Panel finding Canada violated USMC trade agreement could open door for more US dairy exports north

In the first dispute settlement brought under USMCA since the new trade agreement replaced the North American Free Trade Agreement in 2020, a panel found Canada violated the agreement by reserving upwards of 80-85% of its tariff-rate quotas, or TRQs, for Canadian processors rather than producers.

The TRQs establish the quantities of dairy products, like milk, cheese, ice cream and more, that can be imported at lower duty levels under USMCA – often at or near zero – and any additional imports above those predetermined quantities are subject to higher rates.

By reserving the bulk of TRQs for Canadian processors, US farmers who wanted to leverage the lower rates often had to settle for lower prices from processors than they would get from end-line retailers and distributors or face additional higher tariffs.

“In the case of US dairy products, these additional Canadian tariffs typically price US dairy products out of Canada’s market, making fair access to Canadian dairy TRQs vital to maximizing exports to that market,”​ explained the US Dairy Export Council and National Milk Producers Federation.

NMPF president and CEO Jim Mulhern added that because Canada “ignored its commitments … US dairy farmers and exporters have been unable to make full use of USMCA’s benefits.”​

US declares victory​

The ruling​ made public Tuesday could even the playing field.

As such, the decision “is a big step for the US 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,”​ US Department of Agriculture Secretary Tom Vilsack said in a statement​.

He added that the decision “signals to our trading partners that the United States will stand firm against unjustified trade restrictions and continue fighting on behalf of our farmers and workers to ensure that we have full and fair access to foreign markets.”​

US Trade Representative Katherine Tai echoed this sentiment in a separate statement​ noting that “enforcing our trade agreements and making sure they benefit American workers and farmers is a top priority for the Biden-Harris Administration.”​

Tai added the “historic win will help eliminate unjustified trade restrictions on American dairy products, and will ensure that the US dairy industry and its workers get the full benefit of the USMCA to market and sell US products to Canadian consumers.”​

Tai’s office requested the panel review in May after failing to resolve the issue with Canada.

If Canada fails to remove the tariffs by Feb. 3, the US could impose retaliatory measures.

Canada also declares victory​

While Canadian officials did not indicate the country’s next steps, they did take “note” of the panel’s finding regarding the practice of reserving TRQ pools for the use of dairy processors in a joint statement from the Canadian Minister of International Trade, Export Promotion, Small Business and Economic Development and the Minister of Agriculture and Agri-Food.

In the statement, Canadian officials also confirmed that they take the country’s commitments and obligations under international agreements “seriously,” and said the government would work closely with the Canadian dairy industry as it moves through the next steps.

Beyond this, Canadian officials also declared the panel’s decision to be a victory on its behalf as it did not dismantle Canada’s controversial supply management system. Rather the report underscored the legitimacy of the system, Canada’s right to set production quotas and high tariffs to support dairy prices and to manage TRQ allocation policies in a way that supports its management system, which Canadian officials touted as victory.

Size of the prize​

Nonetheless, if Canada complies with the panel’s decision, US dairy producers could see significant financial gains. According to the International Trade Commission, exports to Canada could increase by $227m.

As the third largest export market for the US, American producers exported to Canada $478m in dairy products from January through October 2021, according to the Office of the US Trade Representative.  Global import and export data compiled by Trade Data Monitor suggests this number is on the rise – climbing about $56m since USMCA went into effect.