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Pizza Pizza is among restaurants that had been skirting high Canadian cheese prices due to a loophole the federal government closed last month.Fernando Morales/The Globe and Mail

The federal government has quietly closed a loophole that had allowed Pizza Pizza Ltd. and other restaurant chains to import growing quantities of low-cost U.S. mozzarella, skirting the high tariff wall that shields Canada's dairy industry.

Eager to avoid Canada's 245.5-per-cent tariff on imported cheese, restaurants had been legally buying specially prepared cheese-and-pepperoni topping kits south of the border.

The import surge started after the Canada Border Services Agency ruled last year that the topping kits are "food preparations" and therefore eligible for duty-free entry, enraging the lobby group for Canada's 12,500 dairy farmers.

The ruling was upheld this year by the quasi-judicial Canadian International Trade Tribunal.

But in late November, the government amended the Customs Tariff via a ways-and-means motion to change the definition of "food preparations." As a result, any packages containing fresh cheese are now "classified separately … regardless of their packaging."

The move, which took effect Nov. 29, abruptly cut off imports that dairy farmers had estimated were grabbing as much as 12 per cent of the market for fresh pizza cheese.

Restaurants have long chafed at special Canadian rules that allow McCain Foods Ltd. and other frozen pizza makers to buy mozzarella at the much lower world price.

Strict price and production controls in Canada mean that wholesale cheese prices are 30-per-cent higher in Canada than in the United States.

"We were only given a week's notice," complained Garth Whyte, president of the Canadian Restaurant and Foodservices Association.

Mr. Whyte said the decision appears to be a way to appease the powerful dairy lobby, which has complained loudly about the recently negotiated free-trade deal with Europe. The deal would give European cheese greater access to the Canadian market.

"It's hard not to make that connection," Mr. Whyte said.

"We're a $69-billion industry … We employ 1.1 million – five times more than the auto sector and much more than agriculture, mining, fisheries and forestry combined. And we keep getting hammered. It's frustrating."

Mr. Whyte called the tariff change "back-door dealing."

The issue of cheese imports has become a lightning rod in Quebec, which has the largest share of the Canadian dairy industry. On a trip to Brussels this week, Quebec Premier Pauline Marois threatened to withdraw the province's support for the European free-trade deal until it reaches a deal with Ottawa to compensate dairy farmers for any lost sales.

"Until we get that deal, I will not table the [free-trade] accord and it will not be applicable," Ms. Marois told reporters.

The industry has estimated those losses at $450-million a year.

Dairy farmers are worried that imports are gradually eroding the integrity of the supply management system, which tightly controls production and prices of dairy products in Canada.

In a filing with the Canadian International Trade Tribunal, dairy farmers had warned that cheap mozzarella imports would have a ripple effect through the industry, resulting in significant lost output, sales and market share.

Meanwhile, ice cream and yogurt makers are shifting to imported milk-product concentrates over domestic cream to reduce purchases of higher-cost milk and cream. And last year, some pizza restaurants in Ontario's Niagara region were caught buying blocks of cheese illegally smuggled across the Canada-U.S. border.

Roughly two-thirds of milk produced in Canada goes into the industrial market – to make cheese, yogurt, butter and the like. Mozzarella alone consumes 28 per cent of industrial milk.

Marie Prentice, Finance Minister Jim Flaherty's press secretary, called the move a "technical clarification" that "addresses a gap where certain imported goods could be packaged in a specific, deliberate manner solely to circumvent Canada's tariff system."

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