What are the Dairy Quota Limits?
The United States-Mexico-Canada Agreement (USMCA) established significant new market access for US dairy exports to Canada through a system of tariff-rate quotas (TRQs). These quotas allow specific volumes of US dairy products to enter Canada duty-free or at reduced tariff rates, with imports exceeding these quotas subject to much higher tariffs. This article examines the comprehensive framework of dairy quotas established under the USMCA, their implementation timeline, and the ongoing challenges in fully utilizing these market opportunities.
#Tariff-Rate Quota System Under USMCA
The USMCA agreement signed by Donald Trump, which entered into force on July 1, 2020, replaced the North American Free Trade Agreement (NAFTA) with provisions specifically designed to address longstanding barriers to US dairy exports to Canada. Prior to the USMCA, Canada maintained restrictive policies for dairy imports, including prohibitively high tariffs that limited market access for US producers. While NAFTA had liberalized most agricultural trade between the US and Canada, the Canadian dairy sector remained largely protected through the Canada’s supply management system.
Under the USMCA, Canada committed to establishing fourteen product-specific TRQs exclusively for US dairy products. These quotas set specific volume limits for duty-free access, with the quantities increasing progressively over the agreement’s implementation period. This represented a significant departure from NAFTA, which provided minimal access for US dairy exports to Canada despite the $619 million in dairy products the US exported to Canada in 2017.
The TRQ system operates on a straightforward principle: a specified quantity of dairy products can enter Canada at zero or reduced tariffs, while imports exceeding these quotas face Canada’s standard tariffs, which can exceed 200% for certain dairy products. This structure was designed to gradually increase US access to the Canadian market while allowing Canada to maintain elements of its supply management system.
#Quota Limits for Dairy Products
The USMCA established specific quota volumes for fourteen categories of US dairy exports to Canada. These quotas were designed to increase progressively, with significant growth over the first six years of implementation and continued annual increases thereafter. The key dairy product quotas include:
- Fluid Milk and Cream: For fluid milk, the USMCA established a quota of 50,000 metric tons (MT) by year six of the agreement, with 85% of this volume reserved for further processing rather than direct retail sale. This quota will grow by one percent annually for an additional 13 years after year six. For fluid cream, sour cream, ice cream, and milk beverages, the quota was set at 875,000 liters.
- Cheese and Butter Products: The cheese quota was established at 12,500 MT by year six, with 50% available for any kind of cheese and the remainder designated for industrial cheeses. This quota also increases by one percent annually for 13 years after year six. According to US Customs and Border Protection data, the overall cheese quota amounts to 1,041,500 kilograms.
- Butter and Cream powder: For these products the quota reaches 4,500 MT by year six, with 85% reserved for further processing in year one, decreasing to 50% by year five. This quota also continues to grow at one percent annually for 13 years following year six.
- Milk Powders and Concentrated Products: The USMCA established several quotas for various forms of processed milk, including skim milk powder (7,500 MT by year six), whole milk powder (57,500 kg), and concentrated and condensed milk (1,380 MT by year six). These quotas similarly increase by one percent annually for 13 years after year six.
- Other Dairy Products: Additional dairy product quotas include yogurt and buttermilk (4,135 MT by year six), powdered buttermilk (520 MT by year six), products of natural milk constituents (2,760 MT by year six), ice cream and ice cream mixes (690 MT by year six), other dairy products (690 MT by year six), and whey (4,134 MT by year six).
- Whey represents a unique case among the dairy products, as its quota will rise to 4,303 MT by year 10, after which the over-quota tariff will be eliminated entirely, allowing unlimited duty-free access for US whey exports to Canada.
#Implementation Timeline and Growth Mechanisms
The USMCA established a carefully structured timeline for the implementation of dairy TRQs. Initially, the quotas would be established for year one and then doubled in year two. For years three through six, the quotas would increase by 50%, 33%, 25%, and 20%, respectively. Following year six, the quantities for each category would increase at a compound growth rate of one percent for the subsequent 13 years.
After a total of 19 years from implementation, the quotas would be fixed at the year-19 level, with no further scheduled increases. This progressive approach was designed to provide a transition period for both US exporters and Canadian producers, allowing the market to adjust gradually to increased competition.
The quota year for milk, cream, skim milk powder, butter, milk powder, and whey runs from August 1 to July 31, while other dairy products are administered on a calendar year basis. This alignment with production cycles helps facilitate more efficient management of the quota system.
# Removing Additional Trade Barriers
Beyond establishing new TRQs, the USMCA addressed other barriers to US dairy exports. One significant achievement was Canada’s commitment to eliminate its controversial Class 6 and 7 milk pricing systems within six months of the agreement entering into force.
These pricing classes had been particularly problematic for US producers of ultra-filtered milk and other dairy ingredients, as they allowed Canadian processors to purchase domestic ingredients at artificially low prices, effectively undercutting US exports. Under the USMCA, Canada agreed to price skim milk solids used to produce nonfat dry milk, milk protein concentrates, and infant formula at a level based on the US price for nonfat dry milk minus a Canadian processing margin.
The agreement also established export thresholds and surcharges for Canadian exports of skim milk powder, milk protein concentrates, and infant formula to limit Canada’s ability to disrupt global markets with subsidized exports. For skim milk powder and milk protein concentrates, Canada’s exports were capped at 55,000 MT in year one and 35,000 MT in year two, with a surcharge of CAD $0.54 per kilogram applied to exports exceeding these thresholds.
#Challenges in Implementation and Quota Utilization
Despite the increased market access provided by the USMCA, the US dairy industry has faced significant challenges in fully utilizing the negotiated quotas. According to the International Dairy Foods Association, the US has not reached Canada’s zero-tariff maximum in any dairy category. This underutilization points to ongoing barriers beyond the quota limits themselves.
The Biden administration initiated a dispute settlement case under the USMCA, challenging Canada’s implementation of the dairy TRQs. The US argued that Canada’s allocation of TRQs unfairly favored Canadian processors, effectively limiting US access to the Canadian retail market. In a November 2023 panel ruling, two of three panelists found that Canada’s measures did not breach the USMCA commitments, representing a victory for Canada’s implementation approach.
However, one panelist agreed with the US claim challenging Canada’s narrow definition of eligible applicants, which excludes retailers, food service operators, and other types of importers from utilizing TRQ allocations. US Trade Representative Katherine Tai expressed disappointment with the ruling, stating that “Canada’s revised policies have still not fixed the problem for U.S. dairy farmers”
#Economic Impact and Future Prospects
Initial economic projections estimated that the USMCA would increase US dairy exports to Canada by approximately $227 million per year once fully implemented, representing a 43.8% increase. However, a causal impact analysis conducted by researchers at Texas Tech University found that actual exports increased by 34% ($173 million) compared to what was expected within the agreement.
This discrepancy was attributed to partial rather than full implementation of the agreement’s provisions. The researchers noted that “Canada kept its commitment partially, not fully,” with Canada’s allocation of TRQs favoring its own processors over US exporters targeting the retail market.
The USMCA established unprecedented access for US dairy exports to Canada through a comprehensive system of tariff-rate quotas covering fourteen product categories. These quotas provide for significant duty-free access that increases gradually over a 19-year implementation period. For fluid milk, the quota reaches 50,000 MT by year six; for cheese, 12,500 MT by year six; and for other dairy products, varying amounts that collectively represent the most substantial opening of Canada’s dairy market ever negotiated.
Despite these opportunities, challenges remain in fully utilizing the negotiated market access. The dispute over Canada’s TRQ allocation method highlights the ongoing tensions in implementing the agreement as intended. As the USMCA continues its implementation phase, continued monitoring and enforcement will be essential to ensure that US dairy exporters receive the full market access benefits promised under the agreement. The effectiveness of these quotas will depend not only on their numerical limits but also on how they are administered and whether non-tariff barriers are adequately addressed.
Introduction
As the gears of #North American #trade continues to turn under the United States-Mexico-Canada Agreement (USMCA), #businesses across the continent find themselves navigating an intricate web of #quota limits that govern everything from #dairy to wool suits since replacing NAFTA on July 1, 2020. Take a deep dive into the dairy quotas established under the #USMCA.
