Ottawa’s move to plug a regulatory hole that eased pizzerias’ access to U.S. mozza seems to have halted traffic in “pizza kits” — but U.S. officials see that move as potentially trade-unfriendly.
Officials also estimate the move will effectively shut Canada’s ports to thousands of tons of U.S. pizza toppings valued at up to US$30 million per year.
The federal government last November passed a motion clarifying its tariff classification on “pizza topping food preparations,” otherwise known as pizza kits, as used by some pizza restaurants.
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The U.S.-made kits, packs of shredded mozzarella cheese and sliced pepperoni, were under fire from Canada’s national and provincial dairy groups as “a blatant example of circumvention of the government’s tariff system” on cheese imports.
The federal motion, which took effect Nov. 29, required the cheaper U.S. mozzarella in such kits to be classified under tariff lines for fresh cheese — regardless of their packaging. [Related story]
The clarification stopped importers from classifying the U.S. kits as a “food preparation” exempt from Canada’s tariff rate quotas (TRQs) on dairy imports.
According to a ruling in May last year from the Canadian International Trade Tribunal (CITT), the U.S. kits were a designer product, developed by Ontario importer and distributor J. Cheese Inc. (JCI), for use by a Canadian customer.
JCI’s customer, CITT said, was Toronto-based Pizza Pizza, which operates over 620 Pizza Pizza outlets and 90 “Pizza 73″ outlets in Canada.
“Implies subterfuge”
A recent report, prepared by senior agricultural specialist Darlene Dessureault at the U.S. Embassy in Ottawa and approved by the embassy’s agricultural attache, Jeff Zimmerman, illustrates the scale of the northbound traffic in pizza kits up until last November’s clampdown.
Ottawa’s motion, the U.S. Foreign Agricultural Service (FAS) report said, has slapped the cheese component of pizza kits with a 246 per cent duty. “As a result of this action, trade of meat-based food preparations that contain cheese known as pizza toppings kits halted after Nov. 29, 2013.”
The report noted Canada’s budget implementation Bill C-31 in March “indicates (Ottawa’s) intent to follow through with the new taxation measure.”
The report estimated “the value of the annual trade lost to U.S. exporters as a direct result of the trade action taken by Canada against exports of pizza toppings kits” in the range of US$25 million to $30 million.
The value of Canada’s monthly imports in U.S. products classified under the same tariff category as pizza kits has dropped, the report noted, from over US$5 million last November to just over US$1 million in February.
The report cited Statistics Canada data to show Canada’s imports of products in that category rose from between 2,000 and 4,000 tons in 2006, topped 10,000 tons in 2012 and peaked last year at 10,179 tons — a figure that likely would have been higher if pizza kits’ reclassification were not retroactive to last Nov. 29.
Imports this year in that category are now forecast to drop to the 5,000-ton area, the report said.
Furthermore, the report warned, U.S. exporters “remain concerned that Canada will continue to resort to parliamentary procedures, without any advance notification or consultation to affected parties, to give effect to domestic tax and tariff changes and restrict trade it deems a threat to its domestic dairy industry’s interests.”
The report ripped Canada’s “assertion” that the kits were “packaged in a specific manner to circumvent Canada’s tariff structure.” Such a claim, Dessureault wrote, “implies a level of subterfuge on the part of the importer/exporter that is difficult to establish.”
Canadian officials, the U.S. report argued, would have been made aware of the kits’ contents and “anticipated use” during the application of the 2006 advance tariff ruling that had allowed the kits to enter at a duty rate of zero.
“Rent-seeking behaviour”
U.S. trade officials have since called out Canada on the clampdown “at both the bilateral and multilateral levels,” the report noted.
For example, U.S. officials made note of the change during a January meeting of the World Trade Organization’s (WTO) committee on agriculture, saying they disagree with Canada’s use of the term “circumvention.”
Canada’s supply management system for dairy, the officials said, “encourage(s) inefficiencies in the market and create(s) incentives for entrepreneurs to engage in rent-seeking behaviour that lead to Canada having to create additional barriers.”
Dessureault’s report noted New Zealand, also a known critic of Canada’s supply management system, “expressed concern (at the WTO meeting) about the potential for Canada to adopt similar processes on other food preparations and blended products for which concessions on access have been negotiated.”
Minutes from the January WTO committee meeting quote U.S. officials as saying an unnamed “Canadian importer” had been served notice in December from the Canada Border Services Agency that its 2006 advance ruling, approving imports of pizza kits, was revoked.
The revocation, U.S. officials said in January, was “effective immediately” and referenced the Canadian government’s November ways-and-means motion, “even though it has not yet passed into law.”
The U.S. officials asked at the committee meeting whether Canada had consulted with any of its trading partners before proposing the motion, and sought an explanation of Canada’s “legal basis” for making the change.
Furthermore, U.S. officials said at the meeting, “by using an effective date that is retroactive, the (U.S.) believes the measure immediately impacts trade negatively without any stakeholders’ input.”
Officials in the meeting also asked to know whether Canada now plans any other amendments to its tariff schedule “to target cheese and/or dairy products in a similar fashion.” — AGCanada.com Network
