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Dairy cows graze on a farm near Oxford, in the South Island of New Zealand, on Oct. 8, 2018.Mark Baker/The Associated Press

New Zealand’s Trade Minister says Canada has “locked out” his country’s exporters as he escalates a dispute over whether the Canadian government is being fair to the small dairy powerhouse of 5.1 million people.

Damien O’Connor, who also serves as New Zealand’s Agriculture Minister, has formally requested a binding dispute-settlement panel to resolve the trade tiff with Canada under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a deal that entered into force in late December, 2018.

This fight is over how Canada allocates preferential access to its heavily sheltered dairy market for trade partners under the CPTPP. Tariff-rate quotas grant the right, up to a certain limit, for foreign countries to sell goods into Canada without paying high duties.

Despite its small population, New Zealand, which has been called the “Saudi Arabia of milk,” ranks around seventh or eighth in terms of milk production. In 2021, it was the largest dairy exporter in the world and accounts for approximately 35 per cent of world trade in dairy products.

Under Canada’s supply management system for dairy, this country protects domestic farmers from foreign competition with a wall of high tariffs but grants some access, up to a quota limit, for non-Canadian products such as milk, cheese, ice cream and yogurt that are then imported under a lower, or zero, duty rate.

This special access is called tariff-rate quotas, or TRQs.

This complaint is the first dispute under the CPTPP trade deal and New Zealand accuses Canada of improperly administering these tariff-rate quotes in such a way that its exporters cannot ship enough of their product into the Canadian market.

Earlier this year, Mr. O’Connor had estimated that the cost to New Zealand amounted to 68-million New Zealand dollars over the first two years since the TPP deal came into force. He said this impact would only grow as the size of quota New Zealand is entitled to also increases.

“Canada is not living up to the commitments it made under CPTPP to allow dairy products into Canada,” Mr. O’Connor said in a statement. “This is impacting New Zealand exporters, who remain effectively locked out of the Canadian market, and Canadian consumers, who are missing out on the increased consumer choice that CPTPP promises.”

Toronto-based international trade lawyer Lawrence Herman said New Zealand is raising the same complaint that the American government pursued successfully in a separate dispute under the United States Mexico Canada Agreement (USMCA).

“The issues about Canadian compliance with dairy commitments are essentially the same. It seems New Zealand has a very good case,” Mr. Herman said.

“This illustrates how the whole supply management system we operate is coming under assault by Canada’s trading partners.”

In January this year, a USMCA panel ruled that Canada’s dairy trade conduct violated that agreement. It said Canada must change the way it grants preferential access to its heavily sheltered dairy market.

The USMCA dispute panel said Canada can no longer reserve preferential access, or tariff-rate quotas, exclusively for the use of Canadian processors – a practice the Americans say denies U.S. farmers the full benefit of selling into Canada’s market.

Panel members ruled that Canada is breaching its commitment under the new USMCA by reserving nearly all of its dairy tariff-rate quota for the exclusive use of Canadian processors. “Canada’s practice of reserving TRQ pools exclusively for the use of processors is inconsistent with Canada’s commitment” under the USMCA, it said.

A processor refers to a company that turns dairy goods into products such as processed cheese or ice cream.

Canada’s dairy farmers, however, said they believe Canada will prevail in the dispute with New Zealand.

“New Zealand’s complaints are unfounded and we are confident that a panel will concur,” Jacques Lefebvre, chief executive officer of Dairy Farmers of Canada, said in a statement.

Shanti Cosentino, press secretary to International Trade Minister Mary Ng, said Canada takes its commitments under the CPTPP seriously. She said New Zealand companies are using their allotted quotas, particularly in some categories.

“New Zealand exporters are capitalizing on the CPTPP TRQs, in particular with the butter and cheese TRQs. We will continue to defend our position during the dispute settlement process.”

New Zealand initiated the dispute over dairy imports on May 12 this year by requesting formal consultations with Ottawa to address these concerns. Consultations took place in June, but did not resolve matters, Mr. O’Connor said. New Zealand has therefore made the decision to request the establishment of a panel to hear and decide the dispute.

“New Zealand continues to value its strong friendship with Canada, one of our warmest and closest relationships in the world. This is a discrete trade issue, and the dispute-settlement mechanisms in CPTPP provide us with a neutral forum to resolve it.”