WASHINGTON — The United States is ramping up its dispute with Canada over the sale of American dairy products north of the border — the first significant new trade squabble between the two countries of the post-NAFTA era.

U.S. Trade Representative Katherine Tai formally requested a dispute settlement panel Tuesday to examine allegations from American producers that Canada is denying them fair access to the Canadian market.

The request marks a significant escalation of American complaints about the way Canada is allocating access to its supply-managed dairy market under NAFTA’s successor, the U.S.-Mexico-Canada Agreement.

“A top priority for the Biden-Harris administration is fully enforcing the USMCA and ensuring that it benefits American workers,” Tai said in a statement.

“Launching the first panel request under the agreement will ensure our dairy industry and its workers can seize new opportunities under the USMCA to market and sell U.S. products to Canadian consumers.”

At the heart of the dispute 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.

That is expressly forbidden under the text of the agreement, USTR officials told a background briefing Tuesday.

“What Canada is doing is essentially dividing up the (quotas) … into different pools and saying, ‘Well, here’s a pool that only processors can access,'” said one official, who cannot be identified under the terms of the briefing.

“We read the agreement — and we think it’s pretty plain on its face — that that’s not permitted. Canada disagrees, and so we’re going to argue that out before a panel.”

The two sides held consultations on the issue late last year as an initial first step, “but did not resolve the dispute,” the USTR said in a news release Tuesday.

Canadian officials have been insisting for months that the allocations are perfectly in keeping with Canada’s commitments under the trade agreement, which took effect last July.

International Trade Minister Mary Ng said Canada is “disappointed” in the USTR’s decision, and that the quota allocations are well within the bounds of the agreement, known north of the border as CUSMA or the “new NAFTA.”

“Under CUSMA, Canada agreed to provide some additional market access to the United States for dairy while successfully defending our supply management system and dairy industry,” Ng said in a statement.

“We are confident that our policies are in full compliance with our CUSMA TRQ obligations, and we will vigorously defend our position during the dispute settlement process.”

The request for a panel puts dairy squarely alongside the ongoing softwood lumber dispute as two of the most prominent trade-related sore spots in the Canada-U. S. relationship.
It suggests the U.S. is serious about making sure the USMCA lives up to the promise that everyone reaps the benefits, said Dan Ujczo, a trade lawyer and Canada-U. S. specialist at Thompson Hine in Columbus, Ohio.

“There’s a concerted effort — not only by the U.S., but all three countries — to not make the mistake of the original NAFTA, which is just make a deal, and then let it sit there and become the punching bag over the next 30 years,” Ujczo said.

“The idea is that this is a living, breathing agreement. And that was reflected even last week at the Free Trade Commission meetings, that we’re going to make this work for North America. And this is a piece of that puzzle.”

Advocates for dairy farmers in both countries were quick to react to the USTR’s decision, albeit with very different perspectives.

Pierre Lampron, president of the Dairy Farmers of Canada, described the quota allocations as “consistent” with the terms of the agreement and predicted vindication.

“We believe the Canadian government has a solid case to present before the panel and ultimately our right to administer TRQs will be recognized,” Lampron said.

The U.S.-based National Milk Producers Federation had a different take.

“Canada has failed to take the necessary action to comply with its obligations under USMCA by inappropriately restricting access to its market,” president and CEO Jim Mulhern said in a statement.

“This needs to stop and we are thankful that USTR intends to make that happen.”

Even healthy relationships have disagreements, Prime Minister Justin Trudeau said earlier Tuesday.

“We will always defend supply management and our dairy producers, amongst others. We will always stand up for our forestry workers in the industry across the country,” Trudeau said.

“We will continue — as we did successfully in the previous administration — to stand up to defend Canadian interests and values wherever necessary.”

As for who might be in the right, Ujczo was characteristically diplomatic.

“If this was easy,” he said, “We wouldn’t be going into a dispute resolution panel.”

This report by The Canadian Press was first published May 25, 2021.