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Dairy Dogfight! First CUSMA Dispute yields Two-Sided Victory?

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As covered in a prior blog, Canada has one of the most tightly-controlled dairy industries in the world.  It is not surprising then that the first decision of a dispute resolution panel (“Panel”) under the Canada-United States-Mexico Agreement (“CUSMA”) would involve Canada's dairy “supply management” system (the “Dairy Decision”).  

Ultimately, despite a US victory, the limited scope of the Dairy Decision means that any changes expected from Canada are unlikely to satisfy US-based dairy producers – with both sides seemingly claiming victory!

Background

Canada’s supply management system relies on three “pillars”:

1. Controlled Production  The Canada Dairy Commission (“CDC”) sets supply requirements month-to-month, which is meant to ensure that Canadian milk producers are insulated from swings in the market for raw milk.

2. Pricing Mechanisms – Canada requires that all raw milk be sold by producers to provincial Milk Marketing Boards, at rates which depend on the milk’s end-use.  The boards then pass on the milk to processors, who use it to create further goods (like yogurt or cheese), which can then be used by “further processors” (like the food service industry) or be sold directly to consumers.

3. Controlled Imports – Canada also controls imports of dairy products through Tariff Rate Quotas (“TRQs”).  TRQs are used to allocate import amounts from a “pool” of a total available quantity for a given dairy product.  Any products imported outside of the TRQ garner extremely high tariffs, which tend to be greater than the base value of the good itself.

This heavily regulated approach is not easy to square with Canada’s “free” trade commitments and that was the central issue in the recent Dairy Decision!

Dairy Decision

On May 25, 2021, the US requested a dispute resolution panel under CUSMA, alleging that Canada was improperly allocating its TRQs by reserving a large proportion of TRQs exclusively for the use of processors.  By “pre”-allocating part of its TRQs, Canada effectively required non-processors to compete within a small slice of the total available quota, which the US argued was explicitly barred by Article 3.A.2.11(b) of CUSMA.  Interestingly, the while Panel partially agreed with the US position and ruled against Canada, both the US and Canadian governments claimed victory.  Understanding “why” that could be the case requires a more critical look at the concessions made by the US and adopted by the Panel in its reasons.

The Panel agreed that CUSMA does not allow Canada to restrict access to an allocation to processors.  Essentially, this means that Canada cannot pre-empt other types of dairy sector actors from competing for TRQs – for instance, by earmarking 85% or more of the total allocation to processors. 

That said, the US conceded that having a large portion of any TRQ allocated to processors is not itself problematic, and the Panel agreed that Canada retains a high degree of discretion under CUSMA.  The Panel explicitly distinguished between limiting access to TRQs and their ultimate allocation, stating “… Canada’s administrative discretion in allocating the TRQs is not at issue in this case.”

Commentary

While the US was successful in arguing that Canada violated CUSMA, the Dairy Decision does ultimately suggest that Canada can achieve the same result within the bounds of the text – potentially making it harder for the US to challenge to Canadian supply management practices.

That said, US trade groups seem to think that Canada’s proposal after the Dairy Decision does not go far enough, so both sides may well end up back in dispute resolution.

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