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A dairy farmer herding cows a day in Carrying Place, Ont., on March 24, 2020.

ALEX FILIPE/Reuters

President Joe Biden’s administration is launching the first trade dispute under the United States-Mexico-Canada Agreement, accusing Canada of breaking a deal to partly open its protectionist dairy market to U.S. imports.

U.S. Trade Representative Katherine Tai announced on Tuesday that Washington will sue Ottawa under USMCA, demanding a binational trade panel to resolve the dispute. Prime Minister Justin Trudeau vowed that Canada would defend itself.

The move is the latest in a string of cross-border friction points, and another reminder that, despite Mr. Biden’s promise to mend fences with U.S. allies after the combative Trump administration, irritants remain in the bilateral relationship.

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It is also the latest chapter in the long-running saga of Canada’s supply management system, which protects Canadian dairy farmers from foreign competition, driving up costs for consumers and earning international ire.

“Launching the first panel request under the agreement will ensure our dairy industry and its workers can seize new opportunities under the USMCA to market and sell U.S. products to Canadian consumers,” Ms. Tai said in a statement on Tuesday.

Mr. Trudeau responded that his government would “stand up for Canadian jobs” and fight the trade action. He tried to play down the significance the dispute would have for his relationship with Mr. Biden, who he said was at least an improvement over Mr. Trump, who repeatedly threatened to end continental free trade.

“We have seen with the arrival of the Biden administration there has been a significant change in the United States’ engagement towards [the] international world order, towards multilateralism,” he said. “At the same time, there will always be issues upon which Canada and the U.S. have disagreements.”

The battle comes mere days after the Biden administration jacked up punitive duties on softwood lumber imports from Canada. Mr. Biden has also refused so far to intervene in Michigan’s efforts to shut down Line 5 – a Canadian oil pipeline that crosses the state – or to give Canada an exemption from his tougher proposed Buy American rules.

MPs urge Trudeau-Biden talks to solve looming Line 5 closing

Under supply management, Canada charges tariffs of up to 300 per cent on foreign imports. The issue was a major sticking point in negotiations between the Trump administration and the Trudeau government to replace the North American free-trade agreement with USMCA.

In USMCA, Canada agreed to loosen the system by allowing more imports free of the high tariffs. But the United States now says Canada reserved many of its import licences for Canadian dairy processors, who may be inclined to buy more from Canadian producers rather than importing from other countries.

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Daniel Ujczo, an Ohio-based trade lawyer, said the dispute turns on different understandings of what exactly Canada agreed to. While Canada sees USMCA as allowing it to allocate import licences however it sees fit, the U.S. views the deal as having guaranteed a certain amount of dairy products would be imported.

“This is going to come down to a dispute over the difference between the letter of the USMCA and the spirit of USMCA,” said Mr. Ujczo, of the firm Thompson Hine. “Canada’s position is that it negotiated in good faith for these very specific terms and is using those terms for a straight interpretation of the chapter, whereas the U.S. thinks there is a spirit of the agreement that is violated.”

The dairy fight will also be the first test of the USMCA’s dispute resolution system, which was strengthened at Canada’s insistence. Under NAFTA, the system ground to a halt after the U.S. refused to appoint members to the binational trade panels that resolve such disputes. In USMCA talks, the Trump administration demanded the panels be rendered less powerful. But Canada fought back. The system was retained and countries lost the ability to block the formation of panels.

If the panel finds against Canada, Ottawa will have to change its practices or face retaliatory tariffs from the U.S.

Simon Lester, a trade expert at the libertarian Cato Institute think tank in Washington, said the ability of the system to work is probably more important than the actual substance of the dispute itself.

“This dispute is not really precedent-setting – Canada and the U.S. will be disputing dairy and softwood lumber for the rest of our careers – except to say, ‘Hey, guess what, the dispute settlement that was broken under NAFTA is now working under the USMCA,’ ” he said.

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Lawrence Herman, a Toronto-based trade lawyer, said the regular emergence of irritants in the Canada-U.S. trade relationship is not a cause for alarm. In fact, having a process for adjudicating such disagreements is exactly what Canada wanted in the USMCA.

“We shouldn’t start hand-wringing because the U.S. invokes that [dispute resolution] process. Canada does the same when it concerns us,” he said. “That’s what trade agreements are for.”

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