U.S. Questions Canada's Dairy Commitment

February 20, 2001

The United States has asked that the World Trade Organization (WTO) reconvene a dispute settlement panel to examine whether Canada has complied with WTO rulings on its export subsidies on dairy products. The United States does not believe that Canada has taken the necessary steps to bring its dairy export subsidy program into compliance with WTO agreements, because Canada has introduced new programs that do not fulfill the export subsidy reduction commitments undertaken in the WTO Agreement on Agriculture.

Also, the United States will request authorization from the WTO to suspend trade concessions on Canadian products if the panel determines that Canada has not complied. In that request, the United States proposes to increase tariffs on Canadian products with an annual trade value of up to $35 million, the approximate amount of annual harm to the U.S. economy caused by Canada's dairy export subsidy regime. Under an agreement with Canada, the United States would not suspend trade concessions until an arbitrator has confirmed the level of trade harm suffered by the United States.

The request for authorization to suspend trade concessions includes a list of potential product categories from which the United States will draw in selecting specific products that will be subject to increased duties. At this time, USTR is not publishing a list of the specific products that may be subject to increased duties. However, at a later date the USTR says it will publish a Federal Register notice seeking public comment on a specific list of products.

USTR says Canada agreed to specific export subsidy limits on dairy products as part of its Uruguay Round WTO obligations. However, on Aug. 1, 1995, Canada replaced its subsidy payments on dairy product exports, which were financed by a levy on producers, with a new permit system which allowed Canadian processors to purchase lower priced milk for sales to export destinations. Canada claimed the new system was no longer an export subsidy.

The United States challenged Canada's export subsidy system in the WTO, and on Oct.13, 1999, the WTO Appellate Body found that Canada's special class milk regime, which provides reduced priced milk for export, is an export subsidy. The Appellate Body also found that Canada was shipping subsidized dairy exports in greater quantities than is permitted under its export subsidy commitment levels, violating Canada's obligation under the Agreement on Agriculture. The Canadian federal government eliminated one of the export subsidies that was found to be inconsistent with Canada's WTO obligations.

However, other programs were introduced by Canada to replace the challenged export subsidy. Both the United States government, and the New Zealand government (which is a co-complainant with the United States), believe Canada's changes fail to bring Canada's export subsidy system into conformity with its WTO obligations.