CPTPP Canada – Dairy Dispute: Early lessons for governments and investors26 June 2023
"The progress in the dispute to-date demonstrates the feasibility of CPTPP parties enforcing their rights through binding dispute settlement in an efficient and effective manner."
The first State-to-State dispute under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) reached a significant milestone on 15 June 2023 with the completion of the hearing phase in the dispute. As the World Trade Organization (“WTO”) continues to face difficulties in relation to dispute settlement reform and Appellate Body appointments, and improvements to the covered rules being increasingly hard fought, governments may increasingly look to preferential trade agreements to enforce their rights and the interests of their industries. This makes it an ideal time to examine the progress to-date of the first CPTPP dispute and consider some key early lessons for governments and investors in CPTPP economies.
Background and timeline
The dispute relates to Canada’s administration of its dairy tariff rate quotas (“TRQs”). TRQs are intended to provide CPTPP exporters with preferential tariff treatment for certain quantities of goods they export to Canada. However, New Zealand alleges that Canada has restrictively implemented its dairy TRQs in a way that prevents New Zealand exporters from properly utilising them, undermining the value of the market access Canada agreed to provide under the CPTPP. New Zealand has suggested this lost market access was worth approximately NZ$68m to New Zealand exporters over the first two years of the CPTPP being in force.
The dispute commenced on 12 May 2022, with the disputing parties holding consultations in June 2022 before composing a panel on 9 March 2023. The panel is made up of Jennifer Hillman (Chair), Petros Mavroidis and Colleen Swords. Since 9 March 2023, New Zealand and Canada (as well as third parties and non-governmental entities) have provided written submissions to the panel. Following the recent hearing, the disputing parties will have a further round of written submissions in June and July, before the final report of the panel is planned to be released in September.
"This dispute shows there is a strong role for industry in contributing to CPTPP dispute settlement and ensuring their views are heard by CPTPP panels."
Third-party and non-government participation
In addition to Canada and New Zealand, five other CPTPP Parties are known to have joined the dispute as third parties – Australia, Japan, Mexico, Peru and Singapore. Australia’s third-party submissions are publicly available and are critical of Canada’s dairy TRQ system, arguing it is not consistent with the CPTPP.
Several non-government entities have also made submissions in the dispute. Those whose submissions are publicly available include the Dairy Companies Association of New Zealand (an industry association representing New Zealand dairy companies), D. Tyers Foods Internationals Inc with FoodTec Canada Inc (importers, distributors and sellers of dairy products in Canada), the International Cheese Council of Canada (an industry association representing Canadian small- and medium-sized cheese importers and their suppliers), and the Retail Council of Canada (an industry association representing retail businesses in Canada).
In broad terms, the non-governmental submissions focus on factual issues around Canada’s administration of its dairy TRQs and how this impacts their ability to trade in New Zealand dairy products. Their contents are generally critical of Canada’s administration of dairy TRQs, with most having a commercial interest in increasing the access in Canada to New Zealand dairy products.
At the hearing, New Zealand and Canada presented their cases before responding to a series of questions from the panel. Third parties were present, with Australia, Japan, Mexico and Singapore all making public oral submissions. Third parties were given the opportunity to participate in the question and answer session (although such participation was minimal) and provide closing statements (which none chose to do). Members of the public were also able to attend or view the hearing online, as were other governments (including from the United States Trade Representative, noting that the United States is not a party to the CPTPP).
In line with Australia’s written third party submissions, Australia’s oral intervention supported New Zealand’s argument. The other third parties’ oral submissions instead generally focussed on their systemic interests in the dispute. This included submissions on the proper approach to treaty interpretation under the Vienna Convention on the Law of Treaties, the relevance of the CPTPP’s drafting history (including a drafter’s note that was present in the treaty text but is not publicly available) and the relevance of a decision under the Canada-United States-Mexico Agreement (“CUSMA”) regarding an identical provision to that found in the CPTPP. That decision, rendered in the first-ever State-to-State dispute under the CUSMA, found that Canada’s administration of its TRQs impermissibly reserved access to 85%-100% of its dairy TRQs for specific categories of market participants. This practice favoured Canadian producers over foreign exporters and breached Canada’s treaty obligations. Canada subsequently made changes to its TRQ administration system, but these did not satisfy the United States, which has since launched a second challenge.
"The successful resolution of this dispute would highlight again the usefulness of a rules-based trading system that can rely on an independent umpire to resolve issues between parties."
Several third parties also took the opportunity to underline the importance of the CPTPP’s dispute settlement regime to enhance the effectiveness and relevance of the agreement.
Apart from the substance of the dispute, this first CPTPP dispute highlights three key points for governments of and investors in CPTPP economies as they look to the future implementation and enforcement of the agreement.
First, the progress in the dispute to-date demonstrates the feasibility of CPTPP parties enforcing their rights through binding dispute settlement in an efficient and effective manner. The entire process in this dispute is expected to take less than 18 months in total, including the initial consultations. This may pique the interest of other CPTPP economies in making use of the CPTPP to enforce their rights, particularly those that improve upon WTO outcomes (and thus cannot be enforced through the WTO’s dispute settlement system) and given the on-going impasse regarding Appellate Body appointments in Geneva. State-to-State ad hoc dispute settlement is often highly complex and slow, and there was some uncertainty regarding whether the CPTPP regime would prove any different. The rapid progress seen here should help assuage that worry.
CPTPP governments should consider what irritants their exporters are experiencing that could be resolved through consultations and dispute settlement under CPTPP. They may also want to review their own compliance with the CPTPP to mitigate risks to their defensive interests, particularly in relation to trade exposed sectors that are commercially meaningful to trading partners. Similarly, investors facing difficulties accessing CPTPP markets should seek advice as to whether the obstructions they are facing are in breach of CPTPP rules and how best to engage their governments, or the government of the relevant CPTPP economy, on using the CPTPP to seek their removal. Noting that for private investors, the CPTPP also provides dispute settlement mechanisms enabling them to bring their own claims directly against CPTPP members.
Second, the approach to transparency and non-government participation in this dispute shows there is a strong role for industry in contributing to CPTPP dispute settlement and ensuring their views are heard by CPTPP panels. In this dispute, non-governmental entities were given just over five weeks to notify their interest in lodging a submission, and then under three weeks to lodge their views if the panel allowed them to. The views from industry in both New Zealand and Canada all highlighted an interest in increasing international trade, and there was little defence of the existing dairy TRQ system in Canada.
"This dispute helps show that use of formal mechanisms should not be seen as either extraordinary or escalatory, but instead can be a normal part of resolving differences between partners in an efficient and effective manner.."
Investors should remain alert to future disputes and ensuring their interests under the CPTPP are appropriately protected and ventilated. This would include seeking advice on how best to frame their submissions to best resonate with a panel and respond to the legal issues being contested.
Third, the successful resolution of this dispute would highlight again the usefulness of a rules-based trading system that can rely on an independent umpire to resolve issues between parties. Both Canada and New Zealand have emphasised their support for the rules-based trading system in the context of this dispute. New Zealand in particular has noted its strong bilateral relationship with Canada and the value of the neutral forum such as that provided by the CPTPP to resolve disagreements such as this. Further, a number of other CPTPP parties reiterated the value of having an independent forum to resolve disagreements between parties over implementation and that this demonstrated the relevance and importance of the CPTPP to the region’s trade and economic architecture.
The swift and straightforward resolution of differences regarding Canada’s implementation of its CPTPP commitments would be a significant win for the CPTPP, showcasing its relevance to regional trade and its usefulness to its member economies. This will likely further bolster interest in accessions, adding to the momentum from the recent substantial conclusion of the United Kingdom’s accession negotiations.
While this dispute should not be seen as foreshadowing a major increase in regional trade disputes, its resolution will help alleviate any concerns over the uncertainty or complexity of ad hoc state-to-state arbitration under the CPTPP.
New Zealand’s willingness to bring this dispute demonstrates its willingness to make use of the full suite of international measures available to it to advance the interests of its industries. Other governments may face similar requests, particularly in the face of increasingly inward turns by various economies, a rise of subsidisation, and the use of other potentially measures that may be in tension with trade law obligations. This dispute helps show that use of formal mechanisms should not be seen as either extraordinary or escalatory, but instead can be a normal part of resolving differences between partners in an efficient and effective manner.
Watson Farley and Williams (“WFW”) has deep experience and expertise in international dispute resolution and trade and investment law across the Indo-Pacific region. For more information in relation to this article, please reach out to one of one of our listed authors or another of our industry specialists including: Singapore Partner Sumeet Malhotra, Bangkok Partner Steven Burkill, Hong Kong Partner Marcus Gordon or London Partner Mike Phillips.
Sydney Partner Nathan Eastwood is an authority on public international law and one of only a handful of internationally recognized experts on deep seabed mining and the Law of the Sea. His 10+ years’ experience also includes arbitrations under the ICSID, HKIAC, ICC, LCIA, SCC, SIAC and UNCITRAL Rules and matters before the International Court of Justice. London Partner Alexis Martinez has unparalleled experience working on investment treaty and energy arbitrations, as well as commercial arbitrations involving complex energy, construction, mining and financial disputes. Alexis also has extensive experience advising governments and international companies on public international law. Seoul Partner Philip Do Youn Kim specialises in international arbitration and the resolution of corporate and public international law disputes including under the LCIA, SIAC, ICDR, ICC, UNCITRAL and HKIAC Rules. Philip has an outstanding track record in arbitration cases, including successfully representing the Korea in the first arbitration under the US-Korea Free Trade Agreement. Sydney Special Counsel Devon Whittle has almost a decade of experience in advising and representing the Australian government on trade and investment and public international law issues. This includes on a multi-billion dollar UNCITRAL investor-state dispute, in relation to the WTO, and as a negotiator or advisor on virtually every Australian trade negotiation in the past seven years, including the United Kingdom’s accession to the CPTPP. Bangkok Associate Aaron Murphy worked as Panel Secretary on the CUSMA dairy TRQ dispute referred to above and has advised clients under nearly 100 multilateral free trade agreements, bilateral investment treaties and other international legal instruments.