US challenges Canada’s managed dairy supply under USMCA deal

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A dairy farmer raises cows daily in Carrying Place, Ont., March 24, 2020.

ALEX FILIPE / Reuters

President Joe Biden’s administration is launching the first trade dispute under the US-Mexico-Canada deal, accusing Canada of breaking a deal to partially open its protectionist dairy market to US imports.

U.S. Trade Representative Katherine Tai announced on Tuesday that Washington would sue Ottawa under the USMCA, demanding the creation of a binational panel of experts to resolve the dispute. Prime Minister Justin Trudeau has promised Canada will stand up for itself.

The move is the latest in a series of cross-border sticking points and another reminder that, despite Mr. Biden’s vow to mend barriers with US allies after Trump’s combative administration, irritants remain in bilateral relations. .

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It is also the latest chapter in the long saga of Canada’s supply management system, which shields Canadian dairy farmers from foreign competition, driving up costs to consumers and sparking international anger.

“The launch of the first panel request under the agreement will allow our dairy industry and its workers to seize new opportunities under USMCA to market and sell US products to Canadian consumers,” Ms. Tai said in a statement Tuesday.

Trudeau said his government would “stand up for Canadian jobs” and fight trade action. He tried to downplay the importance the dispute would have for his relationship with Mr. Biden, which he said was at least an improvement over Mr. Trump, who has repeatedly threatened to end free trade. continental.

“We have seen with the arrival of the Biden administration a significant shift in the United States’ commitment to [the] international world order, towards multilateralism, ”he said. “At the same time, there will always be issues on which Canada and the United States disagree.”

The battle comes just days after the Biden administration increased punitive duties on softwood lumber imports from Canada. Mr Biden has also so far refused to intervene in Michigan’s efforts to shut down Line 5 – a Canadian oil pipeline that crosses the state – or to grant Canada an exemption from its stricter U.S. purchasing rules.

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Under supply management, Canada imposes tariffs of up to 300 percent on foreign imports. The issue has been a major sticking point in negotiations between the Trump administration and the Trudeau administration to replace the North American Free Trade Agreement with USMCA.

At USMCA, Canada agreed to ease the system by allowing more imports free of high tariffs. But the United States now says Canada has reserved many of its import licenses for Canadian dairy processors, who may be inclined to buy more from Canadian producers rather than import from other countries.

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Daniel Ujczo, an Ohio-based trade lawyer, said the dispute was based on different interpretations of what exactly Canada had agreed to. While Canada views the USMCA as allowing it to grant import licenses as it sees fit, the United States considers that the agreement guarantees the import of a certain amount of dairy products.

“It’s going to come down to a dispute over the difference between the USMCA letter and the spirit of USMCA,” said Mr. Ujczo of the Thompson Hine Company. “Canada’s position is that it negotiated in good faith these very specific terms and is using these terms for a direct interpretation of the chapter, while the United States believes the spirit of the agreement is being violated. “

Dairy wrestling will also be the first test of the USMCA’s dispute settlement system, which has been strengthened at Canada’s insistence. Under NAFTA, the system came to a halt after the United States refused to appoint members to binational trade groups that resolve these disputes. In the USMCA talks, the Trump administration demanded that panels be made less powerful. But Canada fought back. The system was retained and countries lost the ability to block the formation of panels.

If the panel rules against Canada, Ottawa will have to change its practices or face retaliatory tariffs from the United States.

Simon Lester, a trade expert at the libertarian think tank Cato Institute in Washington, said the ability of the system to work is likely more important than the substance of the dispute itself.

“This dispute isn’t really a precedent – Canada and the United States will be fighting over dairy and softwood lumber for the rest of our careers – except to say, ‘Hey guess what, the dispute settlement that was broken under NAFTA now operates under USMCA, ”he said.

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Lawrence Herman, a Toronto-based trade lawyer, said the regular emergence of irritants in Canada-U.S. Trade relations is not a cause for concern. In fact, having a process to resolve such disagreements is exactly what Canada wanted in USMCA.

“We shouldn’t start wringing our hands because the United States is invoking [dispute resolution] treat. Canada does the same when it concerns us, ”he said. “That’s what trade agreements are for.”

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