The Canada US Mexico Agreement (CUSMA) came into effect in July 2020. Shortly thereafter the new dispute resolution of this trade agreement was activated with the US announcing its first CUSMA dispute in December 2020. The dispute was against Canada’s allocation of dairy tariff rate quotas (TRQs) on milk, cream, cheese, industrial cheese, milk powders, condensed milk and butter among other goods. The US disputed Canada’s practise of setting aside certain allocations to dairy processors, and believes the administration of tariff quotas which violates CUSMA. Canada’s system of Supply Management has been a bone of contention between the US and Canada for a number of years now.
How Does Canada’s Supply Management Work?
Canada’s Supply Management allows specific commodity sectors to limit the supply of their products to what Canadians are expected to consume in order to ensure predictable, stable prices. A National Marketing Agency determines production amounts for each commodity and then sets production quotas for each province.
A farmer must hold a quota in order to sell their products. The quota is really a license for the farmer to produce a set amount. These quotas prevent market prices from dipping or glutting the market.
Producers are guaranteed a minimum price for products. Through provincial marketing boards, farmers negotiate minimum “farm gate prices” with processors. The farm gate price is the price at the farm for the product and does not include the cost of transporting the product to market. Dairy processors buy the product from the farmer and further process it for consumer consumption.
With Supply Management, high tariffs are imposed on foreign imports. This makes imports expensive for consumers who then are left to buy domestically.
Canada sets tariff rate quotas (TRQs), meaning some foreign goods enter tariff free, usually 10% of Canada’s domestic market. This prevents foreign goods from flooding the Canadian market. This is a major bone of contention with US dairy operations as they consistently over produce.
Dairy Dispute Panel Established
Up until spring of 2021, the dispute was in the consultation phase but the US took the next step in the trade dispute and asked for the establishment of a panel to examine their complaint.
Canada committed to increase its dairy import quotas by the sixth year after the CUSMA came into force, and then provide a 1% annual incremental increase thereafter until year nineteen.
Also CUSMA has provided for the elimination of prices associated with Milk Classes 6 and 7. The US dairy industry can access 50,000 tons of fluid milk and 12,500 metric tons of cheese duty free by year 6 of CUSMA via import permits which allow resident Canadians to import agreed upon volumes of US origin milk ingredients.
With a desire to gain a greater share of Canada’s market the US argued that the Supply Management system was still not equitable or fair.
In support of Canada, other smaller dairy farmers and unions have asked the US government to look to improve the US supply management for the smaller farmer community because large corporate dairy farmers are taking over and pushing out the smaller dairy farmers. The corporate dairy lobby in the US wanted the dispute to go ahead and were confident they would gain larger access to the Canadian market.
The final resolution to this dispute has been reached in favour of Canada.