Washington on Tuesday escalated its complaint objecting to Canada's treatment of US dairy products under the revised North American free trade agreement.

After talks failed to resolve the issue, US Trade Representative Katherine Tai called for the creation of a dispute settlement panel under the US-Mexico-Canada Agreement (USMCA, or CUSMA in Canada), the trade agency said.

The action could lead to punitive tariffs if the neighboring countries cannot reach an agreement. A preliminary decision would be expected in four months under the terms of the pact's conflict resolution terms.

USTR filed the first-ever complaint under the USMCA in December, calling for consultations over Ottawa's practice of dictating who can access American dairy exports, "reserving access to the largest pool exclusively for processors."

Those actions "undermine the ability of American dairy exporters to sell a wide range of products to Canadian consumers," the statement said.

A USTR official told reporters the policies prevent US dairy producers from shipping higher-value products to Canadian retailers.

In response, Ottawa said it was "disappointed" that Washington called for the dispute settlement panel.

"Under CUSMA, Canada agreed to provide some additional market access to the United States for dairy while successfully defending our supply management system and dairy industry," Canadian Trade Minister Mary Ng said in a statement.

Washington says Canada's policy on dairy products is harming the ability of US producers to sell to retailers north of the border
Washington says Canada's policy on dairy products is harming the ability of US producers to sell to retailers north of the border GETTY / SCOTT OLSON

"We are confident that our policies are in full compliance with our CUSMA TRQ (tariff rate quota) obligations, and we will vigorously defend our position during the dispute settlement process," she said.

The USMCA, which took effect on July 1, 2020, sets a quota of products that receive duty-free access, known as "tariff rate quotas" or TRQs, and President Joe Biden's officials agreed with his predecessor that Canada has violated the agreement.

"A top priority for the Biden-Harris Administration is fully enforcing the USMCA and ensuring that it benefits American workers," Tai said.

"Launching the first panel request under the agreement will ensure our dairy industry and its workers can seize new opportunities under the USMCA to market and sell US products to Canadian consumers."

Canada's treatment of dairy products was a key sticking point in the talks after President Donald Trump ripped up the North American Free Trade Agreement (NAFTA) signed in 1994 and insisted on a replacement deal.

The USTR official said the current complaint is limited to the TRQs on 14 dairy products -- including cheeses, butter, ice cream, milk powders and yogurt -- and does not extend to the country's broader supply management of the dairy sector, which is a hot-button issue in Canada.