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Supply Management and CUSMA, Part IV: A Rematch and a New Challenger…a Never-Ending Story

This March, we reviewed the ruling in the Canada United States Mexico Agreement (CUSMA) challenge of Canada’s Dairy Tariff Rate Quotas (TRQs)[1]. The Panel found that Canada’s practice of reserving 85-100% of dairy TRQs for processors violated Article 3.A.2.11(b) of CUSMA. Citing the principle of “judicial economy,”[2] the panel members left it for the two sides to work out a solution without applying the strict guidelines the United States was seeking.

At the time, we queried whether the combination of the lack of a strict roadmap and strong domestic pressures in both countries would lead to further CUSMA action. We also noted that Canada’s dairy import obligations under its other trade agreements might lead to other challenges. Now the United States has indeed taken steps towards launching a new CUSMA challenge and New Zealand has now requested consultations regarding Canada’s dairy TRQs and its obligations under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

A U.S. Rematch?

In the Canada-U.S. context, Canada did consult with its own dairy industry and also with U.S. officials before announcing modifications to its TRQ regime.[3] As per Canada’s Minister of Minister of International Trade, Export Promotion, Small Business and Economic Development:

Following public consultations from March 2 to April 19, Canada has published new CUSMA dairy TRQ allocation and administration policies. The CUMSA dispute settlement panel’s report ruled in favour of Canada in a majority of the claims. The new policies address the sole finding of a CUSMA dispute panel that Canada’s practice of reserving TRQ pools exclusively for the use of dairy processors is inconsistent with the Agreement. The new policies end the use of processor-specific TRQ pools.[4]

Canada announced that distributors would be eligible to apply for the CUSMA Industrial Cheese TRQ and indicated that it was opening the application process for “interested entities, who are not current allocation holders” for previously unallocated quota under the 2022 CUSMA dairy TRQs.[5]

Global Affairs Canada stated that “… given Canada’s deep concerns with the discriminatory electric vehicle tax credits proposed in the Build Back Better bill under U.S. Congress consideration, a decision regarding the potential allocation of the previously unallocated quota under the 2022 CUSMA calendar year dairy TRQs will be taken as the issue evolves, but not later than July 31.”[6]

Canada made no changes to existing ministerial allocation policies with respect to its TRQ commitments under the WTO and CPTPP.[7]

The United States quickly responded that it was not satisfied and it requested new CUSMA consultations with Canada, setting the stage for a second dispute-settlement panel, as per the United States Trade Representative (USTR):

I am deeply troubled by Canada’s decision to expand its dairy tariff-rate quota restrictions … We communicated clearly to Canada that its new policies are not consistent with the USMCA and prevent U.S. workers, producers, farmers, and exporters from getting the full benefit of the market access that Canada committed to under the USMCA. We will continue to work … to ensure that our dairy industry can bring a wide range of high-quality American products to Canadian customers. [8]

In its request for consultations, the USTR claims that Canada’s dairy TRQ practices continue to contravene its CUSMA obligations including by:[9]

  • Continuing to limit access to dairy TRQs to processors, further processors, and distributors while denying access to retailers, food service operators, and other eligible applicants.
  • Failing to allocate the TRQ to “eligible applicants” while introducing “… a new or additional condition, limit, or eligibility requirement …”
  • Restricting access to product-specific products by imposing a requirement that applicants be active participants in the quota during the 12-month reference period, discouraging new entrants.
  • Limiting its initial allocation of 2022 TRQs for dairy products to one quarter of the total TRQ quantities with the balance to be released at a later date.

A New Challenger

With the prospect of a second CUSMA panel and tensions between the two North American dairy industries mounting, another long-time trade partner launched formal dispute-settlement process vis-à-vis access against Canada.

On May 12, 2022, New Zealand requested consultations pursuant to Article 28 of the CPTPP. New Zealand’s Trade and Export Growth Minister commented,

New Zealand considers the manner in which Canada is implementing its dairy TRQs to be inconsistent with its obligations under CPTPP. …. New Zealand exporters … are not able to fully benefit from the market access that was negotiated under the agreement. Many of Canada’s dairy TRQs remain unfilled and this represents a tangible loss to New Zealand’s dairy exporters. The value to New Zealand of this lost market access is estimated to be approximately $NZ 68 million over the first two years, with this expected to increase year on year as the size of these quotas increase under CPTPP.[10]

As part of the CPTPP negotiations, which were completed in 2018, [11] Canada agreed to provide the ten participating countries with a combined overall tariff-free access to 3.25% of its domestic dairy market, phased in over a period of six years.[12] This access included a wide-range of dairy categories ranging from fluid milk to cheese to yogurt.[13] New Zealand has expressed disappointment that Canada has failed to import the quantity of dairy product expected under agreement and that the “fill rate” is “unacceptably low,” with import volumes below 10 per cent of the negotiated level in some categories.[14]

In its request for consultations, New Zealand set out the 16 dairy TRQs Canada agreed to in the CPTPP, and outlined the elements of complaint:[15]

  • Canada’s failure to ensure that its administrative procedures are “fair and equitable” and no more “burdensome than necessary.”
  • Canada’s practice of limiting “access to processors.”
  • Canada’s failure to ensure that “any person of a Party that fulfils [Canada’s] eligibility requirement is able to apply and is considered for a quota allocation.”
  • Canada’s failure to ensure that “it does condition access to an allocation on the purchase of domestic product.”
  • Canada’s introduction of additional conditions “including in relation to specification or grade, permissible end-use or package size.”

When Canada announced its changes intended to address the first CUSMA ruling, its officials considered that this brought it into conformity with its CUSMA obligations. Minister Ng declared that Canada “…will always stand up for its dairy industry, farmers and workers and the communities they support … when global food security is under threat, it is even more important that we strengthen and maintain a strong and vibrant domestic dairy industry.”[16]

In the current context, it is hard to foresee Canada and the United States finding middle ground or that either side simply walks away. Canada is likely to reiterate arguments it made in the first CUSMA case about the administrative flexibility needed to guard against both market saturation and undersupply. In the event the United States asks a second panel to examine Canada’s response to the first ruling, Canada will point to first panel’s deference to Canada’s “… significant discretion in designing and implementing its allocation mechanism …”[17] The United Sates would likely respond that Canada cannot be trusted use its discretion fairly.

In response to New Zealand’s challenge, Canada is on the record as claiming that it is meeting its CPTPP commitments[18] and its officials have pointed out that “fill rates” are influenced by the market, including “competitive domestic prices, low domestic demand, market proximity, and transportation costs….”[19] Canada has also pointed out that that New Zealand has been successful in access for key products such as cheese and butter. For butter the TRQ “has been almost completely filled, virtually all of which was of (New Zealand) origin.”[20]

The spectre of two parallel disputes under two different agreements underlines the pressure that Canadian trade officials are under with respect to the defence of supply management. A CPTPP panel will not be bound by CUSMA precedent, but it would be left with the same kind of dilemma that a second CUSMA panel faces and we may be looking at something of a “zero-sum” decision. Has Canada successfully bargained for an increased market opportunity for its trade partners while being allowed to keep a firm domestic (home-field) advantage as to the system’s administration? Or is Canada guilty of fettering this discretion in such a way as to substantially undermine the bargained concessions?

In the broader context, there is concern that the costs Canada is facing for its determined defence of supply management are mounting, as the Government faces increasing pressures from both its international trading partners as well as its own domestic consumers.[21]

On the one hand, with the rising price of milk and other dairy products,[22] Canadian consumers may start seriously questioning maintaining a system which an OECD report indicated costs them “billions every year.”[23] On the other, the fact that Canada is already linking a vital trade policy interest—the proposed U.S. domestic electric vehicle tax credit—and the mounting isolation it faces internationally may force officials to reassess. As New Zealand’s trade minister said during a recent visit to Ottawa, once the dairy dispute is resolved, “the sky is the limit” in terms of the Canada-New Zealand’s trading relationship.[24]

The saga of the “dairy wars” continues.

_______________________________

[1] Canada-Dairy TRQ Allocation Measures (CDA-USA-2021-31-010).  December 20, 2021. Online: https://ustr.gov/sites/default/files/enforcement/USMCA/Canada%20Dairy%20TRQ%20Final%20Panel%20Report.pdf

[2] Ibid. para 165

[3] Statement by Minister Ng on dairy tariff rate quota policies under CUSMA. Global Affairs Canada, May 16, 2022. Online: https://www.canada.ca/en/global-affairs/news/2022/05/statement-by-minister-ng-on-dairy-tariff-rate-quota-policies-under-cusma.html

[4] Ibid

[5] Message to Industry – Opening of the Application Period for the 2022-2023 Dairy Year TRQs and CUSMA Calendar Year 2022 Dairy TRQs (August to December 2022). Online: https://www.international.gc.ca/trade-commerce/controls-controles/messages/2022-05-16-message-industry-industrie.aspx?lang=eng

[6] Ibid

[7] Message to Industry – Opening of the Application Period for the 2022-2023 Dairy Year TRQs and CUSMA Calendar Year 2022 Dairy TRQs (August to December 2022), op. cit.

[8] United States Initiates Second USMCA Dispute on Canadian Dairy Tariff-Rate Quota Policies.  USTR, May 25, 2022. Online: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/may/united-states-initiates-second-usmca-dispute-canadian-dairy-tariff-rate-quota-policies

[9] Ibid. See also: https://ustr.gov/sites/default/files/enforcement/USMCA/US%20Cons%20Req.for.USTR.website%20(1).pdf

[10] Ibid

[11] Hon. Damien O’Connor, New Zealand initiates dispute settlement proceedings against Canada’s implementation of dairy quotas under CPTPP. Government of New Zealand, May 12, 2022. Online: https://www.beehive.govt.nz/release/new-zealand-initiates-dispute-settlement-proceedings-against-canada%E2%80%99s-implementation-dairy

[12] Dairy Processors Association of Canada (DPAC), Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Online: https://www.dpac-atlc.ca/trade/cptpp/. Also, Agriculture Canada, Dairy Import Trade Facts. Online: https://agriculture.canada.ca/sites/default/files/legacy/pack/pdf/DairyImportInfographic-en.pdf

[13] Global Affairs Canada, Consolidated TPP Text – Appendix A to Tariff Schedule of Canada – (Tariff Rate Quotas). Online: https://www.international.gc.ca/trade-commerce/consultations/cptpp-ptpgp/index.aspx?lang=eng

[14] Jake Edmiston, New Zealand cheers Canada’s loss in dairy dispute and calls for ‘significant reform’. Financial Post, January 18, 2022. Online: https://financialpost.com/news/economy/new-zealand-cheers-canadas-loss-in-dairy-dispute-and-calls-for-significant-reform

[15] Canada – Dairy TRQ Allocation Measures, May 12, 2022. Online: https://www.mfat.govt.nz/assets/Trade-General/WTO-Disputes/Request-for-consultations-by-New-Zealand-regarding-Canadas-allocation-of-dairy-TRQs-under-CPTPP.pdf

[16] Statement by Minister Ng on dairy tariff rate quota policies under CUSMA, op. cit.

[17] Para 159 and 160, Canada-Dairy TRQ Allocation Measures (CDA-USA-2021-31-010), op. cit.

[18] Ibid

[19] Jake Edmiston, op. cit.

[20] Ibid

[21] Rita Trichur, Dairy Market Protectionism Exposing Ottawa’s Hypocrisy on Free Trade. Globe and Mail, July 8, 2022. Online: https://www.theglobeandmail.com/business/commentary/article-canada-protectionist-dairy-policies/

[22] Patrick Brethour, How Canada’s Regulated Dairy Prices have Milked Consumers. Globe and Mail, July 9, 2022. Online: https://www.theglobeandmail.com/business/article-price-milk-dairy-inflation-canada/

[23] Ibid

[24] Rita Trichur, op. cit.

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