New Zealand’s trade dispute with Canada has taken a sour turn, with both nations claiming victory and Ottawa issuing an uncharacteristically “ungracious” and vaguely threatening statement.

The outcome of the dispute, about how Canada administers its dairy quotas under the Trans-Pacific Partnership trade agreement, was pushed by the Ministry of Foreign Affairs and Trade and the Minister for Trade and Export Growth Damien O’Connor as a “significant win” for New Zealand.

However, if you’d only read commentary out of Canada’s government, you’d be forgiven for thinking they mopped the floor with New Zealand, labelling it “a clear victory”.

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This was the experience of Stephen Jacobi, executive director of the NZ International Business Forum and formerly New Zealand’s deputy high commissioner to Canada.

The first article Jacobi saw on the outcome of the trade dispute was from a Canadian paper declaring victory.

After a little bit more reading, Jacobi, who says he holds Canada in quite high regard, found out that wasn’t necessarily the case.

How did both New Zealand and Canada win the first dispute brought under the Trans-Pacific Partnership since it was signed in late 2018?

The binding decision from an independent panel chaired by former diplomats and international trade experts seemed to overwhelmingly rule in New Zealand’s favour.

The panel found that New Zealand exporters were not able to fully utilise Canada’s 16 dairy tariff rate quotas and that Canada was granting priority access to their own domestic dairy processors.

Canada, which manages dairy and a few other categories through a scheme called the supply management system, didn’t fully open its markets to dairy imports on agreeing to the trade agreement, instead negotiating quota access.

Under this agreement New Zealand could access about three percent of the country’s dairy market.

New Zealand’s submission argued that Canada’s esoteric system made its domestic dairy industry “gatekeepers of their own competition”.

The panel ruling means Canada’s management of its dairy quotas has to change to allow all Trans-Pacific Partnership importers the opportunity to fully use the quota system and not give priority access to the domestic industry.

Quota changes

However, the panel didn’t side with New Zealand on two relatively minor matters regarding Canada being able to make procedural changes to its quota management without consulting its trade partners when it doesn’t undermine the other findings.

It is this aspect of the decision that the Canadian government seems to be running with, saying the process reaffirmed its controversial supply management system.

In a joint statement, Minister of Export Promotion, International Trade and Economic Development Mary Ng and Minister of Agriculture and Agri-Food Lawrence MacAulay said, “Canada is very pleased with the outcome of the panel’s report which is a clear victory for Canada.

“The Panel has made a significant finding by recognising Canada’s discretion to set TRQ [tariff rate quota] allocation policies, including determining who is eligible to obtain an allocation.”

These comments are very similar to those made after coming off second best in a similar dairy dispute over the allocation of dairy tariff rate quotas with the United States last year, when Ng and MacAulay’s predecessor said the decision ruled overwhelmingly in their favour despite the United States succeeding in their case.

Ng and MacAulay’s statement on this week’s decision went on to take a slightly darker and threatening turn, “We will not negotiate these allocations with countries who seek to weaken Canada’s supply management system.”

Jacobi said that line was likely directed towards its neighbour to the south, with the US having launched a second trade dispute over dairy protections under the United States-Mexico-Canada Agreement.

Overall, the lack of diplomacy in the statement was what took him most by surprise.

Warmest relationship

New Zealand’s relationship with Canada was talked about in glowing terms in Damien O’Connor’s statement, calling it one of the country’s warmest and closest relationships.

Jacobi noted a diplomatic nicety like this was absent from Canada’s statement. “I did think it was ungracious but in Canada you have to see this in the context of the powerful dairy lobby, the Dairy Farmers of Canada, which makes Fonterra look like a kindergarten.”

Big Milk spends up large on lobbying the Canadian government and is understandably not keen to have the protectionist policy compromised.

There’s perhaps another explanation for the lack of niceties – this isn’t the first time New Zealand has come off better in a trade dispute involving Canada and milk.

New Zealand and the US initiated a dispute with the World Trade Organisation in 1997, arguing Canada’s regulation of the domestic supply and export of milk provided export subsidies inconsistent with Canada’s obligations under the WTO Agreement on Agriculture.

New Zealand and the US won the dispute in the early 2000s, and Canada subsequently removed its subsidy scheme.

New Zealand’s High Commissioner to Canada Martin Harvey is confident the dispute wouldn’t take away from the “excellent relationship” between the countries.

“It is a good example of how dispute settlement chapters in Free Trade Agreements are meant to work. It’s an outcome that supports our shared commitment to a rules-based international trading system, and a good day for CPTPP,” Harvey said.

A spokesperson for Damien O’Connor told Newsroom, rather firmly, that Canada had not won the dispute. 

His office referenced Canada’s response to the earlier US decision. “The same situation arose following the release of the outcome of the US case challenging Canada’s dairy quotas under USMCA – Canada claimed victory there too, even though it lost.”

Asked if the statement dented confidence as to whether Canada would open up to New Zealand dairy producers to the fullest extent of the CPTPP, O’Connor’s office said it was more than aware of the strength of Canada’s resolve to protect its domestic industry. 

“New Zealand will be engaging with Canada in the next stage of the process, and will be monitoring closely.”

Andrew Bevin is an Auckland-based business reporter who covers major industries, markets, regulation, aged care and fisheries.

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