Under the USMCA, Canada established tariff rate quotas (TRQs) for 13 categories of U.S. dairy products.[i] Up to the defined quota amount, these products were to receive tariff-free access to the Canadian market. However, last year, Canada reserved between 85 and 100% of the TRQs for many of the product categories exclusively for Canadian dairy processors. As a result, TRQs were substantially under-filled for many of the products (Figure 1a).[ii]
In May 2021, the U.S. filed the first official grievance under the USMCA, claiming that Canadian dairy quota administration procedures were in violation of USMCA trade obligations. In a decision publicly released on January 4, 2022, the dispute settlement panel found that, “The current Canadian system, which sets aside significant TRQ volumes only for processors, does not pass muster under the Treaty.”[iii] Canada is now required to reach agreements with the U.S. on the allocations process or face retaliatory trade sanctions.
In an upcoming working paper, Chris Wolf and I calculate the economic costs of these Canadian dairy quota restrictions for the U.S. dairy industry. We find that the effective trade barrier created by Canadian quota allocation practices was as much as 71% to 94% more restrictive than the negotiated quota for some products.
Figure 2 plots the total TRQ value versus actual imports under USMCA holding current prices and quota fill rates constant. The administrative trade barrier created by Canada dairy quota allocation practices equates to approximately $1.27B in lost trade, or 67% of the total TRQ value, between now and 2030.
Figure 1: USMCA Dairy Quota Fill Rates (2021)
Figure 2: Total TRQ Value versus Actual Imports
[i] Canadian Dairy Quotas are defined in Chapter 2 “National Treatment and Market Access” of the United States-Mexico-Canada Agreement (USMCA).
[ii] Data for this figure are obtained from the Canadian Government Supply-Managed Tariff Rate Quota Utilization Tables (https://www.international.gc.ca/trade-commerce/controls-controles/supply_managed-gestion_offre.aspx?lang=eng&type=Utilization%20Tables#data)
[iii] USMCA Arbitral Panel (2021). Final Report. Canada – Dairy TRQ Allocation Measures (CDA-USA-2021-31-010).
Schaefer, K. Aleks. “The Economic Costs of Canadian Dairy Quota Restrictions under USMCA“. Southern Ag Today 2(25.4). June 16, 2022. Permalink
