On May 25, 2021, dairy products became the first commodity placed before the dispute resolution panel in the newly established U.S.-Mexico-Canada Agreement (USMCA). On December 20, a three-person panel issued their final report to the parties . . . and that report became public on January 4, 2022.

“A USMCA panel agreed with the United States 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,” stated the Office of the United States Trade Representative headed up by Ambassador Katherine Tai.

While that’s the ruling, trade between the two countries will not change overnight. Under USMCA rules, Canada now has 45 days from the date of the final report to comply with the panel’s findings.

That deadline is February 3.

If Canada does not come up with a workable remedy in the spirit of the USMCA, the U.S. could begin a process of tariffs on Canadian products bound for the United States.

At issue are Tariff Rate Quotas (TRQs). During USMCA negotiations, Canada agreed to specified dairy product imports from the United States and the TRQ was set near zero. Of course, imports above those agreed upon levels would come with higher tariffs, essentially making the economics of additional imports a no-go.

At dispute was Canada’s willingness to give TRQs to non-Canadian importers and others who would actually seek out product. By carrying out this action, Canada has been limiting access to dairy imports agreed upon under USMCA.

Two different dairy sectors

The USMCA is a relatively new trade deal, having just been enacted in 2000. It replaced the North American Free Trade Agreement (NAFTA) that had guided trade between Canada, Mexico, and the United States since its passage in 1994.

Back in those days, the Canadian and U.S. dairy sectors were largely similar industries, both serving the domestic market. Dairy exports were minimal. Hence, when NAFTA was negotiated, both countries essentially omitted dairy from the discussions.

That was 1994.

The very next year, the fledgling U.S. Dairy Export Council (USDEC) was born. It took some years for the United States to gather its marketing and sale prowess.

As time passed by, however, dairy exports became a larger and larger portion of dairy product sales. By the time USMCA negotiations unfolded, U.S. dairy cows were producing milk one day each week for the export market. That total has continued to climb and may finish 2021 at a number closer to all cows working five to six days each month to fill export orders.

During the same 28-year window, Canada’s dairy sector remained largely in its 1994 form when NAFTA took root, as domestic quotas continue to place a muffler on milk production through a process called supply management.

The only thing that changed in recent years was the EU-Canada Comprehensive Economic and Trade Agreement (CETA) that went into effect in 2017. As a result, Canada had to yield some dairy imports from Europe. Then USMCA came along, and Canadian farmers were still upset about that first loss of market share to the Europeans. Hence, Canada has collectively slogged along at committing to dairy imports from the United States.

What might happen?

In early February, we will learn of Canada’s response to the first-ever USMCA trade ruling. In the meantime, here’s what U.S. leaders had to say:

“Enforcing our trade agreements and making sure they benefit American workers and farmers is a top priority for the Biden-Harris Administration,” said Ambassador Katherine Tai. “That is why this administration filed the first-ever panel request under the USMCA. 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. dairy products to Canadian consumers.”

“This ruling is a big step for the U.S. dairy sector toward realizing the full benefits of the USMCA and securing real access to the Canadian market for additional high-quality American dairy products such as milk, cheese, and skim milk powder,” said USDA Secretary Tom Vilsack.

“This is a win for American dairy farmers who want a fair shake at the market,” said Senator Debbie Stabenow (D-Mich.). “I look forward to Canada honoring our agreement, so our dairy industry has access to Canadian market opportunities as promised,” continued the chair of the Senate Agriculture Committee.

“On behalf of America's dairy farmers and manufacturers, we want to thank Ambassador Katherine Tai for launching the dispute settlement process and Congressional leaders for strongly supporting the need to uphold USMCA’s dairy provisions. We expect Canada to abide by its trade commitments so that the American dairy industry can fully access the Canadian markets just as USMCA promised,” said Krysta Harden, president and CEO of USDEC.

“The United States and Canada negotiated specific market access terms covering a wide variety of dairy products, but instead of playing by those mutually agreed upon rules, Canada ignored its commitments. As a result, U.S. dairy farmers and exporters have been unable to make full use of USMCA’s benefits,” said Jim Mulhern, president and CEO of NMPF. “The decision is an important victory for U.S. dairy farmers and the millions of Americans whose jobs are tied to the U.S. dairy industry.”