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March 26, 2019
Dairy Provisions in USMCA
On November 30, 2018, the heads of state of the United
agreements with Australia and New Zealand. All three are
States, Canada, and Mexico signed the U.S.-Mexico-
major global dairy exporters.
Canada Agreement (USMCA) to revise the North American
Under USMCA, Mexico’s zero tariffs for U.S. dairy
Free Trade Agreement (NAFTA). The legislative bodies in
product exports are preserved. In addition, in a side letter,
each country must now ratify the agreement for it to come
Mexico confirmed that U.S. market access for 33 cheeses
into force.
will be protected under USMCA (see box). Some cheese
Mexico and Canada are two of the largest markets for U.S.
producers have noted that the list is not comprehensive of
dairy product exports. In recent years, the two USMCA
all cheese varieties exported to Mexico, and additional
partners have accounted for more than a third of the total
work may be needed to preserve access.
value of U.S. dairy product exports. In 2018, U.S. dairy
exports to Mexico were valued at $1.4 billion and to
Recognized U.S.-Mexico Cheese Names
Canada at $731 million (Figure 1) out of total dairy exports
Blue, Blue vein, Brie, Burrata, Camembert, Cheddar, Chevre,
of $5.9 billion. Mexico is the leading market for U.S.
Colby, Cottage, Coulommiers, Cream, Danbo, Edam,
cheese and nonfat dry milk exports. Canada is the leading
Emmental, Emmentaler, Emmenthal, Gouda, Grana, Havarti,
export market for butter and processed dairy products (e.g.,
Mascarpone, Monterey Jack, Mozzarella, Pecorino, Pepper
infant formula, milk drinks, and ice cream).
Jack, Provolone, Ricotta, Saint-Paulin, Samsø, Swiss, Tomme,
USMCA would preserve duty-free access for U.S. dairy
Tome, Toma, and Tilsiter
products in Mexico. The agreement with Canada includes
two key provisions: the elimination of the Canadian Class 7
Canada
milk price and increased market access for selected dairy
Although Canada is the second-leading export market for
products (both discussed below).
U.S. dairy products, some dairy analysts believe U.S.
Figure 1. Leading Markets for U.S. Dairy Exports
exports could be higher but for Canadian import
restrictions. The Canadian dairy sector operates under a
Bil ion $
supply management system that limits production, sets
prices, and restricts imports. Canadian imports of dairy
products are restricted through tariff-rate quotas (TRQs),
with high over-quota tariffs of up to 315.5%.
In recent years, strong demand for butter in Canada resulted
in increased Canadian milk production and, consequently,
surplus skim milk supplies. To address the surplus, Canada
adopted the Class 7 milk price classification in 2017 (Class
6 in Ontario). Class 7 is comprised of skim milk
components, primarily milk protein concentrates (MPC)
and skim milk powder (SMP) used to process dairy
products. Under the Class 7 regime, domestic skim milk
Source: USDA, Global Agricultural Trade System, Foreign
products became cheaper for domestic producers, Canada
Agricultural Trade of the United States, dairy category.
expanded global exports of SMP, and U.S. producers lost
Note: Dairy totals are adjusted to include protein isolates. Ultra-
exports of high protein ultra-filtered (UF) milk to Canadian
filtered (UF) milk is classified as a protein isolate (HTS code
cheese and yogurt processors.
3504001000). It is not included in the USDA dairy categories.
UF milk was not covered under a dairy TRQ negotiated
Mexico
under global trade agreements or NAFTA. This allowed
Under NAFTA, U.S. dairy product exports enter Mexico
U.S. UF milk duty-free access to the Canadian market.
duty free. U.S. dairy exports to Mexico totaled $193 million
According to the U.S. Department of Agriculture (USDA),
in 1994 when NAFTA was implemented and have steadily
the value of U.S. UF milk exports to Canada peaked at
risen to $1.4 billion in 2018. Mexico has been the leading
nearly $107 million in 2015 but declined sharply after the
market for U.S. dairy exports since 2004, and the United
Class 7 regime was implemented in 2017 from $102 million
States is the leading source of dairy imports in Mexico. One
in 2016 to $49 million in 2017 and $32 million in 2018. At
concern for the U.S. dairy industry was that its access to
the same time, Canada’s total exports of SMP more than
Mexico be preserved, especially as Mexico negotiates other
tripled in 2017 to $133 million compared with $42 million
free trade agreements (FTAs). In April 2018, Mexico
in 2016 before the Class 7 price regime was implemented.
signed an FTA with the European Union that includes new
Eliminating Canada’s Class 7 pricing regime was a priority
rules for agricultural goods, and Mexico has been exploring
for the U.S. dairy industry for NAFTA negotiations.
https://crsreports.congress.gov
link to page 2 Dairy Provisions in USMCA
Class 7 and Transparency
Table 1. TRQs for U.S. Dairy Exports to Canada
Under USMCA (Chapter 3, Annex 3-A), Canada agrees to
Metric tons
eliminate Class 7 pricing six months after USMCA enters
Dairy Category
Year 1
Year 6
Year 19
into force. Its Class 7 products are to be reclassified
Milk
8,333
50,000
56,905
according to their end use. They would be priced based on a
Cream
1,750
10,500
11,950
formula that uses the USDA reported nonfat dry milk price
minus a Canadian processing margin (i.e., the cost of
Skim Milk Powder (SMP)
1,250
7,500
8,536
converting raw milk into specific products), multiplied by a
Butter, Cream Powder
750
4,500
5,121
yield factor (the ratio of the volume of nonfat solids needed
Cheese, Industrial Use
1,042
6,250
7,113
to produce a certain volume of SMP). This price would
Cheese, All Types
1,042
6,250
7,113
apply only to milk products for human consumption.
Milk Powders
115
690
785
Under the agreement, Canada is required to monitor its
Concentrated Milk
230
1,380
1,571
exports of MPC, SMP, and infant formula. If MPC and
Yogurt, Buttermilk
689
4,135
4,706
SMP exports exceed 55,000 metric tons (MT) in year 1 and
Powdered Buttermilk
87
520
592
35,000 MT in year 2 of the agreement, Canada is to impose
Whey Powder
689
4,135
NA
an export surcharge of Canadian dollar (CAD) $0.54 per
Products of Natural Milk
460
2,760
3,141
kilogram of exports for the remaining dairy year (August 1-
July 31). If infant formula exports exceed 13,333 MT in
Ice Cream, Mixes
115
690
785
year 1 and 40,000 MT in year 2, a CAD $4.25 surcharge
Other Dairy
115
690
785
will be added to the export price. After year 2 of the
Total
16,667
100,000
109,103
agreement, the export quantities are increased 1.2% each
Source: USTR, Appendix C – USMCA Agriculture TRQs Between Canada
year. Canada is to report on monthly exports of MPC, SMP,
and the United States. Note: NA=not applicable.
and infant formula at the tariff level on a monthly basis.
Several restrictions would apply to certain U.S. dairy
In addition, the agreement requires Canada to publish
products. For example, 85% of the milk and cream TRQs
information on laws and regulations on milk class pricing,
are reserved for bulk shipments to be used for food
including components (butterfat, protein, and other solids),
processing. The remaining portion may be for any use,
processing margins, and yield factors in the interest of
including retail sales. Also, 85% of the butter quota is
greater transparency. After the agreement goes into force,
reserved for bulk shipments during year 1, and that
data on milk utilization by milk class—including quantities
percentage is reduced to 50% over the following five years.
sold, prices and revenues for milk and for each
U.S. exports under the “Cheese, Industrial Use” TRQ are
component—is to be published, excluding confidential
for bulk shipments for further food processing. “Cheese, All
business information. Once in force, the United States and
Types” are for any use. The types of cheese (tariff code) are
Canada are to revisit the agreement after five years and then
the same for both of the cheese TRQs.
every two years to determine if any modifications or
termination of the agreement is required.
Canada is to administer the agreed-upon dairy TRQs
through its import licensing system for each quota year.
Market Access
Quota will be allocated to eligible applicants active in
Under USMCA, Canada agrees to reduce certain barriers
Canada’s food and agriculture sectors. The quota year for
for U.S. dairy exports, a key demand of U.S. dairy groups.
milk, cream, SMP, butter, milk powder, and whey is August
Canada maintains its supply management system but
1 to July 31. The other dairy products are to be
expands TRQs for U.S. exports of milk, cheese, cream,
administered on a calendar basis.
skim milk powder, condensed milk, yogurt, and several
other dairy categories. In addition, USMCA includes
The United States also limits dairy imports through TRQs
broader provisions on transparency for the implementation
for certain dairy products. Under USMCA, the United
of TRQs, such as requirements for advance notice of
States would establish Canada specific TRQs with duty free
changes to the quotas and making details on quota
access for eight categories of dairy products (e.g., cream,
utilization rates publicly available.
butter, cheese, SMP, whole milk powder, dried yogurt, and
concentrated milk). The TRQ amounts are similar to the
The agreement between the U.S. and Canada establishes
access amounts Canada granted to the United States and
TRQs specifically for 14 categories of U.S. dairy products
expand at the same rates through year 6. Thereafter, the
(Table 1), which cover 51 tariff lines as classified in the
TRQ volumes increase 1% each year through year 19.
Harmonized Tariff System. The TRQ amounts are
established for year 1 and doubled in year 2 and would then
If USMCA comes into force, the U.S. dairy sector may gain
more than other agricultural sectors. But USMCA’s benefits
increase by 50%, 33%, 25%, and 20% in years 3-6. After
year 6, the quantities of each category increase at a
may not be realized until agreement is reached on Section
compound growth rate of 1% for the subsequent 13 years.
232 retaliatory tariffs, particularly on U.S. cheese exports to
Mexico. Enforcement of the agreement with Canada will be
After year 19, the quotas would be fixed at the year-19
level. Whey powder is the exception: Its TRQ climbs to
of key interest to the U.S. dairy sector going forward.
4,303 MT by year 10, after which it would be eliminated.
Joel L. Greene, Analyst in Agricultural Policy
U.S. dairy products exported under the TRQ would enter
Canada duty free. U.S. exports above the TRQ quantities
IF11149
would be subject to the Canadian most-favored-nation tariff
rate.
https://crsreports.congress.gov
Dairy Provisions in USMCA
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