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CUSMA Dairy Challenge, Part III: Glass Half Full or Pyrrhic Loss?

On January 4, 2022, the Canada United States Mexico Agreement (CUSMA) Panel on Canada’s Dairy Tariff Rate Quotas (TRQs) released its ruling.[1]

The Panel Decides—Both Sides Claim Victory

The Panel ruled that Canada’s practice of reserving 85-100% of dairy TRQs for processors violated Article 3.A.2.11(b) of CUSMA. The United States claimed victory, correctly pointing out that the Panel had accepted the U.S. argument on the central issue. As per USTR Katherine Tai:

This historic win will help 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.[2]

Canada was equally quick to claim a win, pointing out that the result was not a defeat for Canada’s supply management system. Both Minister of International Trade, Export Promotion, Small Business and Economic Development Mary Ng and Minister of Agriculture and Agri-Food Canada Marie-Claude Bibeau welcomed the ruling:

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.[3]

What do we make of each side proclaiming victory? Beyond the usual practice of applying political “spin” to put the best light on the result, perhaps the claim of victory from both sides belies the consideration that the battle over supply management has ended with this Panel finding. That is not the case. As negotiations to implement the Panel’s decision proceed, it is likely that more battles lie ahead.

Canada’s Defence

In our previous articles we reviewed the trade policy issues related to Canada’s supply management system for dairy and other products.[4] We also examined the relevant CUSMA measure and the case put forward by the United States[5]; in summary, Canada’s practice of allocated 90 to 95 percent of the TRQ to “processors” of “further processors,” contravened Article 3.A.2.11(b), which bans parties from allocating “any portion of the quota to a producer group … or limit access to an allocation to processors.” The United States argued that this severely limited the U.S dairy industry’s access to non-producers such as distributors and retailers–the simpler and more lucrative market.

Canada answered that the U.S argument was based upon a faulty interpretation of the term “allocation” and that a TRQ is not “allocated” “ … unless and until the shares of the in-quota quantity are allocated to individual applicants.”[6] In essence, Canada argued that Article 3.A.2.11(b) did not prevent Canada from establishing “pools” of TRQ exclusively processors and also pointed to the fact that non-processors do have some access to TRQ.[7]

Canada also argued that the United States position was based on an incorrect understanding of the operation of the supply management system and role that processors play—as both purchasers and sellers of dairy products, they “help guard against both market saturation and undersupply … Reserving TRQ pools for processors moderates market unpredictability and allows for more accurate forecasts.”[8] Pointing to its longstanding practice of creating pools for processors under its WTO TRQ and other trade agreements, Canada argued that it had made it clear to U.S. negotiators that the granting “significant TRQ volumes” under CUSMA was “conditional” on its ability to maintain its practice of reserving “pools” for processors.[9]

The Panel Decides—No to a “Ringed-Fenced” Regime

The Panel rejected Canada’s argument relying on the wording of Article 3.A.2.11(b).

    1. A Party administering an allocated TRQ shall ensure that:

(b) unless otherwise agreed by the Parties, it does not allocate any portion of the quota to a producer group, condition access to an allocation on the purchase of domestic production, or limit access to an allocation to processors;

It determined that Canada’s practice of reserving access of 85% or more of the 14 dairy CUSMA processors was indeed inconsistent with Article 3.A.2.11(b). More specifically, the Panel found that Canada had failed to “ensure that, unless otherwise agreed by the Parties … [it did] not limit access to allocation to processors.”[10]

With respect to Canada’s argument that the “pool” reserved for processors was not an “allocation,” the Panel pointed out that Canada’s own Notices to Importers refer fixed pools to TRQ as “allocated to processors.”[11] The Panel addressed Canada’s broader arguments which relied on its long-time and (from Canada’s perspective) or impliedly accepted practices, the critical role of processors, and its understanding of what was negotiated. It found that Canada’s practices under its other trade agreements (which it noted had not faced a dispute settlement review) and Canada’s statements during the CUSMA negotiations failed to establish a “common intent[12] of the Parties in a way that would trump its interpretation based on the wording of Article 3.A.2.11(b). While the Panel acknowledged the importance of the role of the processors to the Canadian dairy industry, it determined that (pursuant to Article 3.A.2.11(b)) “ … Canada cannot, in substance, ring-fence and limit to processors … a reserved ‘pool’ of TRQ amounts to which only processors have access.”[13]

The U.S. Win—Glass Half Full?

… or half empty? The United States won the battle. But what about the war? The U.S. case included claims that Canada had failed to ensure that the TRQs in question were being administered in a “fair,” “equitable,” and “transparent” way.[14] It also asked the Panel to rule that Canada had failed to provide allocations requested by the U.S. dairy industry and that it was imposing “new or additional conditions to limits the TRQ.[15] The Panel declined to rule on these points and go beyond its ruling that Canada’s current practice of reserving TRQ pools for processors was inconsistent with the CUSMA.

Citing the principle of “judicial economy,”[16] the Panel left it to the Parties to work out a solution without strict guidelines one assumes the United States would have preferred. The Panel gave the Parties until February 3, 2022, to agree on a resolution of the matter—in effect a new set of negotiations.

Canada has maintained its supply management system in some form for almost a century[17] and its negotiators have been successful carving out the trade law exception needed to insulate it from challenges since the GATT in 1947, through to the WTO and NAFTA. Under strong pressure, Canada did grant some access to its $16 Billion annual dairy market in the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In the case of the CUSMA, its negotiations where again able to preserve right the maintain the system.

During the CUSMA negotiations, Canada fought off a full court press by the Trump Administration who sought an end to the import restrictions integral to operation of its system. They did cede new access to the United States—about 3.5% of the market—estimated to be worth USD $300 Million a year to the U.S. industry.[18] Will the United States and its politically powerful diary industry be satisfied with a CUSMA win that offers little in terms of increased access to the lucrative distributor and retail market?

To date, we do not know the results of post-finding negotiations and whether officials from both sides will be able to find a path through the Byzantine supply management regime that both satisfies both U.S. access expectations and protect the central role of processors that Canada maintains is essential.

Pyrrhic Loss?

Canada had reason to be content with the Panel’s ruling. As Prime Minister Trudeau pointed out, the Panel did not rule on four additional U.S. claims.[19] As Minister Ng noted (see above), the Panel did show Canada a significance amount of deference, stating that, “… Canada has significant discretion in designing and implementing its allocation mechanisms … The Panel takes seriously … the importance of the processors in the Canadian dairy industry [and] Canada’s interests in regulating supply and demand … ”[20]

A ”Pyrrhic victory” is sometimes defined as one that causes so much damage that is tantamount to a defeat. It may well be that Canada’s apparent celebration of confirmation of the legitimacy of Canada’s supply management may be viewed as something of an overstatement. In fact, the consistency of the system with the CUSMA was never in question. That battle was fought out in the CUSMA negotiations. Pointing to the U.S. submission, the Panel noted that the United States had indicated that it was not challenging Canada’s right to maintain its supply management system.[21] It also noted that Article 3.A.2 “explicitly recognizes” Canada’s right to maintain and administer the TRQs essential to supply management.[22]

Canada should not be too quick to claim victory. The loss might be characterized as narrow and circumscribed. And the battle for improved dairy access is not over for the U.S. officials who must keep negotiating with Canadian officials. The Panel largely left Canada with the task of adjusting its system to comply with CUSMA to Canada.

For Canada, however, the context has changed from the 1995 NAFTA battle. In 1995, the first NAFTA Panel took a broad approach and accepted Canada’s arguments about the underlying “object and purpose” of the Parties in the NAFTA negotiations on supply management and dismissed the U.S. direct attack on the key pillar of supply management – import restrictions made effective though prohibitive tariffs.[23] While the CUSMA Panel did defer to the discretion of Canadian officials with respect to bringing the system into line with its obligations, it took a hardline on the Article 3.A.2.11(b)—the “ordinary reading” of the Processor Clause. This meant that pursuant to CUSMA, “Canada cannot ‘limit access to an allocation’ only to processors.”[24]

This ruling may well set a new hard “red-line” precedent in any future CUSMA dispute. This may help drive U.S. officials, who face strong pressure from its dairy industry, to keep the pressure on Canada via further CUSMA action. For Canada, there is strong domestic pressure from dairy farmers who claim that the combined effect of the access granted to importers from CUSMA, CETA, and CPTPP partners is undermining the viability of supply management. They are pushing for Canada to hold the line. At the same time, the precedent of the CUSMA Panel may encourage some of Canada’s other trade partners to mount challenges of their own.

Canada will have to play the cards the Panel handed them with great skill as the battle continues.

__________________________

[1] Canada-Dairy TRQ Allocation Measures (CDA-USA-2021-31-010); December 20, 2021; Canada Dairy TRQ Final Panel Report.pdf (ustr.gov)

[2] United States Prevails in USMCA Dispute on Canadian Dairy Restrictions; USTR Press Release, January 4, 2022; https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/january/united-states-prevails-usmca-dispute-canadian-dairy-restrictions

[3] Minister Ng and Minister Bibeau welcome Canada-United States-Mexico Agreement dispute settlement panel report on dairy tariff rate quotas; Global Affairs Canada, January 4, 2022;  Minister Ng and Minister Bibeau welcome Canada-United States-Mexico Agreement dispute settlement panel report on dairy tariff rate quotas – Canada.ca

[4] CUSMA Dairy Challenge: “Déjà Vu All Over Again …”; Slaw, January 19, 2021; CUSMA Dairy Challenge: “Déjà vu all over again …” – Slaw

[5] CUSMA Dairy Challenge, Part II: Canada v United-States; Slaw, September 21, 2021; CUSMA Dairy Challenge, Part II: Canada v United-States – Slaw

[6] Panel Report para. 93

[7] Ibid.

[8] Ibid. para 140

[9] Ibid. paras 146-152

[10] Ibid. para 98

[11] Ibid. para 110

[12] Ibid. para 157

[13] Ibid. para 163

[14] Ibid. para 164

[15] Ibid. para 164

[16] Ibid. para 165

[17] CUSMA Dairy Challenge: “Déjà Vu All Over Again …”; Slaw, January 19, 2021; CUSMA Dairy Challenge: “Déjà vu all over again …” – Slaw

[18] CUSMA Dairy Challenge, Part II: Canada v United-States; Slaw, September 21, 2021; CUSMA Dairy Challenge, Part II: Canada v United-States – Slaw

[19] Canada’s Dairy Trade Conduct Violates USMCA Pact, First Panel Rules; Globe & Mail, January 4, 2022; Canada’s dairy trade conduct violates USMCA pact, first panel rules – The Globe and Mail

[20] Panel Report para. 159 and 160

[21] Ibid.

[22] Ibid. para 159

[23] CUSMA Dairy Challenge: “Déjà Vu All Over Again …”; Slaw, January 19, 2021; CUSMA Dairy Challenge: “Déjà vu all over again …” – Slaw

[24] Panel Report para. 158

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