U.S. challenging Canada's dairy quotas in test of new trade deal

The United States is formally accusing Canada of unfairly limiting the ability of American dairy producers to sell their products north of the border.

The U.S. has made an official request for consultations to address Canada's limits on a variety of dairy products — an initial step in the first enforcement action under the U.S.-Mexico-Canada Agreement (USMCA) since the deal took effect in July.

At its core is how Canada has distributed its tariff-rate quotas — the quantities of certain dairy products like milks, cheeses, powders, yogurt and even ice cream — that can be imported at lower duty levels.

U.S. trade officials and dairy industry advocates say a large share of those quotas have been allocated to processors rather than producers, effectively denying U.S. farmers their fair share of the supply-managed Canadian market.

"Canada's measures violate its commitments and harm U.S. dairy farmers and producers," trade ambassador Robert Lighthizer said in a statement.

The U.S. is "disappointed" to be embarking on the first dispute under USMCA, which is supposed to provide American producers "fairer access to Canada's highly protected dairy market," the statement said.

"This action demonstrates that the United States will not hesitate to use all tools available to guarantee American workers, farmers, ranchers, and businesses enjoy the benefits we bargained for."

In Ottawa, Canadian International Trade Minister Mary Ng told reporters she's "very confident that Canada is meeting its obligations under the USMCA."

The next step, presuming the consultation process doesn't produce a resolution, would be to set up a dispute resolution panel under the terms of the agreement.

Wednesday's action comes as little surprise; the U.S. Dairy Export Council set the table in June when it complained that Canada's tariff-rate quotas (TRQs) deny American farmers rightful access to markets north of the border.

"With the Trump administration, often it's 'Ready, fire, aim,"' said Adam Taylor, founder of Export Action Global, an international trade consulting firm.

"This is yet another example of that, where simplicity and a lack of full understanding of the complexities of some issues sort of takes a back seat to actual reality."

The next step, presuming the consultation process doesn't produce a resolution, would be to set up a dispute resolution panel — a mechanism, Taylor noted, that U.S. negotiators fought to get rid of during the effort to renegotiate NAFTA in 2018.

The U.S. Dairy Export Council set the table in June when it complained that Canada's tariff-rate quotas deny American farmers rightful access to markets north of the border.

But given who runs the council, it's safe to assume the dispute won't disappear once Donald Trump leaves the White House: president Tom Vilsack is said to be president-elect Joe Biden's nominee to lead the U.S. Department of Agriculture, after holding the same job under Barack Obama.

It's too soon to know whether dairy could one day rival softwood lumber as a perpetual sore spot between two of the world's largest and closest trading partners, but it won't be resolved soon.

"I think it is always going to be an irritant between Canada and the U.S.," said Andrea van Vugt, who was a foreign policy and trade adviser to former prime minister Stephen Harper.

"Everyone had hoped, with the conclusion of USMCA and the additional quantities that were provided to the U.S. on dairy, that we were not settling that dispute or resolving that dispute, but that we were addressing U.S. concerns."

Vilsack's presence in the Biden administration certainly doesn't augur for a quick resolution, she added.

"I do believe that the temperature on this could heat up."