CUSMA Dairy Challenge, Part II: Canada v United-States

The United States has taken the next step in its trade dispute with Canada and asked for the establishment of a panel to examine its complaint regarding Canada’s administration of its tariff-rate quotas (TRQ) allocations for 14 dairy products.[1]

In its request, the United States Trade Representative (USTR) [2] claims that Canada’s allocation of import quotas exclusively to “producers” violates the terms of Canada’s commitments in the schedule to annex 2-B[3] of the Canada-United States-Mexico Agreement (CUSMA). The request was made pursuant to Article 31.6 state-to-state dispute resolution provisions available when a CUSMA party’s rights have been nullified or impaired.[4]

Despite strong U.S. pressure during CUSMA negotiations to eliminate import restrictions that are essential to the functioning of the supply management system, Canada was successful in pushing back. However, as in the case of the Canada–European Union Comprehensive Economic and Trade Agreement (CETA), and the Comprehensive and Progressive Agreement for Trans–Pacific Partnership (CPTPP), it did make concessions.

Under the CUSMA, Canada agrees to provide U.S. dairy sector access to about 3.5% of its estimated $16 billion annual domestic market.[5] Canada committed to increase its dairy import quotas by 500% by the sixth year after the Agreement comes into force, and then provide a 1% annual incremental increase thereafter until year nineteen.

In addition, the CUSMA provides for the elimination of prices associated with milk classes 6 and 7.[6] The U.S. dairy industry can access 50,000 tonnes of fluid milk and 12,500 metric tonnes of cheese duty free by year six of the agreement via import permits (pursuant to TRQs) which allow resident Canadians to import the agreed-upon volumes of U.S.-origin milk ingredients.[7]

The CUSMA panel will take place pursuant to CUSMA’s “new and improved” state-to-state dispute settlement provisions. Echoing its approach in the early days of the NAFTA,[8] the United States has made its long-standing issues with Canadian dairy practices an early CUSMA target. In 1995, the United States launched the first NAFTA trade challenge.[9] It was the first and only NAFTA Chapter 20 Canada-U.S. dispute as the agreement’s state-to-state provisions fell into disuse.

The CUSMA state-to-state dispute settlement process, set out in chapter 31, includes important improvements with key changes to the panel selection process, transparency of panel hearings, and the rules of procedure.[10] Unlike the NAFTA procedure, each party must maintain a roster of ten panelists for disputes as they arise.[11] Necessary qualifications for panelists are set out in Article 31.8 and include international law and trade experience, objectivity, independence, and compliance with a code of conduct. This is intended to address the NAFTA shortcoming where parties were able to effectively block the process by simply not nominating panelists. In this case, the parties have agreed to the appointment of a highly regarded international legal expert and diplomat, Elbio Oscar Roselli Frieri, as chair of the panel. He was previously Uruguay’s ambassador to Canada. The U.S. appointed Julie Bédard and Canada named Mark C. Hansen as its appointee to the panel.[12]

The first steps in the dispute resolution have taken place. The parties have met for consultations as set out in Article 31.2 and since the parties have neither reached a resolution nor opted for the Article 31.5 option for “mediation, good offices and conciliation,”[13] the USTR requested that a panel be established and provided the required terms of reference for the panel’s consideration pursuant to Article 31.2. The panel will assess written submissions and there will be at least one in-person public hearing, hosted in Ottawa[14], at which the parties submit affidavit and testimonial evidence. The panel will make determinations of fact, determinations regarding the relevant provisions in the terms of reference, provide reasons, and recommended resolutions, if requested by the parties.[15] All determinations are made by majority-decision.

The final report of the panel is due within 120 days after the appointment of the last panelist for disputes concerning perishable goods and 150 days for non-perishables.[16] Within 45 days from the receipt of the final report, the disputing parties must agree on an appropriate resolution, or the complaining party can take measures against the responding party of equivalent effect to the non-conformity or nullification until a resolution is agreed upon.[17] If unilateral measures are taken, the opposing party can request the panel to reconvene to assess the proportionality of those measures. We note that once a CUSMA process has been selected, the dispute cannot be brought to other forums such as the WTO. For this context, complaining parties must consider that unlike the WTO process, Chapter 31 does not provide for an appeal procedure.[18]

According to Inside U.S. Trade, the USTR argues that by reserving a large percentage of the TRQ for dairy processors, Canada is in breach of both the letter and spirit of CUSMA’s Chapter 3 provisions. [19] On July 12, 2021, the USTR filed its first written submission.[20] Building on the four points raised in its request for consultations,[21] the USTR agues that Canada is in violation of provisions of the TRQ administration rules set out in Chapter 3. Referring to 21 Global Affairs Canada Notices to Importers Global Affairs issued in 2020,[22] the USTR argues that Canada has wrongly allocated 90 or 95% of the TRQ to “processors” or “further processors,” with the result that U.S dairy industry’s access to non-producers such as distributors and retailers – the simpler, more lucrative market – is severely limited. It cites 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.” It also relies on Article 3.A.2.11(c)’s requirement that TRQ allocations “shall be made in the quantities requested by applicants to the maximum extent possible.”

In addition, the USTR argues that Canada’s TRQ administration violates Article 3.A.2.6(a), (read together with Section A, Paragraph 3(c) of Canada’s tariff schedule) in that parties are not permitted to introduce new conditions, limits, or eligibility requirements on TRQ utilization without consulting with other CUSMA parties. For the USTR, the condition that one must be a processor to receive an allocation from the reserved pool within the quota and utilize the TRQ is a new condition.

In terms of the spirit of the CUSMA, the USTR argues that Canada’s procedure is neither “fair” nor “equitable” as per Article 3.A.2.4(b) and Article 3.A.2.11(e). By reserving a large portion of the quota for processors before dividing up the quota between applicants fails to provide an equal chance to all potential users of the quota, according to the U.S. submission.[23]

 Canada’s Minister of Small Business, Export Promotion and Trade has expressed confidence “… that our policies are in full compliance with our CUSMA TRQ obligations.” Minister Ng has also indicated that “…we will vigorously defend our position during the dispute settlement process.”[24] We have yet to see the substance of Canada’s defence.

Looking back to the NAFTA dairy case, many predicted a U.S. win. However, Canada’s complex defence was successful. It may be that Canada will ask the panel to consider the broader context of the history and complexity of its supply management system, the need to ensure the critical role of producers in preserving the livelihood of dairy farmers, and the continued operation and survival of the dairy industry. Perhaps the definition of “producer groups” will be the subject of further examination. Does this mean producers writ large or a specific or specified group?

In terms of the “spirit” of the CUSMA, it seems that Canada has some allies in the United States. While the majority of the powerful U.S. lobby vigorously supports the trade challenge, a group representing 21 farmer, worker, and civil society organizations in the dairy industry and broader U.S. food system petitioned the Biden-Harris administration to end the case in the interest of advancing strong worker rights protection and dairy policy reform. This U.S. dairy lobby group believes “the spirit” of the new NAFTA agreement means that the U.S. should not undermine the system by importing their highest value processed products.[25]

…instead of undermining Canada’s dairy system, [the United Sates] should take a page from Ottawa’s popular playbook. We call on them to work with dairy farmer organizations and Congress to design and implement dairy pricing reform and market management policies that protect small farmers, ensure fair prices, and support working families and thriving rural communities. We agree with the Canadian position … and [are] in solidarity with Canadian dairy farmers and dairy workers, we urge the Biden administration to withdraw the complaint,” the American allies countered in their letter.[26]

 The stakes are high. The Biden Administration faces strong pressure from large U.S. producers hungry for the lucrative Canadian distribution/retail sector who are politically powerful (e.g., Wisconsin) and unhappy that the United States did not get a better result in the CUSMA negotiations. For Canada, a loss on this issue could cause important damage to the integrity of the supply management system and an industry – especially the domestic industry’s 470 processing facilities – that already consider that Canada’s current CUSMA concessions will cost the Canadian economy over $100 Million.[27] A loss in this dispute may well also encourage Canada’s CETA and CPTPP partners to launch their own disputes.

The stakes are indeed high. Who will win? As the well-known Canadian trade policy expert Peter Clark responded when asked about the then on-going 1995 NAFTA case, “You never know how panels are going to come out … It’s a crap shoot.”[28]

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[1] USTR Panel Request Letter. May 25, 2021. Online: https://ustr.gov/sites/default/files/IssueAreas/Trade%20Organizations/USMCA/US.Pnl.Req.25May21.FINAL%20(unsigned)%20(wo%20address).pdf

[2] USTR, Mission of the USTR. Accessed: June 14, 2021. Online: https://ustr.gov/about-us/about-ustr

[3] USTR Panel Request Letter, Supra note 1.

[4] CUSMA Article 31.2

[5] Hannah Jackson, Should Canadians worry about the arrival of more U.S. dairy under CUSMA? Global News, July 9, 2020. Online: https://globalnews.ca/news/7145001/us-dairy-canada-cusma/

[6] Khamla Heminthavong, Canada’s Supply Management System; Library of Parliament, Publication No. 2018-42-E. Online: https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201842E

[7] Kathy Holtslander, Op Ed: US farm groups and unions ask Biden to end CUSMA attack on Canada’s supply management system. The National Farmer’s Union, February 16, 2021. Online: https://www.nfu.ca/op-ed-us-farm-groups-and-unions-ask-biden-to-end-cusma-attack-on-canadas-supplymanagement-system/

[8] Michael Woods and Gordon LaFortune, CUSMA Dairy Challenge: “Déjà Vu All Over Again …” Slaw, January 19, 2021. Online: https://www.slaw.ca/2021/01/19/cusma-dairy-challenge-deja-vu-all-over-again/

[9] In the Matter of Tariffs Applied by Canada to Certain U.S. – Origin Agricultural Products [NAFTA Secretariat No. CDA-USA-1995-2008-01]. Online: http://publications.gc.ca/collections/Collection/E100-2-1-95-2008-01E.pdf; for more details, see joint article by Alan Willis QC and Michael Woods, The NAFTA Panel Decision on Supply Management: Gamble or Bargain? The Canadian Yearbook of International Law Vol 35, 1997: pp.81-112. https://www.cambridge.org/core/journals/canadian-yearbook-of-international-law-annuaire-canadien-de-droit-international/article/abs/nafta-panel-decision-on-supply-management-gamble-or-bargain/718EA44C2FB31B83A85B093AC6EC9370

[10] Anita Balakrishna, After CUSMA Breakthrough, International Trade Experts vie for Panel Spots. Law Times, January 20, 2020. Online: https://www.lawtimesnews.com/practice-areas/crossborder/after-cusma-breakthrough-international-trade-experts-vie-for-panel-spots/325210

[11] Panelists do not have to be rosters members, but non-roster panelists may be subject to peremptory challenges by the opposing party.

[12] RealAgriculture, July 9, 2021. Online: https://www.realagriculture.com/2021/07/dispute-panel-formed-for-u-s-dairy-complaint/

[13] CUSMA, Article 31.5

[14] The responding party’s capital – CUSMA, Article 31.11.1(a)

[15] CUSMA, Article 31.13

[16] CUSMA, Article 31.17

[17] CUSMA, Article 31.19

[18] Congressional Research Service, Enforcing International Trade Obligations in USMCA: The State-State Dispute Settlement Mechanism. January 3, 2020. Online: https://crsreports.congress.gov/product/pdf/IF/IF11399

[19] Op cit Inside U.S. Trade; July 13, 2021

[20] Brett Fortnam, U.S. lays out argument against Canada in dairy TRQ dispute; Inside U.S. Trade – World Trade Online; July 13, 2021

[21] Op. cit. Slaw: January 19, 2021

[22] https://www.international.gc.ca/trade-commerce/controls-controles/notices-avis/1015.aspx?lang=eng#a1

[23] Ibid.

[24] Global Affairs Canada Statement by Minister Ng on U.S. request for dispute settlement panel on dairy TRQs under CUSMA. May 25, 2021. Online: https://www.canada.ca/en/global-affairs/news/2021/05/statement-by-minister-ng-on-us-request-for-dispute-settlement-panel-on-dairy-trqs-under-cusma.html

[25] Op.cit. Holtslander

[26] National Family Farm Coalition, Organizations urge U.S. to withdraw petition against Canadian dairy farmer. February 4, 2021. Online: https://nffc.net/organizations-urge-u-s-to-withdraw-petition-against-canadian-dairy-farmers/

[27] James McCarten, Canada’s dairy industry will lose $100M if CUSMA takes effect in July: senator. The Canadian Press, April 28, 2020. Online: https://globalnews.ca/news/6880811/usmca-canada-dairy-losses-plett/

[28] Canada Bracing to Fight for Tariffs, Globe and Mail. July 9, 1995