The USMCA and its impact on agriculture

Introduction

The United States-Mexico-Canada Agreement (USMCA) is anticipated to replace the North America Free Trade Agreement (NAFTA) on January 1, 2020. Mexico is the sole party of the trilateral agreement to ratify as of the date of printing, which they did on June 19, 2019. Canada’s International Trade Minister Chrystia Freeland had expressed that Canada would quickly ratify as well, but on October 21, 2019 Canadian federal election has complicated these efforts. On June 20, 2019 the bill had its second reading in the House of Commons and the bill was referred to the Standing Committee on International Trade. The United States ratification of the agreement is a bit more of an open question as well. Opening markets in agricultural and agri-food products will continue to represent a significant area of challenge for each party in the trilateral trade deal, given the impact on certain producer groups.

All agricultural products that have zero tariffs under NAFTA will remain at zero tariffs under the USMCA. While generally preserving and maintaining its supply management system, Canada made a number of concessions which provide the U.S. additional market access, particularly in the dairy, poultry and egg products sectors. These concessions will result in Canadians seeing more U.S.-origin poultry and eggs on store shelves, but as the changes are being implemented over 10 years the impact is expected to be gradual with Canadian products still dominating the market.

To mitigate the effect of these concessions on producers, the government of Canada has promised affected producers and processors certain compensation to ensure the industry remains strong. The extent to which the parties to the agreement will take advantage of more open trade in these sectors and whether the government-supply management working groups can negotiate arrangements which meets the needs of farmers and processors, remains to be seen.

In the following pages is a high-level summary of how the USMCA will affect agriculture products in Canada.

Tariff changes on dairy, poultry and egg products

Some agricultural products will eventually be allowed to enter Canada duty-free in the prescribed quantities, including

• milk (50,000 metric tonnes, 85 per cent of which is for milk in bulk to be processed into dairy products used as ingredients for further processing)
• cream (10,500 metric tonnes, 85 per cent of which will be dedicated to cream for further processing)
• skim milk products (7,500 metric tonnes)
• butter and cream powder (4,500 metric tonnes, 50 per cent of which will ultimately be for further processing)
• cheese for industrial use (6,250 metric tonnes) and cheese of all types (6,250 metric tonnes).

In five years there will be a tariff elimination on American margarine destined for Canada, including American margarine which uses palm-oil which did not originate from the United States.

Pursuant to the USMCA, Canada will also implement increased tariff rate quotas for U.S.-origin yogurt and buttermilk, whey powder, concentrated milk, milk powders, powdered buttermilk, products of natural milk constituents, ice cream, other dairy, chicken, turkey, egg and egg products, and broiler hatching eggs and chicks.

Canada’s milk pricing system will undergo changes when the USMCA goes into effect. Many technical rules under the milk pricing system will change or be removed. Canadian prices for skim milk solids (such as those used in protein concentrates and infant formula) will be no cheaper than the American prices for nonfat dry milk. Canada has also agreed to use excess skim milk products in their domestic animal feed. Canada’s skim milk powder and milk protein concentrates will ultimately be limited to 35,000 metric tonnes.

It is important to note that under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), Canada already agreed to the following market access by European-origin products: for cheese of 16,000 metric tonnes and for industrial cheese of 1,700 metric tonnes.

In return for opening U.S. access regarding dairy, poultry and egg products, the USMCA provides increased U.S. market access for Canada’s sugar beet producers. With regards to grain, both countries are afforded national treatment of wheat as it relates to the assignment of quality grades.

The Canada-US Bilateral agreement sets out specific notice requirement, whereby Canada is required to provide notice to the U.S. before introducing proposed changes to tariffs on dairy, poultry or egg products and the U.S. must provide notice to Canada for any proposed changes to tariffs on dairy, sugar and sugar containing products (SCP). Also, on request of the other party, the two countries must discuss the measures or policies before any changes can take place. In addition to any consultation, the parties must meet five years after the implementation of the USMCA and every two years thereafter to consider any changes to be made to dairy pricing.

Prior to signing the USMCA, the United States exported US $619 million worth of dairy products and US $600 million worth of poultry and egg products into Canada in 2017. With the decreased restrictions on tariffs for these products coming into Canada, we expect to see more American products in Canadian grocery stores and these export numbers to increase.

Agricultural biotechnology

As for agricultural biotechnology, there are measures in the agreement to promote trade in this area in ways which protect consumers. More information on authorized products of agricultural biotechnology will be made available to the public and the authorization process will be streamlined so as to ensure a timely and transparent decision-making and communication. Each party must create policies for managing low-level presence (LLP) of genetically modified organisms (GMOs). Exporting parties must provide risk assessments of the LLP upon request, and the importing party will also have to provide the same in return if it exists. A “working group” of the parties will be established to exchange information, collaborate, and work on policy and trade issues for agricultural biotechnology.

Pre-packaged foods and food additives

The section in the USMCA on proprietary formulas for prepackaged foods and food additives reflects efforts to increase the protection of confidential information and proprietary formulas. Parties are only allowed to request information if it is necessary to achieve a legitimate objective. The party requesting the information will also be obliged to treat the confidential information in the same manner as such confidential information of a similar nature would be treated domestically by the disclosing party.

Alcoholic beverages annex

The Distilled Spirits, Wine, Beer and Other Alcohol Beverages Annex (“Alcohol Annex”) reasserts the importance of national treatment. The exemption in this annex applies to wine sold in Quebec grocery stores – allowing Quebec to limit wine sold in the grocery stores of that province to be limited to the ones bottled in Quebec only, as long as foreign wines have alternative retail outlets available. Similar discriminatory measures in Ontario and British Columbia are only allowed as per any measure that was in place on January 1, 1989. This Annex provides protection and recognition for distinctive national products – Canadian Whiskey, Tennessee/Bourbon Whiskey, Tequila and Mezcal, which cannot be produced out of their respective areas. Ice-wine is also limited to wines made from grapes which experienced natural freezing on the vine. Labelling laws have been modernized as well, requiring truth and accuracy, and allowing for supplementary labels. No date marks may be required on any wine or distilled spirits container unless they have a shorter date than would be normally expected by the consumer. Labelling laws around alcohol products are expansive and require specific legal advice.

Promoting cooperation and integration

The agriculture chapter continues cooperation and increased market access and integration between the three countries. It endeavours to create opportunities to discuss disputes and address possible and potential trade-distortions and to further trade among the three Parties.

It will be interesting to see how successful the committees for the trade of agricultural products, to be created under the USMCA, are at promoting collaborative solutions for the already highly-integrated agriculture and agri-food sectors.