Canada–New Zealand Dairy Dispute: A Full Analysis
I. Historical Context: Canada’s Dairy Supply Management System
Canada’s dairy sector is governed by a supply management system that dates back to the 1970s. It was designed to stabilize prices, ensure predictable income for farmers, and avoid overproduction. The system rests on three pillars:
- Production Control: Farmers are issued quotas that limit how much milk they can produce. These quotas are tightly regulated and expensive to acquire.
- Pricing Mechanisms: Prices are set by provincial marketing boards to reflect production costs and ensure fair returns for farmers.
- Import Restrictions: Canada uses tariff rate quotas (TRQs) to control the volume of dairy imports. Imports within the quota are subject to low tariffs, while those exceeding the quota face steep duties often over 200%.
This system has been fiercely defended by Canadian dairy farmers and politicians, but it has also drawn criticism from trade partners who argue it restricts market access and violates free trade principles.
II. CPTPP Commitments and the Seeds of Dispute
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a trade pact among 11 Pacific Rim countries, including Canada and New Zealand. It came into force in December 2018 and includes provisions for:
- Market Access: Canada agreed to open its dairy market to CPTPP members via TRQs.
- Fair Allocation: TRQs must be administered in a transparent, equitable, and commercially viable manner.
New Zealand, a global dairy powerhouse, expected meaningful access to Canada’s market. But by 2022, it became clear that Canada’s allocation practices were favoring domestic processors, limiting the ability of New Zealand exporters to benefit from the quotas.
III. Timeline of the Dispute
| Date | Event |
| May 2022 | New Zealand initiated formal consultations under CPTPP. |
| June 2022 | Consultations failed; NZ requested a dispute panel. |
| March 2023 | Panel hearings held in Ottawa. |
| September 5, 2023 | Panel ruled in favor of NZ, citing violations of CPTPP obligations. |
| May 1, 2024 | Deadline for Canada to comply with the ruling. |
| October 2024 | NZ threatened retaliatory tariffs after Canada failed to comply. |
| July 17, 2025 | Canada and NZ announced a mutually satisfactory resolution. |
IV. Legal Arguments and Panel Findings
New Zealand’s Position
New Zealand argued that:
- Canada’s TRQ allocation prioritized domestic processors, excluding distributors and other importers.
- The system was opaque and overly complex, with quotas split into pools that were difficult for foreign firms to access.
- TRQs were chronically underutilized, with some quotas seeing less than 10% fill rates.
- These practices violated CPTPP articles, particularly Article 2.30(1)(b), which prohibits limiting allocations to processors.
Canada’s Defense
Canada maintained that:
- It had discretion under CPTPP to set eligibility criteria.
- Its allocation system was consistent with domestic policy and supply management principles.
- The TRQ pools were designed to ensure orderly marketing and prevent market disruption.
Panel’s Decision
The panel sided with New Zealand on key points:
- Canada’s allocation system restricted full utilization of quotas.
- Reserving quotas primarily for processors contravened CPTPP rules.
- Canada’s pooling system limited access for eligible importers and undermined the spirit of the agreement.
However, the panel acknowledged Canada’s right to maintain its supply management system, provided it did not violate CPTPP obligations.
V. Economic Impact and Stakeholder Reactions
For New Zealand
- Estimated C$100 million in lost export revenue over three years.
- The resolution is projected to unlock up to $157 million annually in export value.
- New Zealand’s dairy sector, which accounts for one-third of its merchandise exports, saw this as a major win.
For Canada
- Canada’s dairy sector includes 9,256 farms and 549 processing plants, generating $19.3 billion in sales in 2024.
- Over 70,000 jobs are supported by dairy production and processing.
- Dairy Farmers of Canada expressed disappointment but acknowledged that the changes were minor and did not undermine supply management.
VI. Resolution Terms and Implementation
Canada agreed to technical policy changes to its TRQ administration:
- Earlier return dates for unused quotas.
- Penalties for importers who chronically underuse quotas.
- Underfill mechanisms to reallocate quotas that consistently go unused.
- Increased transparency in quota data and allocation processes.
These changes will be published on October 1, 2025, and take effect for the 2026 dairy quota year. Importantly:
- Canada did not expand market access or alter its supply management system.
- New Zealand agreed not to pursue further action under CPTPP dispute mechanisms.
Conclusion: A Reflection on Trade, Sovereignty, and Diplomacy
The Precedent of Rules-Based Trade
This dispute marks the first formal case under the CPTPP’s dispute settlement mechanism a milestone for international trade law. It demonstrates that:
- Even close allies like Canada and New Zealand can have serious trade disagreements.
- Multilateral agreements like CPTPP provide structured pathways for resolution.
- The panel’s ruling reinforces the importance of honoring commitments, even when domestic policies are at odds with international obligations.
The case also echoes similar tensions under the Canada–United States–Mexico Agreement (CUSMA), where the U.S. challenged Canada’s dairy TRQ practices. Together, these cases suggest a pattern of friction between Canada’s supply management system and its trade partners’ expectations.
Balancing Domestic Sovereignty and Global Integration
Canada’s insistence on preserving its supply management system reflects a broader tension in trade diplomacy:
- Domestic sovereignty vs. global integration: Canada wants to protect its farmers, but also participate in global trade.
- Political sensitivity: Dairy is a politically charged sector in Canada, with strong lobbying and rural support.
- Economic complexity: Supply management ensures stability, but can stifle innovation and competitiveness.
New Zealand’s victory underscores the power of smaller nations to assert their rights under trade agreements. It also highlights the economic stakes involved hundreds of millions in potential revenue and market access.
This resolution shows that technical adjustments, rather than sweeping reforms, can often bridge the gap between domestic policy and international obligations. It’s a lesson in pragmatism and diplomacy.
Looking Ahead: What This Means for Future Trade Relations
The Canada–New Zealand dairy dispute sets a powerful precedent for future trade negotiations and enforcement:
- Other CPTPP members may now feel emboldened to challenge Canada’s TRQ practices.
- Canada’s credibility in trade talks may hinge on its willingness to implement fair and transparent quota systems.
- Global dairy markets could see shifts as exporters gain better access to Canadian consumers.
For policymakers, this case is a reminder that trade agreements are living documents they require ongoing interpretation, enforcement, and adaptation. For farmers and exporters, it’s a signal that market access is not just about tariffs, but also about how quotas are administered.
Ultimately, this resolution is a win for diplomacy. It shows that even entrenched disputes can be resolved through dialogue, legal mechanisms, and mutual respect. Canada and New Zealand remain close partners, and this case may even strengthen their relationship by proving that disagreements can be settled constructively.