United States Initiates Second USMCA Dispute on Canadian Dairy Tariff-Rate Quota Policies

May 25, 2022

Action by USTR Seeks to Address Canada’s Continuing Failure
to Meet Its USMCA Obligations


WASHINGTON ­– United States Trade Representative Katherine Tai today announced that the United States is, for the second time, requesting dispute settlement consultations with Canada under the United States – Mexico – Canada Agreement (USMCA) to address dairy restrictions by Canada that are contrary to its USMCA commitments.  
Specifically, the United States is challenging Canada’s dairy tariff-rate quota (TRQ) allocation measures, which deny allocation access to eligible applicants, including retailers, food service operators, and other types of importers, and impose new conditions on the allocation and use of the TRQs. 
The United States is also challenging Canada’s failure to fully allocate its annual dairy TRQs; Canada is instead parceling out a few months’ quota at a time.  Through these measures, Canada undermines the market access that it agreed to provide in the USMCA. 
“I am deeply troubled by Canada’s decision to expand its dairy tariff-rate quota restrictions,” Ambassador Katherine Tai said.  “We communicated clearly to Canada that its new policies are not consistent with the USMCA and prevent U.S. workers, producers, farmers, and exporters from getting the full benefit of the market access that Canada committed to under the USMCA.  We will continue to work with USDA to ensure that our dairy industry can bring a wide range of high-quality American products to Canadian customers.” 
“Canada’s protectionist dairy policies are a top concern for the U.S. Department of Agriculture under the Biden-Harris Administration,” Secretary of Agriculture Tom Vilsack said. “Canada has failed to honor and implement its USMCA commitments by removing the trade restrictions that disadvantage and deter U.S. dairy producers and exporters from enjoying real and meaningful access to the Canadian market. Obtaining that access remains a top priority for the Administration and we are considering all options available to achieve this objective.”
This is the second dispute the United States has brought under the USMCA regarding Canada’s allocation of its dairy TRQs.  While the United States prevailed in the first dispute, Canada’s implementation measures and other actions have moved Canada further away from full compliance with its USMCA obligations.  If the United States and Canada are not able to resolve U.S. concerns through consultations, the United States may request the establishment of a panel under the USMCA.
USTR officials worked closely with staff from the U.S. Department of Agriculture throughout the first dispute, and both agencies will continue working together, in consultation with stakeholders, to obtain Canada’s full compliance with its USMCA dairy commitments.
A tariff-rate quota applies a preferential rate of duty to an “in-quota” quantity of imports and a different rate to imports above that in-quota quantity.  Under the USMCA, Canada has the right to maintain 14 TRQs on the following types of 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.
In notices to importers that Canada published in June and October 2020 and May 2021 for dairy TRQs, Canada set aside and reserved a percentage of the quota for processors and for so-called “further processors”, contrary to Canada’s USMCA commitments.  As a result of this restriction, Canada has been undermining the value of its dairy TRQs for U.S. farmers and exporters since entry into force of the USMCA by limiting access to in-quota quantities negotiated under the Agreement.  
In January 2022, a USMCA panel agreed with the United States that Canada’s allocation of dairy TRQs, specifically the set-aside of a percentage of each dairy TRQ exclusively for Canadian processors, is inconsistent with Canada’s commitment in Article 3.A.2.11(b) of the USMCA not to “limit access to an allocation to processors.”  The Panel additionally found that the Agreement makes no distinction between initial processors and “further processors”, and that therefore, the restriction in Article 3.A.2.11(b) applies to all processors, including specific subsets.
On March 2, 2022, Global Affairs Canada initiated public consultations regarding proposed changes to its policies with respect to the allocation of Canada’s USMCA dairy TRQs and explained that the changes are intended to implement the findings of the USMCA Panel.  On May 16, 2022, Canada published the changes as final.  The United States has stated clearly that it rejects the changes Canada has made as a basis to resolve the dairy dispute because Canada remains out of compliance with its USMCA obligations.
For all of Canada’s dairy TRQs, Canada’s revised policies provide that only processors, further processors, and distributors will be able to apply for and be granted an allocation.  This means that Canada continues to exclude other eligible applicants, such as retailers and food service operators.  Additionally, for all of Canada’s dairy TRQs, Canada requires that applicants be active during all 12 months of a 12-month reference period, potentially excluding otherwise eligible applicants, in particular new entrants.  Finally, Canada has allocated only part of its dairy TRQs for calendar year 2022 despite USMCA requirements that Canada fully allocate the TRQs at the beginning of the year, and commitments to administer the TRQs in a transparent manner.
A copy of the consultation request can be found here.