US Initiates Dispute Panel With Canada Over Dairy TRQs

U.S. Trade Representative Katherine Tai said the U.S. and Canada could not reach an agreement on the administration of Canada's dairy tariff rate quotas, so the dispute will be decided by a panel. At issue is the fact that Canada has reserved the large majority of TRQs for Canadian processors, which means that consumer goods produced in the U.S. like ice cream, cheese or yogurt face higher tariffs in Canada because very little of the TRQ is available to Canadian retailers. Even when it's not restricted to processors, the TRQs are reserved for distributors, which means American producers cannot pitch their goods at lower prices directly to retail chains.

In a background call, officials from the Office of the U.S. Trade Representative were careful to say they are not challenging Canada's supply management system, which undergirds prices in Canada, or arguing for larger TRQs than were negotiated. "The measures essentially prevent us exporters from shipping higher value products to retailers in Canada that are under quota," an official said.

The USTR officials declined to identify what are higher-value products, saying that they're challenging the TRQ administration for all 14 dairy products, which include milk, milk powders and whey, as well as processed dairy such as yogurt, ice cream and cheese.

The text is clear that processors should not be privileged, they say. "We read the agreement, and we think it’s pretty plain on its face that that’s not permitted," an official said. In the formal panel request, they quote from the USMCA, which says Canada may not “introduce a new or additional condition, limit, or eligibility requirement on the utilization of a TRQ” that is “beyond those set out in [Canada’s] Schedule to Annex 2-B.”

The International Dairy Foods Association said that Canadian processors are often also dairy producers, so importing dairy products competes against their own interests. They also welcomed the announcement. "Canada has constructed its dairy TRQs to discourage the entry of those products by reserving a large percentage of each dairy TRQ to its own dairy processors, who have no incentive to import U.S. products that they themselves produce," IDFA said.

Canada's trade minister, Mary Ng, on May 25 issued a statement that Canada has requested a panel, which will be established within 35 days. "We are confident that our policies are in full compliance with our CUSMA TRQ obligations, and we will vigorously defend our position during the dispute settlement process," she said. Canada calls USMCA the Canada-U.S.-Mexico Agreement.

The panel could take up to 120 days to issue an initial report, and then another 30 days to issue a final report, USTR said. Canada said it could take until December to get a result.

If the U.S. prevails, Canada and the U.S. will discuss how to remedy the violation. The USTR officials say it's premature to talk about the possibility of punitive tariffs if they cannot agree on that remedy.

Congress has been pushing hard on the dairy TRQ issue, and the news was warmly greeted by members of both parties. The top Republican on the House Ways and Means Committee said, "Ambassador Tai is right to use USMCA’s powerful new enforcement mechanism to hold Canada accountable for unfair treatment of U.S. dairy products."

Rep. Ron Kind, D-Wis., said, "Trade agreements work best when they are fully enforced, which is why I spent years working with colleagues on both sides of the aisle to make sure USMCA is fully enforceable and Wisconsin dairy farmers are able to compete on an even playing field."

The predecessor to USMCA, NAFTA, did not have a functioning state-to-state dispute mechanism, as any country could block the formation of a panel.