Parliamentary Research Branch

PRB 98-5E

FROM THE IMPORT CONTROL LIST
TO TARIFF-RATE QUOTAS

Prepared by:
Jean-Denis Fréchette
Economics Division
October 1998

The problem with importing butteroil/sugar blends to replace milkfat in ice cream goes back to long before the tariff system established by the Uruguay Round.

Prior to the Uruguay Round agreements, the Export and Import Permits Act provided for the establishment of an Import Control List (ICL). The importation of dairy products was thus governed by permits limiting the entry of products through import quotas.

Most of the primary dairy products were specifically identified in the ICL, while unspecified dairy products were covered by a general provision controlling the entry of all forms of fat. Products on the ICL were identified by name only; they were not described in detail, as they are on today’s tariff-rate quota lists. The legal interpretation provided by the Department of Justice was that any product with a dairy content of at least 50% could be considered a dairy product.

Dairy products and products composed entirely or primarily of milk were covered by the Canadian Dairy Commission Act, but, because the ICL was also covered by the Export and Import Permits Act and the Agricultural Stabilization Act, the Diary Farmers of Canada, realizing that different interpretations were possible, requested that the definition of "dairy products" be narrowed, particularly with respect to the word "primarily."

In 1988, after the Canada-United States Free Trade Agreement was signed, the federal government added three dairy products to the ICL: ice cream, yogurt and dairy blends containing at least 50% skim milk, casein, caseinate, buttermilk or whey, used alone or in combination (ICL Item 21). For the first time, the threshold of 50% for dry dairy blends became a set rule.

The United States challenged the addition, arguing that yogurt and ice cream were too far down the production line to be considered as dairy products that should be protected in order to preserve supply management. A special GATT group ruled in Canada’s favour, however.

Subsequently, the government blocked various attempts to import into Canada dry blends containing less than 50% dairy products. One importer tried to bring into Canada a blend containing 49% skim milk powder (SMP) and 51% coarse salt, which was then sifted so that the SMP could be extracted and used. Even though in principle the ICL made no mention of products containing less than 50% dairy products, this blend was deemed to have been manufactured deliberately to circumvent the regulations and was therefore banned.

As a result of the multilateral trade agreements signed during the Uruguay Round, dairy product import quotas were replaced with tariff-rate quotas; that is, tariffs (in some cases prohibitive) that were associated with different levels of market access, thereby making it possible to protect specific markets.

Canada’s tariff-rate quota (TRQ) for ice cream was 347 tonnes in 1995, and the tariff was 15.5%. The TRQ will increase to 484 tonnes in the year 2000, and the tariff will be 6.67%. Any imports beyond those tariff-rate quotas are subject to a tariff ranging from 277% to 326%; that is, between $1.16 and $1.36 per kilogram.

In 1993, as it was developing its final tariff lines for GATT, the federal government had to describe the products, not just name them, to ensure that they would fall under the correct tariff line. Many dairy products that had not been on the old ICL were now described under a tariff line. Although some blends used in preparations such as processed cheese were not specifically described under a tariff item, most dairy blends likely to be imported and used as a substitute for milkfat produced in Canada in the manufacture of dairy products were.

When the tariff lists were first tabled, the dairy industry and government negotiators knew how complicated it was to describe dairy blends, not only because of their very nature, but also because many different tariff lines applied to various blends. For example, milk and cream powders, whether or not they contain added sweeteners, are covered by tariff line 0402; dairy blends with less than 50% dairy content are covered by line 2106.90.33/34; and products consisting of natural milk constituents, whether or not they contain added sweeteners, are covered by line 0404.90. This last line actually covers products not specified elsewhere: "products consisting of natural milk products, whether or not containing added sugar or other sweetening matter, not elsewhere specified or included."

In early 1994, during the final phase of the Uruguay Round, Canada submitted its final tariff lines. The Canadian dairy industry was convinced that by including tariff line 0404.90, which no longer referred to the 50% dairy content threshold, the Government of Canada was serving notice of its determination to fight any attempts to import dairy blends manufactured specifically to circumvent the regulations.

The DFC’s confidence in the tariff protection against blends increased further when a special NAFTA group, following a challenge by the United States, reviewed the conversion of import quotas to tariff-rate quotas. In its 19 August 1996 response to the special group, the Government of Canada referred specifically to dairy blends:

43. Tariff Subheading 0404.90 is a residual category that covers products not specified elsewhere. The removal of the fifty percent threshold from the portion of this Tariff Subheading that was formerly subject to ICL Item 21 allowed Canada to respond to a problem that had developed contemporaneously with the Uruguay Round: concerted efforts by some private firms to import mixtures specifically designed to circumvent the import controls on dairy products.(1)

The future would reveal what the players in the Uruguay Round already knew: some tariff items, no matter how well written they might be, will never be as airtight as import quotas and will always be vulnerable to contentious administrative descriptions.

(1) Dairy Farmers of Canada, legal brief submitted to the Honourable Lyle Vanclief, Ottawa, November 1997.