Blood in the water: Ottawa likely to face more trade battles after losing U.S. dairy dispute, lawyers say

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More countries are likely to pick fights with Canada over its protectionist dairy policies following a loss to the United States in a dispute over cheese imports, international trade lawyers said.

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Trading partners around the world have made no secret of their displeasure with Ottawa’s high tariffs on dairy imports — a tactic used to shelter Canadian farmers from competition under the federal supply management system. Those allies, particularly in Europe and New Zealand, were no doubt paying close attention last week when the U.S. won a key ruling that could allow more American dairy brands to break into the Canadian retail market.

When you say ‘dairy’ and ‘Canada,’ the world laughs

Trade lawyer Mark Warner

“When you say ‘dairy’ and ‘Canada,’ the world laughs,” said Mark Warner, a trade lawyer and former official at the Organisation for Economic Co-operation and Development (OECD). “The Canadians are going to have to say, ‘Hm, it’s not just the Americans that have a beef with us. It’s actually all of our trading partners.’”

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The U.S. has been accusing Canada of playing tricks to water down the impact of its commitments under the United States-Mexico-Canada Agreement (USCMA), the pact that replaced the North American Free Trade Agreement in 2020. In the new treaty, Ottawa agreed to expand so-called tariff-rate quotas, which allow for a limited volume of American dairy products to cross into Canada without the regular tariffs.

American farmers heralded the larger duty-free quota in the new North American trade agreement as a victory in their long fight against supply management. But soon they were complaining again, because the U.S. dairy that Canadians were bringing over the border was mostly low value — mass-produced slabs of mozzarella for frozen pizzas, rather than fine chévre from Vermont goat herds.

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That’s because Canada opted to give the vast majority of the USMCA quotas to domestic processors — the dairy companies behind Canada’s biggest milk, cheese and yoghurt brands — who are more inclined to import commercial quantities of cheap cheese, and then slice it, grate it and sell it for a premium in grocery stores.

“We basically agreed to limited market access and then we said, ‘We’ll hand it to your competitors,’” Warner said. “That’s very cynical, right?”

At the USMCA dispute-settlement panel, Canada argued that its practice of handing out tariff-free quota has “never once fallen afoul” of its other free-trade agreements, including the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Trans-Pacific Partnership (TPP), which ties Canada to a group of Asian and Latin American economies.

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That argument could ultimately backfire, though. As the panel pointed out , Canada’s behaviour has “apparently gone unchallenged” under TPP or CETA. The USMCA ruling could become a template for litigation elsewhere, said Nicolas Lamp, a former dispute settlement lawyer at the World Trade Organization who now teaches trade law at Queen’s University.

“Canada’s trading partners might even use this report to say, ‘Look, if it wasn’t OK under USMCA, it’s clearly also not OK under the CPTPP,’” he said.

The European Union asked for a review of Canada’s system of allocating tariff-rate quotas under CETA in 2019. Last year, Canada ran consultations on its quota system but that process has “stalled”, according to a recent Twitter post from Meredith Lilly, an associate professor of trade at Carelton University who served as a trade advisor to former Prime Minister Stephen Harper.

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The USMCA ruling gives Canada until February to come up with a method of handing out quotas that doesn’t exclusively favour domestic dairy companies.

U.S. Deputy Trade Representative Jayme White pressed the issue in a meeting with his Canadian counterpart on Wednesday, where he “stressed the importance of Canada fully meeting its USMCA commitments,” according to a readout of the call. A spokesperson for Trade Minister Mary Ng last week said Canada “will keep working closely with the dairy industry to develop” the new quota system. And on Wednesday, trade tensions continued as Ng announced that Canada would join Mexico as a complaining party against the U.S. in a new USMCA panel that will look at the cross-border flow of auto parts.

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Warner, principal at Toronto-based firm Maaw Law, said the panel ruling on dairy won’t cause Canada to “surrender” its position in the years-long feud. It’s more likely Canada will “dance around” and make a minor change to its quota system, the Americans will launch another challenge, and the series of legal battles will continue.

“I want to say, at some point Canada will just look stupid in the world community,” he said. “But to be very honest, having worked at the OECD and having been around these discussions at the WTO, Canada already looks stupid on dairy.”

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