On February 7, 2007, the Government of Canada announced its intention to adopt new cheese compositional standards that will prohibit the importation, manufacture and sale of cheese that does not meet the new standards.

On June 16, 2007, the government introduced proposed regulations to amend the cheese standards in the Dairy Products Regulations and the Food and Drugs Regulations to require minimum percentages of proteins derived from Canadian milk to produce various cheeses and to allow for the balance to be filled by proteins from other dairy sources, the vast majority of which are imported into Canada.

The underlying objective of the introduction of these new cheese compositional standards is to limit the importation of other dairy protein sources, such as Milk Protein Concentrates (MPCs), that are used to make cheese, and to increase the use of milk produced by Canadian dairy farmers.

Imported dairy protein gives Canadian dairy processors, including cheese producers, access to cheaper imported ingredients and reductions in cost. However, for Canadian dairy farmers, it results in more domestic milk being displaced, and increased pressure to lower milk prices to remain competitive with the imported dairy ingredients. For this reason alone, Canadian dairy farmers applaud the proposed changes because they will guarantee the use of a certain percentage of Canadian milk in all cheese.

The other side of the cheese compositional standard issue is the increase in the number of imported dairy components (such as MPCs) that have been able to enter Canada through non-quota items with low or no tariffs. Canadian dairy producers have objected to the increasing use of these imported protein concentrates in cheese-making and other dairy products.

For this reason, the government also initiated negotiations with its trading partners under Article XVIII of the General Agreement on Tariffs and Trade (GATT) to introduce new restrictions on imports of these dairy sources by setting increased tariffs and new tariff rate quotas. Since negotiations are to take place with each affected member separately, quotas will be distributed in a country-specific manner.

One of the issues of significant concern for dairy processors and cheese makers will be the allocation of the new tariff rate quotas for the various milk proteins. The larger players who have been major users of MPCs will likely demand a quota distribution based on historical usage since they will want to maintain their imports. However, alternative methods of quota allocation also exist, including first come first serve, new entrant quota, production-based performance quota and market share quota. In addition, the imposition of adequate transfer rules should help to resolve many internal supply issues in Canada.

By adopting new cheese standards and renegotiating old concessions, Canada exposes itself to challenges for the creation of new quotas and new barriers to international and interprovincial trade. This may result in formal complaints under the Agreement on Internal Trade, World Trade Organization or the North American Free Trade Agreement (NAFTA). Individual companies adversely affected by this new regulation may sue the Government of Canada for damages for loss of quota and investment under Chapter 11 of the NAFTA, and may also seek judicial review of any quota allocation decision.