Three dairy cows eat their breakfast after their morning milking in Exeter, Rhode Island, in April, 2018.OLIVER DOYLE/Reuters
In November, 2018, U.S. trade officials walked out of trade negotiations with what they thought was a substantive victory. Ottawa had seemingly given ground on one of its most sacred files: Supply management for the dairy sector.
For half a century, the supply of Canadian dairy has been restricted to buoy farm incomes by keeping prices artificially high. As part of that system, any imports entering the country without a special license are subject to levies that can surpass 200 per cent.
Seven years ago, American negotiators had convinced Canada to issue more of these rare import licences, granting the U.S. dairy industry access to around 3.5 per cent of the domestic market. Ottawa paid out $1.2-billion over six years to dairy farmers to make up for any potential losses.
Opinion: The dairy sector is lobbying hard in USMCA talks. The government didn’t want you to know
But Canadian farmers did not lose all of this market to southern competitors, and U.S. exporters did not get the access they had been promised. Regardless of intent, Canada pulled what amounted to a bait and switch. Ottawa honoured the deal with respect to the volume of dairy that could cross the border tariff-free, but by restricting who had access to the licences, demand was artificially suppressed.
The lion’s share of tariff-free import licences for dairy go to major Canadian processors. Distributors get a small amount, and retailers – the most likely to import products that consumers could purchase – receive none.
The end result: The U.S. dairy industry has consistently been unable to export the volume of dairy it was promised in 2018. In 2024, only 30 per cent of the total tariff-free import quota was used.
U.S. dairy exporters argue that this is because the entity with the most licences – processors – do not use their power. Why would they import competitive U.S. product? And the dairy they do import is typically the type used as ingredients. For example, in 2025, three types of cheese – cheddar, grated or powdered cheese, and mozzarella – accounted for 72 per cent of the tariff-free imports under the cheese category.
Washington has launched two disputes under the USMCA concerning this matter. Canada has made minor changes, but has thus far managed to avoid granting retailers access to the licences. This is because in strict lawyerly technicalities, Ottawa is abiding by the terms of USMCA. They never promised to allocate license to retailers.
But simply because something is legally defensible does not mean it honours the spirit of an agreement, and this bad faith action has only served to give the Trump administration pretext for more tariffs. In July, the White House used these “discriminatory practices” to justify 50-per-cent tariffs on US$97-million worth of Canadian exports.
Altering how dairy quotas are allocated is one of 10 key demands that U.S. negotiators are pressing, sources have told The Globe and Mail. Some of those demands are questionable, but the U.S. does have a point on the allocation of dairy quotas agreed upon in 2018.
White House has beef with Canada’s dairy import rules. Does the EU have a better deal?
The federal government should be under no illusion that that acceding to the dairy quota demand will earn lasting grace from the Trump administration. The President will undoubtedly find some other pretext to justify his trade wars.
Canada should concede the issue, but not as a favour or in a bid to somehow win goodwill with the Trump administration. If Ottawa wants to make the point (as it should), that trade treaties should be binding, then it should act accordingly. In doing so, the federal government will strengthen its position with political players outside of the White House, particularly the U.S. business community.
There is also the fact that the Canadian taxpayer has already paid the bill for this deal. A few thousand dairy farmers across the country have received a flat sum of cash every year for six years to compensate them for losses that have been forestalled, in part. It’s time for Ottawa to step aside.
Reforming import-licence rules would be a small (and overdue) step toward increasing competition in the dairy market. It’s understandable why the Dairy Farmers of Canada would worry about such a change: The cartel system of supply management is the antithesis of a free market. This space continues to believe that supply management should be scrapped.
But the notion that fully implementing the incremental changes of 2018 heralds the collapse of supply management is simply fearmongering. Canada should fulfill its promise.