Liberal government nearing revived trade spat with U.S. as tensions mount over dairy, aluminum

OTTAWA — The Canadian government could be edging toward a revived trade spat with the U.S., after America’s top trade advisor accused Canada of “shading” its dairy obligations and breaking agreements over aluminum exports.

Renewed trade rifts with the U.S. come just days ahead of a key deadline for the U.S.-Mexico-Canada Agreement (USMCA), which comes into force July 1 and replaces the former North American Free Trade Agreement (NAFTA).

The two countries have enjoyed a year of relative calm on the trade front, after agreeing in mid-2019 to remove tariffs on steel and aluminum and finally ending years-long negotiations over USMCA. But comments last week from U.S. Trade Representative Robert Lighthizer suggest that relationship is beginning to sour once again, after the Trudeau government introduced new dairy quotas that Lighthizer said could be purposely skirting international trade obligations. Those tensions add to a separate spat over aluminum supplies, in which the U.S. has threatened to re-impose tariffs on Canada.

James McIlroy, a trade consultant who works with the International Cheese Council of Canada (ICCC), said the recent moves by Ottawa exposes a “two-faced foreign policy” that has long frustrated its international trading partners, who claim they are unfairly and routinely cut out of the Canadian market. He said a revived spat with the U.S., if left unresolved, could threaten to hamper Ottawa as it looks to climb out of a deep economic slump caused by the COVID-19 pandemic.

“It almost seems like the Trudeau government is sleepwalking into this,” he said.

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Concerns have persisted for decades over Canada’s protection of its dairy industry, and came up in a review launched by European trade partners under the Comprehensive Economic and Trade Agreement (CETA).

“There’s a concern in the international community that the Trudeau government is signing agreements and then not respecting them,” McIlroy said.

Lighthizer took issue with Canadian trade policy in a Senate committee hearing last week, where he blasted quotas for cheese, milk and poultry, while also blaming Canada for a recent influx in U.S. aluminum imports.

International Trade Minister Mary Ng on June 15 published updated guidelines for allocating so-called trade tariff rate quotas (TRQs) for a range of dairy products. The updated TRQs allocated 85 per cent of some cheese quotas to Canadian processors, for example, which effectively hands the bulk of the market to three entities: French multinational firm Lactalis, Montreal-based Saputo, and the dairy organization Agropur Coopérative.

The U.S. has now threatened to file a formal complaint with Canada over the allocations, saying it gives market access directly to American competitors, rather than opening up the Canadian market to foreign firms, as USMCA sought to do.

“Dairy is something we’re going to be very closely monitoring with Canada,” Lighthizer said in the hearing last week. “If there’s any shading of the benefits to American farmers, we’re going to bring a case against them,” he told the committee. He said he would be “very closely monitoring” Canadian dairy allocations to protect American producers.

Lighthizer also told the committee that a “surge” in aluminum supply, mostly from Canada, ran counter to previous anti-dumping arrangements, and was “something that we’re looking at and talking to both Mexico and Canada about.” A report by Bloomberg News on Monday, citing anonymous sources, suggested the Trump administration was mulling the re-imposition of tariffs on aluminum, and could make an announcement by Friday.

A spokesperson for Deputy Prime Minister Chrystia Freeland, who still oversees the Canada-U.S. trade file, said Ottawa has been discussing the disagreement with its American counterparts.

“The free flow of goods and services, including aluminum, is important for jobs and economic growth in both of our countries,” the person said in a statement. “We firmly believe that our aluminum exports do not harm the U.S. market. We are emphasizing this in our ongoing conversations with our American partners.”

A response to questions around dairy quotas was not immediately answered.

Mark Warner, international business and regulatory lawyer at MAAW Law, said the trade relationship between the U.S. and Canada has remained tense, as any slight move by Ottawa could quickly dust off old resentments.

“Anyone who is seen to be playing close to the bone, Trump and the Trump administration respond,” he said.

Dairy industries in New Zealand, Europe, the U.S. and elsewhere have long claimed that Canada has unfairly used its quota system to protect domestic producers, while expecting foreign countries to maintain an open market. The Canadian dairy industry rejects those claims, saying various forms of protections exist in other jurisdictions as well.

Jaime Castaneda, a senior vice-president at the U.S. National Milk Producers Federation, said in an interview last week that their group had “significant concerns” over Canada using TRQs in a way that it claims is counter to free trade. He said the “Canadian government has used this system for other trade agreements and, in fact, in USMCA there are specific provisions to prevent this from happening again.”

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