Background

The first dispute settlement panel proceeding under the U.S.-Mexico-Canada Agreement has resulted in a decision that should improve U.S. access to Canada’s dairy market, which is already the third-largest export destination for U.S. dairy products.

Under the USMCA, Canada has the right to maintain tariff-rate quotas on the following dairy products: 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. A TRQ applies a preferential rate of duty to an in-quota quantity of imports and a higher rate to imports above that quantity. 

According to a press release from the Office of the U.S. Trade Representative, the USMCA panel agreed that Canada’s allocation of its dairy TRQs – specifically, setting aside 80-85 percent of each dairy TRQ exclusively for Canadian processors – is inconsistent with Canada’s commitment under the USMCA not to limit access to an allocation to processors. Press sources note that this practice restricts the ability of other Canadian entities like distributors and retailers to buy U.S. dairy products at lower prices.

While Canada’s trade ministry acknowledged the panel’s finding on TRQ allocation, it also pointed out that the panel expressly recognized “the legitimacy of Canada’s supply management system” and confirmed that “Canada has the discretion to manage its TRQ allocation policies under CUSMA in a manner that supports Canada’s supply management system.”

USTR said Canada now has until Feb. 3 to comply with the panel’s findings. An Inside US Trade article noted that if Canada does not comply the U.S. “could seek to suspend USMCA concessions” in the dairy or possibly other sectors. This could include increasing tariffs on imports from Canada, though a senior USTR official reportedly said the U.S. is more interested in negotiating a solution with Ottawa than imposing retaliatory tariffs.

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