In a statement issued on 9 December 2020, the U.S. Trade Representative (USTR) announced that the United States has made a formal request for consultations to address Canada’s import limits on a variety of dairy products. This request for dispute settlement consultations is the first enforcement action taken under the Canada-United States-Mexico Agreement (CUSMA), which entered into force on July 1, 2020. (See “Farewell to the NAFTA and Welcome to the USMCA/CUSMA/T-MEC”).

In its statement, the USTR formally alleges that Canada is unfairly undermining the American dairy farmers’ ability to sell their products to Canadian consumers, and presents a four-pronged argument against Canada’s tariff-rate quota (TRQ) allocation measures. This accusation echoes the concerns of the U.S. Dairy Export Council, which complained in June 2020 about Canada’s TRQs. The USTR’s “request for consultations” could be the first step in what might become the first full-blown trade dispute under the CUSMA between Canada and the United States.

Under Chapter 31 of the CUSMA, the establishment of a dispute settlement panel may be requested if the matter is not resolved by consultations. The dispute resolution mechanism under Chapter 31 may be invoked when a party believes that another party has “nullified or impaired” a benefit that the first party “could reasonably have expected to accrue to it” under the CUSMA.

According to the USTR’s statement, the CUSMA allows Canada to maintain the right to apply certain TRQs on dairy products, including for the following kinds of goods: milk, cream, skim milk powder, butter and cream powder, industrial cheeses, cheeses of all types, milk powders, concentrated or condensed milk, yogurt and buttermilk, powdered buttermilk, whey powder, products consisting of natural milk constituents, ice cream and ice cream mixes, and “other” dairy. The USTR claims that Canada’s dairy TRQ allocation measures appear to be inconsistent with the following provisions of the CUSMA:

1. Article 3.A.2.11(b) because Canada is setting aside and reserving a portion of the quota to processors.
2. Articles 3.A.2.4(b) and 3.A.2.11(e) because Canada is not providing “fair” and “equitable” procedures and methods for administering its TRQs.
3. Article 3.A.2.11(c) because, as a consequence of reserving large shares of the quota for processors and so-called “further processors”, Canada fails to ensure that, “to the maximum extent possible”, the allocation is made “in the quantities that the TRQ applicant requests”.
4. Article 3.A.2.6(a) because the allocation measures “introduce a new or additional condition, limit, or eligibility requirement on the utilization of a TRQ” that goes “beyond those set out in [Canada’s] Schedule to Annex 2- B.”

The USTR’s challenge could set the stage for bilateral discussions and the development of measures aimed at re-shaping the trade landscape with respect to supply-managed diary products.

Tereposky & DeRose regularly provides advice on the interpretation, application, and implementation of international trade agreements. Should you have any questions regarding the CUSMA, or any other trade matter, we are at your disposal.