Canada’s Supply Management System Part v – New Zealand’s Trade Challenge

In our July 2022 update on the Canada- U.S. Canada-U.S.-Mexico Agreement (CUSMA) dispute over Canada’s supply management system for dairy products,[1] we referred to “new front” in the “dairy wars.“ New Zealand launched a complaint against Canada pursuant to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP),[i] taking issue with its lack of “promised access” to its otherwise restricted dairy market.[ii]

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… .[iii]

As part of its CPTPP commitments, Canada provides its partners with a combined duty-free access to 3.25% of its dairy market which is otherwise protected by prohibitive tariffs. Access to 16 dairy categories, ranging from fluid milk to cheese and yogurt is managed through Tariff Rate Quotas (TRQs)[iv] administered via an import licensing system. Import permits allow importers to draw upon the TRQ. Notices to Importers for each of the categories include “Eligibility Criteria” limiting imports to allocation holders determined pursuant to a pooling system with separate access for processors, further processors, and distributors. “Calculation of Allocations” is used to set specific percentages reserved for each eligible pool.

The CPTPP Panel released its findings in September 2023.[v] Both Canada[vi] and New Zealand[vii] quickly claimed victory. While Canada was able to point to the ruling as confirming its discretion to establish allocation policies and operate its pooling system, New Zealand could highlight the Panels’ ruling against Canada on the what it termed as the “heart of this dispute”[viii] – the practice of reserving access of large percentage of dairy products for processors and further processors.

Calculation of Allocations

In its Notices to Importers, Canada reserves a very large part of each of the 16 dairy categories for processors – varying between 80-85% for processors and between 10-20% for further processors. For New Zealand this was a breach Canada’s Article 2.30(1)(b) (the “Processor Clause”) that:

(b) unless otherwise agreed, 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.

New Zealand also argued that the setting of a reserved percentage of TRQs for allocations to processors, “impeded” its industry from accessing and utilising the entire TRQ amount in breach of Article 2.29(1):

1. Each Party shall administer its TRQs in a manner that allows importers the opportunity to utilise TRQ quantities fully.

The Panel had had no problem in finding Canada’s practice was inconsistent with Article 2.30(1)(b) which “ … operates to prohibit any mechanism that restricts access to all or any allocations to processors alone.”[ix] Canada had argued it allowed some limited access for non-producers but he Panel conclude that, “Canada’s interpretation would permit a Party to reserve 99.9% of the allocations available under a TRQ for processors, “ … an absurd result that gives the Processor Clause no meaningful effect.”[x] With respect Article 2.29(1), the Panel wrestled with “ … the broader treaty context regarding TRQs which represents a balance in the CPTPP between enhanced market access and the negotiated right to limit access via the quantity of a TRQ.”[xi] In the end the Panel followed the interpretation “that is more consistent with the liberalizing objective of the CPTPP.”[xii] While CPTPP permits Canada “some discretion “in implementing its allocation mechanism, its current “overly compartmentalized and complicated system”[xiii] undermined the opportunity for the of the TRQ quantities being taken up in their entirety. [xiv]

Eligibility Criteria

New Zealand argued that the Eligibility Criteria in the Notices to Importers limited the opportunity to apply for TRQ allocation to processors, further processors, or distributors this excluding other potential importers contrary to Article 2.30(1)(a)::

1. In the event that access under a TRQ is subject to an allocation mechanism, each importing Party shall ensure that:

(a) any person of a Party that fulfils the importing Party’s eligibility requirements is able to apply and to be considered for a quota allocation under the TRQ

It also that argued requirement that an importer fit within one of three pools to be able to access quota has the effect of introducing a new eligibility requirement beyond those set out in Canada’s Tariff Schedule contrary to Article 2.29(2)(a):

2. (a) Except as provided in subparagraphs (b) and (c), no Party shall introduce a new or additional condition, limit or eligibility requirement on the utilisation of a TRQ for importation of a good including in relation to specification or grade, permissible end-use of the imported product or package size, beyond those set out in its Schedule to Annex 2-D (Tariff Commitments).1

On this issue two of the Panel members (the majority) did not follow the “more liberalizing” interpretation but found for Canada deciding that Eligibility Criteria fell within Canda’s discretion and was not inconsistent with Article 2.30(1)(a). The Panel compared them to the “ types of procedural and administrative details that Parties choosing to employ an allocation mechanism, have some leeway to determine on an annual basis …”[xv] A finding for New Zealand … “would deprive Canada of the discretion that it has …. to determine the details of its allocation mechanism, including eligibility requirements, application procedures, application deadlines, and application methodologies …”[xvi] For Article 2.29(2)(a) the majority also decided in favour of Canada, ageing that provision did not apply to the allocation stage,[xvii] but to product focused requirements on the use of the TRQ for the actual importation of goods.

Eligibility Criteria – A Separate Dissenting Opinion

A dissenting member cited principle international customary law principle that ”agreements must be kept”[xviii] and concluded that Canada was unilaterally undoing its promise by over-extending the scope of “eligibility requirements.” The “Scope and General Provisions” of the Agreement meant that no new or additional conditions, limits, and/or eligibility requirements could be introduced.[xix] The dissent rejected Canada’s argument that Eligibility Criteria concerns the utilisation, not the allocation of TRQs reasoning that “ … the commonplace understanding of the term ‘eligibility requirements’ concerns importers only. If the CPTPP signatories had intended otherwise … they would of course have mentioned it.”[xx] For the dissenting member Canada’s pooling system operated to ensure active dairy importers that ae not processors, further processors, and/or distributors) are not allocated any share of Canada’s 16 TRQs^[xxi] contrary to Article 2.29(2)(a).[xxii] The dissent also found that setting fixed percentages reserved for each of the three types of importers as set out in the Calculation of Allocations also introduced a new limit contrary to Article 2.30(1)(a).[xxiii]

Where Next?

As per the norm in international trade settlement, the Panel left it to Canada bring itself into conformity.’’ The CPTPP permits Canada to maintain and operate its supply management system but it “… may not .. reserve access to some or all of its dairy TRQ allocations only to processors.”[xxiv] This will not be a simple task. As we have noted , Canada and its industry consider processors as key to maintaining the integrity and effective operation of the system “ … “ the vast majority of dairy TRQs should always be allocated to dairy processors [as they] have a proven track record as serious importers, with deep expertise of trends and Canadian consumer preferences.”[xxv]

The pressure on Canada will continue. Changes made to address similar findings on the processor issue in the CUSMA challenge were met with a sharp rebuke from the United States and a new trade challenge.[xxvi] Canada’s effective advocacy, the complexities of its system, the lack clarity in the text of the agreements has led this and previous Panels to struggled find the balance “ … between enhanced market access and the negotiated right to limit access via the quantity of a TRQ.”[xxvii] “Eligibility Criteria” are fine but “Calculation of Allocations” are in violation. The integrity of supply management is damaged but it survives. Without a new approach that adequately addresses the balance and concerns from both sides, Canada may have to face a world trading system hat is losing its patience. The dissenting view in the CPTPP Panel may gather momentum and the case for trade liberalization may override the intent to maintain the validity of the pooling system in future disputes. In all of this, we should forget that the provisions that allow any CPTP, CUSMA, or WTO member to maintain a supply management system were negotiated by Canada in the give and take of hard bargaining, agreed to and clearly and openly and adopted going all the way back to 1947 and the original GATT.

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[1] https://www.slaw.ca/2022/07/26/supply-management-and-cusma-part-iv-a-rematch-and-a-new-challengera-never-ending-story/ For more on Canada’s supply management system see previous SLAW articles including: https://www.slaw.ca/2022/07/26/supply-management-and-cusma-part-iv-a-rematch-and-a-new-challengera-never-ending-story/

[i] Text of the CPTPP: thttps://www.iilj.org/wp-content/uploads/2018/03/CPTPP-consolidated.pdf

[ii] For a detailed description of the operation of the TRQs see: https://www.international.gc.ca/trade-commerce/controls-controles/supply_managed-gestion_offre.aspx?lang=eng

[iii] 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: https://www.beehive.govt.nz/release/new-zealand-initiates-dispute-settlement-proceedings-against-canada%E2%80%99s-implementation-dairy

[iv] 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

[v] Canada – Dairy Tariff Rate Quota Allocation Measures (CDA-NZ-2022-28-01) [Final Report of the Panel] https://www.worldtradelaw.net/document.php?id=fta/panel/canada-dairytrq(cptpp).pdf&mode=download

[vi] “Canada is very pleased with the outcome of the panel’s report which is a clear victory for Canada.” Minister Mary Ng. CPTPP reaffirms Canada’s dairy supply management system, September 5, 2023. https://www.canada.ca/en/global-affairs/news/2023/09/cptpp-reaffirms-canadas-dairy-supply-management-system.html

[vii] “This is a significant win for New Zealand and our exporters. Our dairy industry lost out on an estimated $120 million in revenue from the Canadian market in the past three years.” Minister Damien O’Connor. New Zealand wins CPTPP dispute against Canada, September 6, 2023. https://www.beehive.govt.nz/release/new-zealand-wins-cptpp-dispute-against-canada

[viii] Final Report of the Panel, Para. 52

[ix] Final Report of the Panel, Para. 72

[x] Final Report of the Panel, Para 83

[xi] Final Report of the Panel, Para 123

[xii] Final Report of the Panel, Para. 124

[xiii] Final Report of the Panel, Para 122

[xiv]Final Report of the Panel, Para 99

[xv] Final Report of the Panel, Para 150

[xvi] Final Report of the Panel, Para 153

[xvii] Final Report of the Panel, Para 199

[xviii] Para 226 – Article 26 of the Vienna Convention on the Law of Treaties (VCLT) : “pacta sunt servanda” (agreements must be kept), https://legal.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf

[xix] The dissenting member submitted that the It cited Paragraph 3(c) of Appendix A:

(c) Canada shall allocate its TRQs each quota year to eligible applicants. An eligible applicant means a resident of Canada, active in the applicable Canadian dairy, poultry or egg sector, as appropriate, and that is compliant with the Export and Import Permits Act and its regulations.

[xx]Final Report of the Panel, Para 238

[xxi] Final Report of the Panel, Para 240

[xxii] Final Report of the Panel, Para 230

[xxiii] Final Report of the Panel, Para 232

[xxiv]Final Report of the Panel, Para 85

[xxv] Trade Agreements and Canada’s Dairy Processing Industry https://www.dpac-atlc.ca/trade-agreements/

[xxvi] https://www.slaw.ca/2022/07/26/supply-management-and-cusma-part-iv-a-rematch-and-a-new-challengera-never-ending-story/

[xxvii] Final Report of the Panel, Para 123