A move by the Canadian government to block Pizza Pizza Ltd. and other Canadian restaurant chains from importing low-cost U.S. mozzarella is stoking trade tensions with the United States.
A senior U.S. trade official has bluntly warned Ottawa that the decision could harm its exporters and was made without proper notice or justification.
Ambassador Islam Siddiqui – the top U.S. agriculture negotiator – urged Ottawa in a letter to the heads of three federal departments plus Gary Doer, Canada's ambassador to Washington, to delay implementation of this change.
"I trust that Canada will continue to administer its customs regulations fairly and transparently," Mr. Siddiqui noted pointedly in the letter obtained by The Globe and Mail.
The letter was sent Nov. 27, or a week after Ottawa quietly moved to close a loophole that has allowed Canadian restaurants to import growing quantities of specially prepared cheese-and-pepperoni pizza topping kits. The Canada Border Services Agency had previously ruled that the U.S. kits can enter Canada duty-free, rather than with the normal 245.5-per-cent tariff that's designed to protect Canada's dairy industry.
Trade experts said Ottawa's move is about more than just cheese – a highly protected piece of the tightly regulated dairy sector. And it could expose Canada to potentially costly trade disputes under the North American free-trade agreement, the World Trade Organization, or both.
It could also undermine the work of Canadian negotiators in future trade deals, such as the Trans-Pacific Partnership.
"This move goes way beyond dairy. It goes to our credibility as a reliable trading partner," argued James McIlroy, a Toronto-based trade lawyer and consultant, who is not representing a client in the case.
"The fact that you do it retroactively flies in the face of the rule-of-law. You don't change the rules of the game in the middle of the second period."
The letter from Mr. Siddiqui does not explicitly mention a possible NAFTA or WTO challenge. But that may be where the case is headed unless Canada backs down, according to Mr. McIlroy. He pointed out that all countries use the identical customs categories, and Canada can't unilaterally move an item from one tariff code to another.
The CBSA ruled last year that pizza topping kits are "food preparations" and therefore eligible for duty-free entry, enraging the lobby group for Canada's 12,500 dairy farmers. The Dairy Farmers of Canada failed earlier this year to get the quasi-judicial Canadian International Trade Tribunal to reverse the customs ruling. It is now appealing the case to the Federal Court of Canada.
The move to close the loophole, introduced quietly through a ways-and-means motion in the House of Commons in late November, appears to be part of an effort to appease the dairy industry, according to Garth Whyte, president of the Canadian Restaurant and Foodservices Association.
Dairy farmers are upset about the recently negotiated free-trade deal with Europe, which will eventually give European cheese a greater share of the Canadian market.
Finance department spokesman Jack Aubry insisted the tariff amendment is "fully consistent with Canada's international trade obligations." Earlier this week, Marie Prentice, Finance Minister Jim Flaherty's press secretary, called the change a "technical clarification" to stop a "deliberate" attempt to skirt Canada's tariff system.
The high tariff wall has created enormous incentives to buy cheese at world prices, which are typically 30 per cent lower than Canada's. Dairy processors, for example, are importing growing quantities of imported milk protein concentrates as a substitute for higher-priced Canadian-made milk in various products.
Earlier this year, the Canadian Dairy Commission moved to partly address the problem by creating a special lower-price class of milk for producing mozzarella for restaurants. But the food service industry has continued to complain about unjustified price hikes – the latest of which goes into effect next February.