Introduction
United States Trade Representative (USTR) Katherine Tai announced in January of 2022 that the United States had won its first dispute panel under the newly established United States-Mexico-Canada Agreement (USMCA). The panel agreed with the U.S. that Canada “is breaching its USMCA commitments by reserving most of the in-quota quantity in its dairy tariff-rate quotas (TRQs) for the exclusive use of Canadian processors” (Office of the United States Trade Representative, 2022, A).
For context, the United States-Mexico-Canada Agreement (USMCA) is a new treaty replacing the North American Free Trade Agreement, or NAFTA, which lasted from 1994 to 2020. The USMCA treaty went into effect on July 1, 2020 under President Trump. Under the treaty, American farmers gained greater access to Canadian markets for dairy, poultry, and eggs in exchange for giving Canadian producers expanded access to American dairy, peanut, and sugar markets (United States–Mexico–Canada Trade Fact Sheet, n.d.; Office of the United States Trade Representative, 2022,).
A dispute panel was created in response to import notices published by Canada in June and October of 2020. Canada “set aside and reserved a percentage of the quota for processors…contrary to Canada’s USMCA commitments” (Office of the United States Trade Representative, 2022, A). According to the National Milk Producers Federation (NMPF), Canada specifically restricted access to its dairy markets. The USTR brought the case forward in May 2021, arguing that Canada was maintaining dairy tariff-rate quotes that were violating the Agreement (National Milk Producers Federation, 2022). Both the NMPF and the U.S. Dairy Export Council (USDEC) urged Canada to comply with the panel’s ruling.
The Issue
Tariff-rate quotas are a system of tariffs that allow for a predetermined tariff rate on certain items. Often, the predetermined tariff rate is close to zero or very low. This puts the country receiving the imports at a disadvantage. Under the USMCA, Canada has agreed to TRQs on fourteen different categories of American dairy products. The tariff-rate on these fourteen categories is zero (VanTassell, 2021). Canada, however, is reserving much of those TRQs for their own processors, limiting the amount of TRQ space for American imports that was agreed upon in the USMCA. In 2021, Canada reserved between 85% and 100% of the TRQs exclusively for Canadian processors (Schaefer, 2022). This means the United States is not getting the zero-cost tariff-rates and instead has to pay tariffs to export much of its products. This is consistent with the panel’s findings, in which they “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’ ” (Office of the United States Trade Representative, 2022, B).
Ambassador Tai said, “This historic win will help eliminate unjustified trade restrictions on American dairy products, and will ensure that the U.S. dairy industry and its workers get the full benefit of the USMCA to market and sell U.S. products to Canadian consumers” (Office of the United States Trade Representative, 2022, A). Canada agreed to specific terms under the USMCA and their refusal to follow its guidelines should be corrected. The bipartisan dispute panel pointed this out, confirming Ambassador Tai’s concerns.
A Second Panel?
The organization Global Affairs Canada initiated policy changes according to the first panel’s findings. However, once the changes were fully published on May 16, 2022, the United States deemed the changes insufficient. A few days later, on May 25, 2022, Ambassador Tai announced the United States request for a second “dispute settlement” with Canada. In addition to challenging the measure of Canada’s TRQs, the U.S. is challenging Canada’s failure to allocate its TRQs annually. Instead of assigning its tariff quota at the beginning of the year, Canada is parceling out “a few months’ quota at a time” (Office of the United States Trade Representative, 2022, B). This is undermining the market access Canada agreed to in the USMCA. According to Secretary of Agriculture Tom Vilsack:
Canada’s protectionist dairy policies are a top concern for the U.S. Department of Agriculture… 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 [Biden-Harris] Administration and we are considering all options available to achieve this objective (Office of the Trade Representative, 2022, B).
If consultations fail to resolve the problem, the United States may request another panel under the USMCA or consider implementing retaliatory tariffs.
The Canadian Dairy System
To understand why Canada is going back on its agreement, one must understand the Canadian dairy system.
The dairy sector is a significant part of the Canadian economy. In 2020, the net farm cash receipts from dairy farmers selling to their provincial boards and the boards selling to licensed dairy processors was $7.13 billion, coming from 10,095 dairy farms and over 18,000 employees The dairy processing sector employs 24,500 people and earned $17.3 billion in manufacturing sales of dairy products in 2020 (Office of the United States Trade Representative, 2021).
Second, the Canadian agricultural industry is federalized. Raw milk produced in Canada is purchased by provincial boards and a national quota is determined and issued to all the provinces in Canada. The provinces then assign quotas of milk production to Canadian farmers (actual milk pricing is based on cost of production and the consumer price index) (Johnson, 2018). This is called Canada’s market sharing quota, which the Canadian Dairy Commission establishes (VanTassell, 2022). This market sharing quota is part of Canada’s federalized system of supply management.
The market sharing quota is adaptable. From 2014 to 2017, the amount of quota divided among farms had grown 24% (Johnson, 2018) and each month the national quota is re-evaluated and allocated to regional pools (McCullough, 2019). Farmers are expected to reach their monthly quotas (flexibility is taken into consideration with weather, shifts in herd numbers, or feed changes) and excess quota that one farmer fails to hit is given to another farmer. Most importantly, Canadian farmers are not paid for any milk produced over their quota requirement.
(Alberta Milk, n.d).
This intricate system of quotas reasonably protects Canada’s small farms from going out of business. Canadian farmers have no incentive to expand to the size of American conventional dairy farms. Unless they acquire more quota, which is difficult to do, Canada’s small farms receive no monetary gain. As of 2021, the average dairy herd size in Canada has 96 milking cows, with 98% of all farms being family-owned and operated (Dairy Farmers of Canada, 2021). In 2021, the United States dairy herd size was 300 dairy cows per farm. While American dairy farms are also family-owned, large dairy farms often buy out smaller farms who cannot compete with them. Since 2003, the U.S. has lost over half its dairy farms. There were 70,375 dairy farms in 2003, but by 2020, there were only 31,657 (Hanson, 2021). Small farms are becoming increasingly rare in the United States. In Canada, they are the norm.
Lastly, Canadian dairy farmers foresaw the USMCA putting them out of business as early as 2018. The group Dairy Farmers of Canada (DFC) said that, “At the farm gate alone, [the USMCA] represents an annual loss of $1.3 billion for farmers” (Edwards, 2018). The American dairy industry is 10 times larger than Canadas. The USMCA would give American farmers tariff-free access to 3.6% of Canada’s dairy market, allowing for millions of dollars of American dairy products to replace Canadian labels in stores. “A handful of dollars doesn’t replace the livelihood of dairy farmers,” tweeted the DFC (Dairy Farmers of Canada/Les Producteurs Laitiers du Canada, 2018). The Canadian government could import milk from the U.S. cheaper than they could produce it themselves, thus saving money, The USMCA, Canadian farmers feared, would render them increasingly unnecessary.
Division in Canada
Canadians’ concerns over the dairy issue have several points of origin. The farmers blame the Canadian government for poorly negotiating on their behalf. Canadian officials blame President Trump for bullying them into agreeing to terms favorable to the United States (Macdonald, 2018).
DFC President Pierre Lampron gave a statement saying that, “[The USMCA] has happened despite assurances that our government would not sign a bad deal for Canadians. We fail to see how this deal can be good for the 220,000 Canadian families that depend on dairy for their livelihood” (Dyck, 2018). However, Markus Haerle, vice-president of Grain Growers of Canada, points out that the U.S. and Mexico are major markets for Canadian exports, especially for grains and oilseeds. “The certainty that the USMCA brings,” said Haerle, “will support Canadian farmers who rely on access to the integrated North American market to succeed” (2018). For Haerle, the USMCA re-enforces trade connections with the rest of the North American continent.
Conclusion
What is the next step? The cards rest with Canada’s anticipated response to Ambassador Tai’s calls for consultations on the tariff allotment timetable. Canada desires to protect its dairy farmers, but also sees the opportunities for larger economic expansion in the Northern Hemisphere, thus its participation in the USMCA. Canada is at worst, breaking its commitment to USMCA policies and at best, skirting its legal obligations. If Canada continually refuses to adjust its policies to follow the USMCA, the United States government will exert tariffs of its own to make up for the lost revenue. The relationship between the neighboring countries will become strained – no one wants to see that happen.
In the world of trade one must give to gain. Understandably so, Canada wants to limit imports as much as possible. Instead of violating previously agreed upon policies, however, Canada should have negotiated better terms or found other ways to earn trade advantages. Many farmers in Canada are upset with their government for poorly negotiating on their part as they directly shoulder the effects of foreign importations. Unfortunately, the U.S dairy industry is significantly larger than Canada’s dairy industry, and American farmers are always searching for ways to export their milk. Fighting the United States in this area is a losing battle for Canadian farmers and their government.
References
Alberta Milk. (n.d.). How Does Quota Work in Paying Dairy Farmers? https://albertamilk.com/ask-dairy-farmer/how-does-quota-work-in-paying-dairy-farmers/
Dairy Farmers of Cananda. (2021, September 1). How many cows are on Canadian dairy farms? Canadian Goodness. https://dairyfarmersofcanada.ca/en/our-commitments/animal-care/how-many-cows-farms-sizes
Dairy Farmers of Canada/Les Producteurs Laitiers du Canada [@dfc_plc]. (2018, October 1). A handful of dollars doesn’t replace the livelihood of dairy farmers. [Tweet]. Twitter. https://twitter.com/dfc_plc/status/1046808494475685889
Dyck, Toban, (2018, October 2). Canada’s farmers aren’t a monolith-and for many of us, the USMCA is a good thing. Macleans. https://www.macleans.ca/opinion/canadas-farmers-arent-a-monolith-and-for-many-of-us-the-usmca-is-a-good-thing/
Edwards, Kyle. (2018, October 4). The truth about dairy farming in Canada. Macleans. https://www.macleans.ca/economy/the-truth-about-dairy-farming-in-canada/
Hanson, M. (2021, August 13). U.S. Dairy Herd Hits 27-year high. Dairy Herd Management. https://www.dairyherd.com/news/dairy-production/us-dairy-herd-hits-27-year-high
Johnson, R. (2018, March 25). Canadian Dairymen Explain Milk Quota System. https://www.dairystar.com/Content/News/Daily-News/Article/Canadian-dairymen-explain-milk-quota-system/1/256/14375
Macdonald, N. (2018, October 1). With its new trade deal, Canada surrenders sovereignty to a bully: Opinion. CBC News. https://www.cbc.ca/news/opinion/canada-usmca-1.4845494
McCullough, C. (2019, August 15). Canadian Dairy Farmers Battle for Extra Quota. Dairy Global. Retrieved November 8, 2022, from https://www.dairyglobal.net/dairy/milking/canadian-dairy-farmers-battle-for-extra-quota/
National Milk Producers Federation. (2022, January 4). U.S. triumphs in USMCA dispute with Canada over Dairy Market Access [Press release]. https://www.nmpf.org/u-s-triumphs-in-usmca-dispute-with-canada-over-dairy-market-access/
Office of the United States Trade Representative. (2022, January 4). A. United States prevails in USMCA dispute on Canadian Dairy Restrictions [Press release]. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/january/united-states-prevails-usmca-dispute-canadian-dairy-restrictions
Schaefer, K. Aleks. (2022, June 16). The Economic Costs of Canadian Dairy Quota Restrictions under USMCA. Southern Ag Today 2(25.4).
United States–Mexico–Canada Trade Fact Sheet. (n.d.). Agriculture: Market Access and Dairy Outcomes of the USMC Agreement [Fact Sheet]. United States Trade Representative. https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/market-access-and-dairy-outcomes
Office of the United States Trade Representative. (2021). CANADA-UNITED STATES-MEXICO AGREEMENT ARBITRAL PANEL ESTABLISHED PURSUANT TO ARTICLE 31. Office of the United States Trade Representative. https://ustr.gov/sites/default/files/enforcement/USMCA/Canada%20Dairy%20TRQ%20Final%20Panel%20Report.pdf
Office of the United States Trade Representative. (2022, May 25). B. United States initiates second USMCA dispute on Canadian dairy tariff-rate quota policies [Press release]. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/may/united-states-initiates-second-usmca-dispute-canadian-dairy-tariff-rate-quota-policies
VanTassell, G. (2022, February). What is the effect of USMCA on the American Dairy Market? Yeutter Institute. https://yeutter-institute.unl.edu/what-effect-usmca-american-dairy-market
