By Andrea Shalal and David Ljunggren
WASHINGTON (Reuters) -Canada violated a trade accord with the United States and Mexico by reserving most of its preferential dairy tariff-rate quotas for Canadian processors, a dispute panel found, and Washington warned it could retaliate if Ottawa did not change course.
The U.S. Trade Representative's office claimed victory for Washington in the first dispute settlement panel ever brought under the U.S.-Mexico-Canada Trade Agreement (USMCA) that took effect in 2020. Canada said the report found "overwhelmingly" in its favor.
At issue in this case is Canada's practice of reserving 80-85% of the volume of its dairy tariff rate quotas (TRQs), which are specified quantities of products from ice cream to cheese that can cross the border at lower or zero tariffs, for import by Canadian processors.
The United States requested creation of the dispute panel on May 25 after failing to resolve the issue bilaterally with Canada. The panel issued its confidential findings to the parties on Dec. 20 and released them publicly on Tuesday.
In its 50-page report, the panel concluded, "Canada’s practice of reserving TRQ pools exclusively for the use of processors is inconsistent with Canada’s commitment in Article 3.A.2.11(b) of the Treaty not to 'limit access to an allocation to processors.'"
U.S. Trade Representative Katherine Tai said the "historic win will eliminate unjustified trade restrictions on American dairy products, and will ensure that the U.S. dairy industry and its workers get the full benefit of the USMCA to market and sell U.S. products to Canadian consumers."
U.S. producers exported $478 million of dairy products to Canada from January through October, according to U.S. data. It was not immediately clear how much the volume could increase as a result of the panel's finding.
The senior U.S. official said the United Sates expected Canada to resolve the issue by a deadline of Feb. 3 and its goal was not to impose retaliatory measures but it had the right to do so if Ottawa did not remove the restrictions.
"We will ensure compliance with the ruling which is overwhelmingly in Canada's favor ... Canada is seeing this (report) as a win in a lot of ways," said Alice Hansen, spokeswoman for Canadian Trade Minister Mary Ng.
Hansen, speaking by phone, said it would be premature to discuss how Canada would ensure compliance.
U.S. farmers have complained that Canada's supply management system hurts their ability to export to their northern neighbor.
Ng said in a statement the panel had expressly recognized the legitimacy of Canada's supply management system, which sets production quotas and high tariffs to support prices of dairy, poultry and eggs.
(Reporting by Andrea Shalal and David Ljunggren; additional reporting by Rod Nickel; Editing by Mark Porter, Heather Timmons and Cynthia Osterman)