Canada doubles down after New Zealand escalates its trade dispute over dairy sales

Canada is digging in its heels after New Zealand escalated its trade dispute with Ottawa last week. 

It says it is “disappointed” with New Zealand’s action and has vowed to defend its management of its dairy industry.

New Zealand for its part says it cannot rule out retaliatory tariffs equivalent to its lost dairy sales in Canada.

NZ initiated the dispute in late 2022, saying Canada was breaching the rules of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) by blocking dairy exporters’ access to its market.

Subsequent arbitration by a CPTPP panel essentially sided with the New Zealand argument, though the Canadian Government contested this interpretation. Ottawa subsequently said it had changed a system of pooling Tariff Rate Quotas (TRQs) to comply with the panel’s ruling. New Zealand had objected to that pooling, but responded that Canada was bringing in new rules that achieved the same thing in a different way. 

At the time of the ruling by the CPTPP panel, the then Trade Minister Damien O'Connor put the cost of Canada’s action at $120 million in lost sales, but more recent estimates by the industry are around $200 million.

Last week, the New Zealand Government stepped up the pressure against Canada by requesting formal negotiations, which must be initiated in 15 days. 

“New Zealand takes its obligations under trade agreements seriously,” the Trade Minister Todd McClay says. 

“The CPTPP is one of the highest quality agreements signed by a group of like-minded economies.  Parties to the agreement understood the commitments they were making when the agreement was signed, and it is important that they honour them.

“As a matter of principle, the New Zealand Government expects our trade partners to treat our exporters fairly and within the rules of our agreements. Canada is not doing that in respect to the dairy quotas that were negotiated and agreed with New Zealand.”

But within two days of McClay’s comment, the Canadian Government issued a defiant response.

“Canada is very disappointed that New Zealand has decided to continue to challenge Canada’s dairy TRQ system,” the country’s Trade Minister Mary Ng and its Agriculture Minister Lawrence MacAulay said in a joint statement. 

“We have been through this before and have consistently and successfully defended our dairy sector and supply management from trade challenges under the Canada United States and Mexico Agreement (CUSMA) and the CPTPP.

“The Government of Canada will always defend our supply management, firmly standing up for Canada’s dairy industry, farmers and workers and the communities they support.”

This dispute is partly driven by the political strength of the Canadian dairy farmer lobby, which enjoys guaranteed prices and production quotas. 

At the time of the original ruling by the CPTPP panel, the lobby group, Dairy Farmers of Canada said only two of the six claims lodged against Canada by NZ were upheld by the rulings panel, while the Canadian Government argued it was making concessions under the CPTPP that it was not making under CUSMA, which replaced the old NAFTA.  

But the Dairy Companies Association of New Zealand (DCANZ) said at the time that removing the pooling system was not as good as it seems.

"They have got a really complex formula, but it basically puts the lion’s share of the product in the hands of the Canadian processors,” said its executive director, Kimberly Crewther.

Despite this criticism, Ng and MacAulay are standing their ground. 

“We are confident that Canada’s new policies fulfill Canada’s obligation to eliminate the non-conformity (with CPTPP) identified by the panel.”

Much of the problem stems from the political power of Canada’s dairy producers, who enjoy domestic production quotas that protect them from competition. The system keeps incomes for Canadian farmers and prices for consumers high. 

McClay is currently talking trade in Brazil, but he issued a short statement in the wake of the Canadian response.

"We will continue to seek the mandatory negotiations as announced on Friday, and if Canada does not make changes to honour CPTPP obligations, we are prepared to take the next steps after that," he said.

He did not give details on what those next steps would be. However, he spoke earlier about the possibility of retaliatory tariffs on Canadian sales to New Zealand. Canada’s main exports to New Zealand include machinery, wood, pork and fertilisers. That trade was worth $1.19 billion in the 2023 year.