New Zealand has won a significant trade dispute with Canada over dairy quota, the first case taken under the CPTPP and the first dispute New Zealand has ever taken against any partner in a free trade agreement. 

The binding decision, made by an independent panel, has just been released and the result should give dairy producers in New Zealand improved access to the Canadian market. 

It finds that Canada has been breaching the CPTPP rules and will have to change its ways. 

New Zealand trade officials estimate that the restrictive way Canada has run its dairy quota has cost New Zealand exporters about $120 million in lost revenue in the past three years. 

New Zealand argued that Canada was violating both the spirit and rules of the CPTPP, that unless challenged, it would set a dangerous precedent for compliance and that Canada was making a mockery of the rules that it had signed up to. 

Canada had adopted a protectionist administration system for its dairy quota that undermined access and reduced its value to CPTPP parties, the New Zealand case said. 

New Zealand was supported in its case against Canada by most of the other CPTPP countries. 

Trade Minister Damien O’Connor has welcomed the ruling, calling it “a significant win for New Zealand and our exporters”. 

“Canada was not living up to its commitments under CPTPP, by effectively blocking access for our dairy industry to upscale its exports. That will now have to change,” he said. 

“As part of the CPTPP agreement, we secured new dairy quota access accounting for 3.3 per cent of Canada’s market - tens of thousands of tonnes per year in key dairy products for New Zealand’s exporters.” 

The panel had found that New Zealand exporters were not able to fully utilise Canada’s 16 dairy tariff rate quotas and that Canada was granting priority access to its own domestic dairy processors. 

He said New Zealand still valued its strong friendship with Canada, “one of our warmest and closest relationships in the world”. 

At the heart of the case was the unorthodox and restrictive way Canada was managing the annual tariff-free quota it had negotiated for 16 classes of dairy products when it joined CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership among 10 countries which came into force in December 2018. 

Canada declined to fully open up its market to dairy imports from CPTPP partners when it signed up to CPTPP but negotiated limited access in the form of quotas, known officially as tariff rate quotas (TRQs). 

The TRQ schedule sets out a certain volume of tariff-free dairy products that it will allow to be imported to Canada over 19 years from other CPTPP partners, usually increasing in volume each year. 

The 16 categories are: industrial cheese; whey powder; yogurt and buttermilk; cream; ice-cream and mixes; skim milk powders; butter; milk powders; other dairy; cream powders; products consisting of natural milk constituents; powdered buttermilk; cheeses of all types; concentrated milk; milk; and mozzarella and prepared cheese. 

One of the most restrictive measures Canada used was to completely block retailers - such as supermarket chains - from acquiring any of the quota allocation – a group that would be highly motived to import dairy products from New Zealand and possibly other CPTPP partners. 

Instead, Canada set up a complex system that meant the allocations were channelled away from Canadian importers who were likely to use the quota to buy New Zealand goods. Instead, the quota was acquired by “processors” who manufactured the same dairy product identified in the TRQ. 

Because they were director competitors, they did not have a good reason to utilise the TRQ. 

The result, as the New Zealand submission pointed out, was that “Canada makes its domestic dairy processors gatekeepers of their own competition”. 

It encouraged chronic underfill of the TRQ and New Zealand dairy exporters have not been able to fully benefit from the access agreed to at the outset. 

“In the 2021-22 quota year, for example, the fill rates for 13 of the 16 TRQs were 10 per cent or below, with nine of those 13 at zero.” 
 

New Zealand's top trade official Vangelis Vitalis. Photo / Audrey Young 

New Zealand first raised the issue of its unfair system formally with Canada in May last year but failed to resolve the matter. In November last year under disputes procedures, New Zealand requested a panel be formed to examine the matter. 

The panel was formed in March, held a hearing in June in Ottawa, and has just released its decision. 

It was chaired by Jennifer Hillman, a former commissioner at the US International Trade Commission, Colleen Swords, a former Canadian diplomat, and Petros Mavroidis, an international trade specialist. 

New Zealand’s top trade official, Vangelis Vitalis, said the panel was clear: “The way Canada is administering its dairy quotas under CPTPP is against the rules. It has to change. 

“Putting it frankly, Canada’s approach to administering its dairy quotas is protectionist and undermines the market access agreed between CPTPP parties,” said Vangelis, the deputy secretary, trade and economics at the Ministry of Foreign Affairs and Trade. 

The panel had made it clear that all importers must have the opportunity to utilise Canada’s TRQ fully. 

Canada was not allowed to use administrative complexity to prevent its importers accessing quota, or favour some importers over others. 

“The panel also made it clear that Canada is not allowed to give priority access to its domestic dairy processors. This has to stop.” 

Vitalis said that the panel found Canada was not in breach in two minor claims relating to its ability to make changes to the TRQ without consulting other CPTPP parties. 

But that was limited discretion. 

“The panel was clear that those changes cannot be used to undermine access to quota, or to favour Canada’s domestic industry. 

“Overall, New Zealand achieved a decisive win.” 

The Dairy Companies Association of New Zealand, which made a submission to the panel, has welcomed the ruling but called Canada’s behaviour “outrageous.” 

Executive director Kimberly Crewther said it showed the importance of dispute provisions in trade agreements. 

“Defending our access rights under all New Zealand trade agreements is important, and taking on a G7 country with a history of bending the rules has been no easy task,” Crewther said. 

“It is outrageous that Canada has sought to undercut the access it promised by reserving most of the quota quantities for domestic processors of those same products, who are least likely to import.” 

She said DCANZ was frustrated that, where dairy was concerned, Canada had a repeated pattern of needing to be legally compelled to adhere to its international trade commitments. 

Canada was now obliged to bring its system into compliance without unnecessary delay, 

“Canada’s failure to fulfil its obligations has robbed New Zealand exporters of trade opportunities for over four years now. DCANZ is calling on the Canadian Government to do the right thing by changing to a system that is fair and above board as soon as possible.” 

New Zealand has previously brought trade disputes within the World Trade Organisation but this is the first under a free trade agreement.