U.S. Wins Canada Trade Spat as Panel Says Dairy Rules Defy Pact

(Bloomberg) -- The U.S. notched a victory in a spat with Canada over dairy trade, with a dispute-settlement panel finding that the nation's allocation of American lower-tariff imports violates their agreement.

The arbiters found that Canada is breaching its commitments by setting aside the vast majority of lower-duty imports for the exclusive use of Canadian processors, with only a small minority reserved for other businesses along the dairy supply chain, such as distributors. The case is the first-ever ruling by a dispute-settlement panel under the trade pact that also includes Mexico.

The panel decision was delivered to the parties as a final report on Dec. 20, the U.S. Trade Representative said in a statement. Canada now has until Feb. 3 -- 45 days from when that final report was issued -- to respond or adjust its rules comply with the panel's ruling, the USTR said.

Under the U.S.-Mexico-Canada Agreement that took effect in July 2020, Canada conceded to granting more duty-free or lower tariff access across dairy products including milk, cream, cheese, yogurt and ice cream via a tariff-rate quota, or TRQ.

But Canada is allocating 85% to 100% of those imports to processors, limiting the ability of other groups like retailers to buy U.S. product, said Jim Mulhern, president and chief executive officer of the U.S. National Milk Producers Federation, an industry group.

“The United States and Canada negotiated specific market-access terms covering a wide variety of dairy products, but instead of playing by those mutually agreed upon rules, Canada ignored its commitments,” Mulhern said. “As a result, U.S. dairy farmers and exporters have been unable to make full use of USMCA's benefits.”

The U.S. exported $478 million of dairy products to Canada from January through October, though USTR officials wouldn't provide an estimate of the size of the economic impact from Canada's restrictions. Should Canada fail to change its policy, under the rules of the USMCA the U.S. could retaliate by imposing tariffs on Canadian products, the officials said.

Canada has “taken note of the panel's finding regarding Canada's practice of reserving TRQ pools for the use of dairy processors,” and “takes its commitments and obligations under international agreements seriously,” the nation's trade and agriculture ministries said in a statement.

Still, the ministries said that they were “pleased” with the panel's report because it “expressly recognizes the legitimacy of Canada's supply-management system.”

The U.S. had said in submissions to the dispute resolution panel that it wasn't challenging Canada's right to maintain a supply management system -- but rather the inflexible rules of the system's current allocation to processors.

The panel ruling results from the U.S. decision in May to challenge Canada's tariff-rate quotas, which apply a preferential duty rate to a certain quantity of imports and a different rate to imports above that quantity.

The U.S. dairy industry has long pushed for greater accountability from Canada, part of the impetus for President Donald Trump insisting on including dairy policy in the USMCA pact that replaced the North American Free Trade Agreement.

The case is the latest example of the U.S. pushing for enforcement of the USMCA. Last year, the Biden administration and a Mexican auto-parts maker reached an agreement to improve working conditions at one plant, while the governments of the two nations outlined a plan to address the denial of workers' rights at another General Motors Co. pick-up truck facility.

Canada and Mexico have also challenged the U.S. under the deal. They've protested Biden's push to grant additional tax rebates for electric vehicles built by unionized American workers, a stricter U.S. interpretation of rules for cars built in North America, and increased U.S. duties on Canadian softwood lumber.