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Canada has lost the first-ever dispute case under the new North American trade agreement, with a panel siding with the U.S. and saying Ottawa flouted part of its obligation to open the dairy market.

The three-member panel — made up of a Uruguayan diplomat who was once ambassador to Canada, a Canadian trade lawyer based in the U.S., and a U.S. trade lawyer named to the panel by Canada — agreed that Canada violated its promise to allow slightly more dairy imports by imposing unfairly complicated rules.

The U.S. says Canada now has a few weeks to comply with the ruling, or face the possibility of a trade penalty such as a tariff.

The finding comes amid a succession of trade disputes between the countries that risk souring the bilateral relationship. 

"We prevailed — as we thought we would," a senior official in the U.S. Trade Representative's office told reporters in a briefing Tuesday.  

"Now the goal is to work with Canada.… The end goal is not to put retaliatory tariffs in place." 

The report was released to the countries in a full confidential version just before the holidays, on Dec. 20; a 53-page public version was released Tuesday.

The Canadian government also claimed a partial victory: It noted that the panel otherwise upheld Canada's system of supply management of its dairy sector. 

What's the context

Dairy was one of the hardest-fought issues in negotiating the new Canada-U.S.-Mexico Agreement on trade (CUSMA), and was resolved in the final days of negotiating.

The Canadian government worked to prevent new imports, under pressure from producers concentrated in Central Canada.

They argued that Canada's tightly controlled system allows for stable farming communities without the wild price fluctuations that have periodically battered U.S. farms.

For the U.S., exporting more dairy was a top priority.

Its allies argued that the tight Canadian controls unfairly shut out competition, and innovation, and can lead to higher prices for consumers.

In the end, the U.S. gained a small opening.

A series of measures in Chapter 3 of the new trade agreement allowed the U.S. some additional exports to the tune of more than three per cent of Canada's market.

But when it came time to implement the agreement, Canada left domestic processors in charge of allocating import permissions, known as tariff-rate quotas.

This angered the U.S. industry and government: both the Trump administration and the Biden administration moved forward with a case against Canada.

They argued that by giving Canadian producers control over 80 per cent of the import quotas they created an undue hurdle to cross-border sales.

One USTR official put it this way in Tuesday's briefing: an American producer would hope to talk directly to their customer in Canada, say a grocery store, about import rights, instead of their competitors.

He said those buyers in Canada, and their customers, have an incentive to allow imports to flow — unlike the producers.

The first panel decision under the new trade pact agreed with the U.S.; it said Canada violated Article 3.A.2.11(b) of the agreement, which says tariff-rate quotas should not be allocated to producer groups. 

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