Ottawa declared a decisive victory Friday over the United States in an ongoing dairy-based trade dispute that has U.S. milk producers accusing Canada of "playing games" with its largest trading partner. 

A dispute resolution panel largely rejected the U.S. Trade Representative's latest set of contentions, which essentially accuse Canada of intentionally bottlenecking imports of American dairy products.

It's the USTR's second offensive in three years against how Canada allocates tariff rate quotas, or TRQs — how much of certain dairy products can enter Canada at lower duty levels under the terms of the U.S.-Mexico-Canada Agreement. 

The  conclusions of the first dispute resolution panel, released in December 2021, were largely a triumph for the U.S. side, although International Trade Minister Mary Ng called it more of a split decision. 

This time, there was less ambiguity. 

"Canada is very pleased with the dispute settlement panel's findings, with all outcomes clearly in favour of Canada," Ng said in a statement. "This is good news for Canada's dairy industry and our system of supply management."

In three of the four principal U.S. claims, the panel concluded that the Canadian measures in place were "not inconsistent" with the terms of the USMCA, known in Canada as CUSMA. 

The U.S. accused Canada of excluding retailers, food service operators and others from TRQs; using a market-share basis to determine eligibility; and requiring applicants to have been active in the sector for 12 months.

In a fourth claim, which said Canada was not being "timely and transparent" about its unused TRQ allocations, the panel said it was unable to find that the measures were inconsistent with the agreement. 

U.S. Trade Representative Katherine Tai said she was "very disappointed" in the findings and that "serious concerns" persist about Canada's approach to tariff rate quota allocation. 

The USTR requested a second panel, Tai noted, because Canada had yet to  adequately take action in response to the findings of the first one.  

"Canada's revised policies have still not fixed the problem for U.S. dairy farmers," she said in a statement.

"We will continue to work to address this issue with Canada, and we will not hesitate to use all available tools to enforce our trade agreements."   

In fact, the ruling demonstrates that Canada is honouring the terms of the deal, said Adam Taylor, an international trade consultant and partner at NorthStar Public Affairs in Ottawa.

"The shared-gain-through-shared-pain dynamic, omnipresent in difficult trade negotiations, is working well," Taylor said. 

Securing access to a supply-managed market like Canada's was a significant victory in and of itself when the terms of the USMCA were finally agreed to in 2018, he added.

"Providing this access to Canada's market was a tough political decision for the federal government," he said. "The U.S. should recognize this and move on." 

Not only do the findings validate Canada's approach on quotas, Ng said, but they also offer a measure of vindication for supply management, the system that has regulated the dairy industry since 1972. 

Supply management, she said, provides stability to the market and supports producers with "fair returns" for their investments. "The government of Canada will also continue to work with processors and retailers to stabilize food prices," she added.

Ottawa says Canada's dairy sector generated $8.2 billion in farm cash receipts and $17.4 billion in sales last year, supporting more than 70,000 production and processing jobs across the country. 

The USMCA's dispute settlement mechanism includes no appeals process, but Agriculture Secretary Tom Vilsack — himself the former head of the U.S. Dairy Export Council — made it clear the fight is not over. 

"We will continue to voice deep concerns about Canada's system," Vilsack said.

"We remain focused on securing the market access we believe Canada committed to under the USMCA and we will continue exploring all avenues available to achieve that goal."

The finding "weakens the agreement's value to the U.S. dairy industry," the council said in a joint statement with the National Milk Producers Federation.

Federation president Jim Mulhern called it "profoundly disappointing" and a decision that favours obstructing trade over facilitating it. 

"We urge Ambassador Tai and Secretary Vilsack to look at all available options to ensure that Canada stops playing games and respects what was negotiated."

Krysta Harden, Vilsack's successor as council president and CEO, warned of a "dangerous and damaging precedent" that allows Canada to ignore its obligations under the deal. 

The first dairy-focused dispute settlement panel of the USMCA era, launched in May 2021, largely agreed with the U.S. complaint that Canada's strategy was a violation of the terms of the agreement. 

Vilsack said the second case was brought "to refine and expand upon our win in the first case." 

Disputes and disagreements have become a recurring feature of the USMCA since it became the law of the land in summer 2020.

Canada and the U.S. are together taking Mexico to task for energy policies they say unfairly favour domestic suppliers and threaten to undermine American efforts to jump-start the green energy industry and combat climate change.

And Canada and Mexico together claimed a significant victory in January, when a separate panel ruled against the U.S. interpretation of the rules that determine whether core automotive parts are considered to be of domestic or foreign origin.

The U.S. has been silent on whether it intends to comply with that decision. 

This report by The Canadian Press was first published Nov. 24, 2023.