing the provision.
Senate Finance Committee Chairman Ron Wyden, D-Ore., called USTR's resorting to a panel to resolve the dispute "effective action to ensure that our farmers received what we bargained for in USMCA.” House Ways and Means ranking member Kevin Brady, R-Texas, said, "Canada must now do the right thing and come into full compliance with its obligations on dairy. The Biden Administration must build on this success by standing up for the rights of American farmers, workers, families, and businesses with respect to all aspects of USMCA, including addressing a range of concerning issues in Mexico that are negatively affecting our American farmers and energy producers.”
The USMCA said explicitly that Canada cannot limit access to quotas to its own processors, unless the U.S. agrees to it. Canada had argued that even though some dairy subcategories had no room for direct U.S. exports -- and no category allowed more than 15% of the quota for finished U.S. dairy foods -- as long as any dairy TRQ was not limited to processors, then it was fulfilling its obligation.
Canada had also argued that the U.S. knew it would get around what looked like expanding access to U.S. dairy exports by controlling the TRQs through its own processors, since it does that in the Trans-Pacific Partnership. But the panel noted that the chief agricultural negotiator for Canada admitted "that Canada’s first clear communication of its position -- that the Treaty 'allows Canada to create pools reserved for processors and only prohibits a Party from issuing allocations under a TRQ exclusively to processors' occurred on April 1, 2020, in response to the United States raising the practice as a concern."
Canada spun the panel report as a victory for its side. Canada issued a statement from Trade Minister Mary Ng and Agriculture Minister Marie-Claude Bibeau that said, in part: "We are pleased with the dispute settlement panel’s report, which ruled overwhelmingly in favour of Canada and its dairy industry. In particular, it is important to note that the panel expressly recognizes the legitimacy of Canada’s supply management system. The panel also confirms that Canada has the discretion to manage its TRQ allocation policies under CUSMA in a manner that supports Canada’s supply management system."
The panel did write that Canada can grant 85% of its quota to its own processors through administrative means, as long as the system does not discriminate against U.S. firms. "Under the Panel’s decision, Canada is not restricted in the amount of quota it grants to processors; it is restricted in its ability to ring-fence all or any part of a TRQ quota and permit access only to processors," the findings said. The panel also wrote, "The Panel takes seriously Canada’s statements regarding the importance of processors in the Canadian dairy industry. The Panel does not question Canada’s interests in regulating supply and demand within its dairy industry, including by striving to ensure predictability in imports."
It is not clear how Canada will change its TRQs, as its statement just said that it recognizes it cannot reserve part of the quotas for its processors, and that it will work with the Canadian dairy industry on designing a solution. In the panel, Canada said it had considered historical, first-come, first-served, on-demand, market-share, equal-share, pro-rata and an auction or lottery to fulfill quotas, and saw problems with all those methods.