A Second CUSMA Panel on Canada’s Supply Management Regime

Over the last three years we have followed Canada’s ongoing battle to protect and reserve it supply management system for dairy and poultry products in place and negotiated for since the original GATT negotiations concluded in 1947. For the most part these trade disputes have been with the United States before NAFTA and Canada-U.S.-Mexico Agreement (CUSMA) Panels.[1] More recently another of Canada’s trade partners joined the fray – New Zealand.[2] The results were mixed and Canada lost some ground but has been able to preserve its right to maintain and operate its system.

On November 24, 2023,a second CUSMA Panel examining Canada’s administration of its dairy tariff rate quotas (TRQs) under the Agreement released its report.[3] Unlike the case of the first Panel, where both sides claimed victory, Canada was the clear winner as its Trade Minister, Mary Ng commented:

Canada is very pleased with the dispute settlement panel’s findings, with all outcomes clearly in favour of Canada. This is good news for Canada’s dairy industry and our system of supply management.[4]

Minister Ng’s counterpart, United States Trade Representative USTR) Katherine Tai was “ … very disappointed by the findings …” She added;

 … the United States continues to have serious concerns about how Canada is implementing the dairy market access commitments it made in the Agreement. While the United States won a previous USMCA dispute on Canada’s dairy TRQ allocation measures, Canada’s revised policies have still not fixed the problem for U.S dairy farmers. We will continue to work to address this issue with Canada, and we will not hesitate to use all available tools to enforce our trade agreements and ensure that U.S. workers, farmers, manufacturers, and exporters receive the full benefits of the USMCA. [5]

Ambassador Tai was referring the 2022 CUMA Panel ruling that [6] Canada’s practice of reserving 85-100% of dairy TRQs for processors violated Article 3.A.2.11(b) of CUSMA. While the United States considered a win while Canada took the view that the report was overwhelmingly in favour of Canada and its dairy industry;

… 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.[7]

As part of its CUSAM commitments, Canada provides its he United Sates with combined duty-free access of about 3.9 % of its dairy market which is otherwise protected by prohibitive tariffs . This access to 14 dairy categories [8] is managed through Tariff Rate Quotas (TRQs) 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 and “Calculation of Allocations” which set specific percentages reserved for each eligible pool.

The first CUSMA Panel,^[9] found that Canada’s practice of reserving 85-100% of dairy TRQs for processors violated Article 3.A.2.11(b) of CUSMA. However it declined to apply the strict guidelines he United States was seeking in terms of implementation, deferring to Canada’s discretion under CUSMA. It left it for the two sides to work out an agreement on the modification of Canada’s TRQ regime. ^[10] Unable to find common ground, Canada acted unilaterally and ended its use of processor-specific TRQ pools and allowing distributors to access the CUSMA Industrial Cheese TRQ.^[11]. It also 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.^[12]

Canada considered that this brought it into conformity with its CUSMA obligations^[13] but the United States was far from satisfied and it requested new CUSMA consultations with Canada as USTR Tai indicated:

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. ^[14]

Canada reiterated its points about the need for administrative flexibility needed to guard against both market saturation and undersupply. The United States requested a second dispute- settlement Panel, arguing that Canada’s dairy TRQ practices continue to contravene its CUSMA obligations including by:^[15]

• Continuing to limit access to diary TRQ’s 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.

The new Panel found against the United States on all four complaints – Canada’s measures were not inconsistent with the CUSMA.[16] The Panel correctly determined that “the core”[17] of the U.S. case was Canada’s refusal to allocate its TRQs to certain categories of applicants that the U.S industry wished to access. The United States considered this to be contrary to paragraph 3(c) of Section A of Canada’s TRQ Appendix (“Paragraph 3(c)”) which provides:

Canada shall allocate its TRQs each quota year to eligible applicants. An eligible applicant means an applicant active in the Canadian food or agriculture sector. In assessing eligibility, Canada shall not discriminate against applicants who have not previously imported the product subject to a TRQ.

The Panel considered the text of Paragraph 3(c)”) and determined that the “ordinary meaning”[18] of the language did not require Canada to consider the applications of any and all entities “active in the Canadian food or agricultural sector,” reasoning:

… the first sentence of Paragraph 3(c) contains the relevant obligation on Canada and, on its face, that obligation concerns Canada’s allocation of its TRQs, not its application process nor any other aspect of its licensing system. That sentence on its own provides no guidance as to how Canada determines who receives an allocation, apart from limiting that universe of potential recipients to “eligible applicants.[19]

The Panel decided that the second sentence of Paragraph 3(c) is part of a broader description that “ left it to Canada’s discretion within certain explicit bounds. The context supports the understanding that this sentence was not intended as a comprehensive articulation of who Canada must consider.”[20]

Concluding that “… the implementation and administration of that market access system is left to Canada …” [21] [and] … Canada has some flexibility in its implementation of that system. Not every term is defined and not every procedure is delineated by the Agreement. The Panel finds insufficient support from the language’s broader context. and the object and purpose of the Agreement, that a limitation on Canada’s discretion of the type of the United States suggests is implicit in the text of Paragraph 3(c).”[22]

While Canada could claim a definitive win it did come with an important caveat in the form of a strong dissent. In this context the result could be considered a narrow 2 to win on the core issue. The dissent

Found that Canada’s exclusion of certain types of importers, including retailers and food service operators to be contrary to inconsistent with Paragraph 3(c).[23]

…. Canada’s measures are inconsistent with Paragraph 3(c) for excluding ex-ante potential applicants who are indeed active in the Canadian food or agriculture sector, as well as with Article 3.A.2.11(b) to the extent that they grant access 62 only to processors, distributors, and, in some cases, further processors and exclude all other eligible applicants, such as retailers and food service operators, among others.[24]

Relying upon Article 31(1) of the VCLT,[25] the dissenting members, reasoned that Canada’s obligation to  allocate its TRQs to “eligible applicants” includes no qualifier that would permit Canada to deviate from the central obligation ‘’’ … which is to “allocate its TRQs each quota year to eligible applicants”. Moreover, the term “shall” at the beginning of the first sentence reflects that the obligation is binding on Canada and does not give space for discretionary application of the rule.”[26] The second sentence of contains no language that permits “… Canada to restrict this universe of entities or individuals to “processors, further processors, or distributors” exclusively. It is interesting to note that the dissenting member cited the object and purpose of the CUSAAM as Agreement “as inextricably linked to market access ….”[27]

Article 10.10.2.d.(ii) states: “the object and purpose of this Agreement and this Chapter, which is to establish fair and predictable conditions for the progressive liberalization of trade between the Parties. This provision is an express statement of the object and purpose of the entire Agreement and refers to fair and predictable conditions for the progressive liberalization of trade between the Parties.[28]

CUSMA has no appeal mechanism which from Canada’s point of view the issue has been settled. However, U.S. officials have promised to keep pressing for improved access and Canda will continue to face pressure from its trade partners. It may well be that the fight over supply management will move from the quiet and orderly world of trade panels to the more turbulent and noisier arena of hardball trade negotiations – witness the United Kingdom’s pausing of Free Trade talks with Canada over the issue of supply management.[29]

– Michael Woods

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[1] For further background see the Slaw series beginning with CUSMA Dairy Challenge: “Déjà Vu All Over Again, January 19, 2021; https://www.slaw.ca/2021/01/19/cusma-dairy-challenge-deja-vu-all-over-again/

[2] See our Slaw article, Canada’s Supply Management System Part v – New Zealand’s Trade Challenge,  November 21, 2023;  https://www.slaw.ca/2023/11/21/canadas-supply-management-system-part-v-new-zealands-trade-challenge/

[3] Canada- Dairy Tarriff-Rate Quota Allocation Measures 2023 CDA-USA-2023-31-01: Final Report: November 10, 2023; (Certain legal documents related to this case can be viewed on the TAS e-filing system Note – registration is required) see – https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/settlement-cases-reglement-cas.aspx?lang=eng#a1_2 )

[4] https://www.canada.ca/en/global-affairs/news/2023/11/canada-welcomes-cusma-dispute-settlement-panel-findings-on-dairy-tariff-rate-quotas.html

[5] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2023/november/usmca-panel-releases-canada-dairy-report-biden-harris-administration-will-continue-seeking-full

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

[7] 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

[8] Milk, cream, skim milk powder, butter and cream powder, industrial cheeses, cheeses of all types, milk powders, concentrated or condensed milk, yogurt and buttermilk, powdered buttermilk, whey powder, products consisting of natural milk constituents, ice cream and ice cream mixes, and other dairy products

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

[10] Statement by Minister Ng on dairy tariff rate quota policies under CUSMA; Global Affairs Canada, May 16,2022; Statement by Minister Ng on dairy tariff rate quota policies under CUSMA – Canada.ca

[11] Ibid Statement by Minister Ng on dairy tariff rate quota policies under CUSMA – Canada.ca

[12] 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) (international.gc.ca)

[13] Ibid Statement by Minister Ng on dairy tariff rate quota policies under CUSMA – Canada.ca

[14] United States Initiates Second USMCA Dispute on Canadian Dairy Tariff-Rate Quota Policies; USTR, May 25, 2022; United States Initiates Second USMCA Dispute on Canadian Dairy Tariff-Rate Quota Policies | United States Trade Representative (ustr.gov)

[15] Ibid see also – US Cons Req.for.USTR.website (1).pdf

[16] On the fourth issue whether Canada was not being “timely and transparent” about its unused TRQ allocations, the Panel was “unable to find that the measures were inconsistent” with the agreement.

[17] Para 61

[18] guided by the VCLT, Para.

[19] Para 83

[20] Para 89

[21] Para. 92

[22] Para. 93

[23] Para.313

[24] Para.

[25] “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”.

[26] Para. 318

[27] Para 328

[28] Para 328

[29] Janyce McGregor, John Paul Tasker: U.K. Walks Away from Trade Talks with Canada; CBC · Posted: Jan 25, 2024; https://www.cbc.ca/news/politics/canada-uk-trade-cheese-1.7094817