Why New Zealand is right to challenge Canada on its dairy industry

When it comes to dairy products and free trade, Canada wants to have it both ways. The dairy dispute between New Zealand and Canada reveals ongoing tensions within Canada’s trade agenda.

On May 12, New Zealand requested consultations with Canada on its administration of tariff quotas for dairy products, known as TRQs.

Tariff quotas are reserved quantities of a good that are exempt from existing customs duties. Canada maintains high tariffs on dairy products to protect its industry from foreign competition, but tariff rate quotas are exempt. These tariff quotas are divided into different categories, such as butter or milk powders.

Under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), Canada allows other countries to sell their dairy products at low prices for a specified amount. The challenge is how to administer these amounts or TRQs. New Zealand argues that Canada’s administrative methods run counter to its CPTPP commitments to freer trade between signatories.

The problem for Canada is that New Zealand’s case is strong.

Case of New Zealand v Canada

New Zealand’s trade dispute alleges that Canada’s TRQ administration reduces its market value by underfilling its dairy TRQs. As a result, New Zealand does not ship enough of its dairy products to Canada, and the products that Canada imports are of lower value. New Zealand attributes this to Canada’s exclusive “pooling” of processor TRQs.

Since 1995, Canada has administered its TRQs in pools separated by their location in supply chains. For example, 85% of Canada’s milk TRQs under the CPTPP are reserved for dairy processors who produce products such as dairy cream and powders.

Canada’s TRQ administration is distorted, as the vast majority of dairy products are allocated to processors rather than retailers. This means that countries that are part of the CPTPP cannot put their products directly on Canadian store shelves.

Canadian milk and dairy products line a grocery store shelf in Aylmer, Quebec.
THE CANADIAN PRESS/Sean Kilpatrick

This is a major problem for several reasons. First, Canada’s allocation of dairy TRQs makes it more difficult to maximize what the agreement allows for imports. In other words, it undermines the efforts of countries like New Zealand to sell their products in Canada. The first signs seem to show that this is the case.

Second, processors are more likely to buy cheaper products as inputs for more expensive products. For example, an ice cream sandwich is a product made from other, usually less expensive, dairy products. This could mean a shortfall for New Zealand growers.

Fortunately in the case of New Zealand, the CPTPP is more thorough than other agreements. It specifies that TRQs should not be “more administratively cumbersome than absolutely necessary”. The agreement adds that countries cannot “allocate part of the quota to a group of producers” or “limit access to an allocation to processors”.

Canada has already lost

If Canada loses the panel’s ruling on the matter, it wouldn’t be the first time. The United States successfully submitted a similar request for consultation under the Canada-United States-Mexico Agreement.

The US dispute also identified the Canadian pooling as unfair and inequitable. Canada argued that a processor pool was not an allocation under the agreement. Canada added that the Americans were aware of its TRQ administration and therefore had tacitly accepted it.

These arguments did not convince the panel and Canada has yet to comply with this decision. It seems unlikely that Canada will succeed under the CPTPP either, as both agreements have similar TRQ stipulations.

The better question is why Canada put itself in this position in the first place.

Dairy cows stick their heads through metal bars to eat hay in a barn.
Dairy cows are spotted on a Quebec farm.
THE CANADIAN PRESS/Ryan Remiorz

Canada’s Trade Agenda

Since Canada’s first trade agreement, there have been obvious tensions because while Canadian policymakers want free trade, they also want certain sectors exempt. Canada is not unique in agricultural exceptionalism, but it is among the world leaders in this practice.

While early trade agreements overcame this tension, recent agreements have struggled to do the same. Canada’s last three major trade agreements have each granted more access to the Canadian market for foreign dairy producers. In return, Canada offered direct compensation to dairy farmers and processors.

This change in trade policy comes at a time when free trade is receiving increased attention. As trading partners like the United States are pulling out of trade deals, Canada is stepping forward.

This is part of Canada’s new trade strategy, the Inclusive Trade Agenda. This program aims to bring historically marginalized groups into the trade. Women, indigenous peoples and the middle class are among these groups.

Global Affairs Canada adds that “communicating the benefits of trade and investment” is a key objective of the program, which aims to curb “the perception of negative or divergent effects of trade and investment”. But it’s more than a perception.

The Inclusive Trade Agenda is as much a substantive trade policy reform as it is a rebranding effort. The program communicates Canada’s renewed commitment to free trade.

Selective free trade

The problem is that Canada selectively embraces economic liberalization. Canada only wants free trade for certain aspects of its economy. Canada’s trade policy is torn between two tracks.

There is nothing inherently wrong with isolating the dairy industry from foreign competition. Good arguments can be made in favor of its exemption.

But Canada can no longer have it both ways. Canada cannot make dairy concessions and then backtrack on those commitments while pushing for rules-based agreements.

The contradictions in Canada’s trade agenda have never been more apparent. The New Zealand dispute reminds us that Canada must make difficult choices.

Canada can either promote a restricted trade agenda with few concessions or fully embrace liberalization. Trying to do both will accomplish neither.

About Jimmie T.

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