In the first decision under the new North America trade pact, a three-judge dispute settlement panel ruled that Canada had manipulated its tariff-rate quotas to limit imports of U.S. dairy products, despite agreeing to greater U.S. access in the 2020 agreement. Agriculture Secretary Tom Vilsack said the ruling was a signal of U.S. resolve against unjustified trade restrictions anywhere.
Canada and the United States are now obliged to negotiate a resolution. If they cannot agree, the United States can impose penalties of its own choosing on Canadian products, ideally in the same sector. Dairy groups said the deadline for a binational agreement was Feb. 3. The dispute panel decided the challenge on Dec. 20, but the report was not made public until Tuesday.
“The panel finds that Canada’s acknowledged practice of reserving access to 85 to 100 percent of 14 separate dairy TRQs (tariff-rate quotas) exclusively to processors (including further processors) is inconsistent with Article 3.A.2.11(b),” which says access will not be limited to processors, said the decision. “No one other than processors has access to, or can apply for, these allocations. Hence, access is limited to processors, which is not permitted by the treaty.”
A tariff-rate quota allows a specified volume of imports to enter a country at no or low duties, with higher tariffs applied on volume above the threshold.
“This ruling is a big step for the U.S. dairy sector towards realizing the full benefits of the USMCA and securing real access to the Canadian market for additional high-quality American dairy products, such as milk, cheese and skim milk powder,” said Vilsack. When the USMCA was concluded, Canada agreed to provide new TRQs exclusively for 14 categories of U.S. dairy products.
Canadian officials said they would protect their nation’s supply management system while trying to resolve the dispute. The supply management system guarantees stable prices for dairy farmers and limits imports to prevent surpluses.
“Our government, as it proceeds with the next steps in the process, will continue to work closely with the Canadian dairy industry. Canada takes its commitments and obligations under international agreements seriously,” said Trade Minister Mary Ng and Agriculture Minister Marie-Claude Bibeau in a statement.
Canada told the USMCA panel that it apportioned dairy TRQs into “pools,” with processors assigned the bulk of each TRQ, to create a degree of predictability for imports and avoid an excess of domestic supplies. Processors are uniquely positioned to balance imports, domestic supplies, and consumer demand, it said.
The two nations have disagreed for years over Canada’s dairy quotas. President Trump made dairy trade a contentious issue with Canada, and in its final weeks in office, his administration challenged the quotas under the USMCA. The Biden administration elevated the conflict last May by calling for a dispute settlement panel.
U.S. dairy groups called the USMCA ruling a landmark decision. “We expect Canada to abide by its trade commitments so that the American dairy industry can fully access the Canadian market, just as USMCA promised,” said Krysta Harden, chief executive of the U.S. Dairy Export Council.
The USMCA decision is available here.
The U.S. trade representative’s fact sheet on the USMCA’s agricultural provisions is available here.