Dairy Provisions in USMCA

Dairy Provisions in USMCA

link to page 1

Updated December 16, 2019
Dairy Provisions in USMCA
On November 30, 2018, the leaders of the United States,
and Progressive Trans-Pacific Partnership (TPP-11), which
Canada, and Mexico signed the U.S.-Mexico-Canada
includes Australia and New Zealand. All three are major
Agreement (USMCA) to revise the North American Free
global dairy exporters.
Trade Agreement (NAFTA). The legislative bodies in each
Under USMCA, Mexico’s zero tariffs for U.S. dairy
country must now ratify the agreement for it to come into
product exports would be preserved. In addition, in a side
force.
letter, Mexico confirmed that U.S. market access for 33
Mexico and Canada are two of the largest markets for U.S.
cheeses would be protected under USMCA (see box). Some
dairy product exports. In recent years, the two USMCA
cheese producers have noted that the list is not
partners have accounted for more than a third of the total
comprehensive of all cheese varieties exported to Mexico,
value of U.S. dairy product exports. In 2018, U.S. dairy
and additional work may be needed to preserve access.
exports to Mexico were valued at $1.4 billion and to
Canada at $731 million (Figure 1) out of total dairy exports
Recognized U.S.-Mexico Cheese Names
of $5.9 billion. Mexico is the leading market for U.S.
Blue, Blue vein, Brie, Burrata, Camembert, Cheddar, Chevre,
cheese and nonfat dry milk exports. Canada is the leading
Colby, Cottage, Coulommiers, Cream, Danbo, Edam,
export market for butter and processed dairy products (e.g.,
Emmental, Emmentaler, Emmenthal, Gouda, Grana, Havarti,
infant formula, milk drinks, and ice cream).
Mascarpone, Monterey Jack, Mozzarella, Pecorino, Pepper
USMCA would preserve duty-free access for U.S. dairy
Jack, Provolone, Ricotta, Saint-Paulin, Samsø, Swiss, Tomme,
products in Mexico. The agreement with Canada includes
Tome, Toma, and Tilsiter
two key provisions: the elimination of the Canadian Class 7
milk price and increased market access for selected dairy
Canada
products (both discussed below).
Although Canada is the second-leading export market for
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
Bil ion $
restrictions. The Canadian dairy sector operates under a
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
Source: USDA, Global Agricultural Trade System, Foreign
products. Under the Class 7 regime, domestic skim milk
Agricultural Trade of the United States, dairy category.
products became cheaper for domestic producers, Canada
Note: Dairy totals are adjusted to include protein isolates. Ultra-
expanded global exports of SMP, and U.S. producers lost
filtered (UF) milk is classified as a protein isolate (HTS code
exports of high protein ultra-filtered (UF) milk to Canadian
3504001000). It is not included in the USDA dairy categories.
cheese and yogurt processors.
Mexico
UF milk was not covered under a dairy TRQ negotiated
Under NAFTA, U.S. dairy product exports enter Mexico
under global trade agreements or NAFTA. This allowed
duty free. U.S. dairy exports to Mexico totaled $193 million
U.S. UF milk duty-free access to the Canadian market.
in 1994 when NAFTA entered into force and have steadily
According to the U.S. Department of Agriculture (USDA),
risen to $1.4 billion in 2018. Mexico has been the leading
the value of U.S. UF milk exports to Canada peaked at
market for U.S. dairy exports since 2004, and the United
nearly $107 million in 2015 but declined sharply after the
States is the leading source of dairy imports in Mexico. One
Class 7 regime was implemented in 2017 from $102 million
concern in the USMCA negotiations for the U.S. dairy
in 2016 to $49 million in 2017 and $32 million in 2018. At
industry was that its access to Mexico be preserved,
the same time, Canada’s total exports of SMP more than
especially as Mexico negotiates other free trade agreements
tripled in 2017 to $133 million compared with $42 million
(FTAs). In April 2018, Mexico signed an FTA with the
in 2016 before the Class 7 price regime was implemented.
European Union that includes new rules for agricultural
Eliminating Canada’s Class 7 pricing regime was a priority
goods, and Mexico is also a party to the Comprehensive
for the U.S. dairy industry for NAFTA renegotiations.
https://crsreports.congress.gov

link to page 2 Dairy Provisions in USMCA
Class 7 and Transparency
would be subject to the Canadian above-quota most-
Under USMCA (Chapter 3, Annex 3-A), Canada agrees to
favored-nation tariff rate.
eliminate Class 7 pricing six months after USMCA enters
Table 1. TRQs for U.S. Dairy Exports to Canada
into force. Its Class 7 products would be reclassified
Metric tons
according to their end use. They would be priced based on a
Dairy Category
Year 1
Year 6
Year 19
formula that uses the USDA reported nonfat dry milk price
Milk
8,333
50,000
56,905
minus a Canadian processing margin (i.e., the cost of
converting raw milk into specific products), multiplied by a
Cream
1,750
10,500
11,950
yield factor (the ratio of the volume of nonfat solids needed
Skim Milk Powder (SMP)
1,250
7,500
8,536
to produce a certain volume of SMP). This price would
Butter, Cream Powder
750
4,500
5,121
apply only to milk products for human consumption.
Cheese, Industrial Use
1,042
6,250
7,113
Under the agreement, Canada would be required to monitor
Cheese, All Types
1,042
6,250
7,113
its exports of MPC, SMP, and infant formula. If MPC and
Milk Powders
115
690
785
SMP exports exceed 55,000 metric tons (MT) in year 1 and
Concentrated Milk
230
1,380
1,571
35,000 MT in year 2 of the agreement, Canada would
Yogurt, Buttermilk
689
4,135
4,706
impose an export surcharge of Canadian dollar (CAD)
Powdered Buttermilk
87
520
592
$0.54 per kilogram of exports for the remaining dairy year
Whey Powder
689
4,135
NA
(August 1-July 31). If infant formula exports exceed 13,333
MT in year 1 and 40,000 MT in year 2, a CAD $4.25
Products of Natural Milk
460
2,760
3,141
surcharge would be added to the export price. After year 2
Ice Cream, Mixes
115
690
785
of the agreement, the export quantities would increase 1.2%
Other Dairy
115
690
785
each year. Canada would report on monthly exports of
Total
16,667
100,000
109,103
MPC, SMP, and infant formula at the tariff level on a
Source: USTR, Appendix C – USMCA Agriculture TRQs Between Canada
monthly basis.
and the United States. Note: NA=not applicable.
In addition, the agreement would require Canada to publish
Several restrictions would apply to certain U.S. dairy
information on laws and regulations on milk class pricing,
products. For example, 85% of the milk and cream TRQs
including components (butterfat, protein, and other solids),
would be reserved for bulk shipments used for food
processing margins, and yield factors in the interest of
processing. The remaining portion would be for any use,
greater transparency. If the agreement goes into force, data
including retail sales. Also, 85% of the butter quota would
on milk utilization by milk class—including quantities sold,
be reserved for bulk shipments during year 1, which would
prices and revenues for milk and for each component—
decline to 50% over the following five years. U.S. exports
would be published, excluding confidential business
under the “Cheese, Industrial Use” TRQ would apply to
information. Once the agreement is in force, the United
bulk shipments for further food processing. “Cheese, All
States and Canada would revisit the dairy provisions of the
Types” would be for any use. The types of cheese (tariff
agreement after five years and then every two years to
code) would be the same for both of the cheese TRQs.
determine if any modifications or termination of the
agreement is required.
Canada would administer the agreed-upon dairy TRQs
through its import licensing system for each quota year.
Market Access
Quotas would 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 would maintain its supply management system but
1 to July 31. The other dairy products are to be
would expand TRQs for U.S. exports of milk, cheese,
administered on a calendar year basis.
cream, skim milk powder, condensed milk, yogurt, and
several other dairy categories. Also, USMCA includes
The United States would also limit dairy imports through
broader provisions on transparency for the implementation
TRQs for certain dairy products. Under USMCA, the
of TRQs, such as requiring advanced notice of changes to
United States would establish eight Canada-specific TRQs
the quotas and public release of quota utilization rates.
with duty-free access for cream, butter, cheese, SMP, whole
milk powder, dried yogurt, concentrated milk, and other
The agreement between the U.S. and Canada establishes
dairy products. The TRQ amounts are similar to the access
TRQs specifically for 14 categories of U.S. dairy products
amounts Canada granted to the United States and expand at
(Table 1), which cover 51 tariff lines as classified in the
the same rates through year 6. Thereafter, the TRQ volumes
Harmonized Tariff System. The TRQ amounts would be
would increase 1% each year through year 19.
established for year 1 and doubled in year 2 and would then
increase by 50%, 33%, 25%, and 20% in years 3-6. After
If USMCA comes into force, the U.S. dairy sector may gain
year 6, the quantities of each category would increase at a
the most of any agricultural sector. Enforcement of the
compound growth rate of 1% for the subsequent 13 years.
agreement among the three countries, particularly dairy
After year 19, the quotas would be fixed at the year-19
support transparency and access with Canada, will be of
level. Whey powder is the exception: Its TRQ would rise to
key interest to Congress and the U.S. dairy sector going
4,303 MT by year 10, after which it would be eliminated.
forward.
U.S. dairy products exported under the TRQ would enter
Canada duty free. U.S. exports above the TRQ quantities
Joel L. Greene, Analyst in Agricultural Policy
IF11149
https://crsreports.congress.gov

Dairy Provisions in USMCA

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11149 · VERSION 4 · UPDATED