Background: Canada’s administration of the tariff rate quota for peanut butter exports to the United States under the World Trade Organization

In 1995, as part of its implementation of the World Trade Organization (WTO) Agreement on Agriculture, the United States established a tariff rate quota (TRQ) system for imports of peanut butter, including those from Canada. In order to qualify as a product of Canada under this TRQ, the peanut butter must be manufactured in Canada. Canada is allocated a country-specific share of 14,500,000 kilograms of this TRQ. As a result, the Governor in Council placed “peanut butter” on the Export Control List (Order Amending the Export Control List, SOR/95-35). Only peanut butter that is manufactured in Canada and shipped with an export permit may enter the United States under Canada’s country-specific reserve within the U.S. import TRQ.

For the purposes of the TRQ, peanut butter is defined as a good classified under tariff item No. 2008.11.10 in the List of Tariff Provisions set out in the Schedule to the Canadian Customs Tariff. The applicable U.S. tariff item number for peanut butter is 2008.11.05 of the Harmonized Tariff Schedule of the United States (HTSUS). The quota year extends from January 1 to December 31, inclusively.

With the entry into force of the Canada-United States-Mexico Agreement (CUSMA), the U.S. over-access tariff rate for peanut butter, bleached peanuts and paste (2008.11.15, 2008.11.35 and 2008.11.60 of the HTSUS) is being phased out through 6 equal annual cuts (the last on January 1, 2025), for peanut butter produced from peanuts wholly obtained or produced in the free trade area, which means the United States, Mexico or Canada.  Despite the tariff elimination for originating CUSMA products, the WTO TRQ will remain available to eligible products, providing within access preferential treatment to Canadian manufactured goods from non-originating peanuts, meaning peanuts from outside Canada, the United States or Mexico. Products not meeting this CUSMA rule of origin and imported in volumes in excess of the WTO TRQ will continue to be subject to the U.S. over-quota Most Favoured Nation tariff rate of 131.8%.

Article 34.7 of the CUSMA stipulates that the Agreement shall terminate 16 years after the date of its entry into force, unless each Party confirms it wishes to continue this Agreement for a new 16-year term. CUSMA and the WTO are two independent agreements. If CUSMA was terminated, Canada’s access to the U.S. WTO TRQ for peanut butter and paste should not be affected.

Definitions

• Allocation methodology
• Eligibility criteria
• Return policy
• Return penalty
• Under-utilization penalty
• Transfer policy

Allocation methodology

Allocation methodologies may vary from quota to quota. The following are some examples:

1. First-come, first-served:
   1. There is no allocation policy
   2. Eligible companies may export products and receive the preferential rate of duty until the quota is filled
   3. Export permits are issued on a shipment-by-shipment basis until the specified quantity for the quota is reached
   4. Once that threshold is reached (i.e., once the quota is filled), additional exports will be subject to the Most-Favoured Nation (MFN) rate of duty
2. Previous year’s utilization:
   1. Eligible applicants receive an allocation equal to their total utilization during the previous year
   2. Further allocations are available on a first-come, first-served basis as long as quota remains available
   3. New entrants normally obtain quota on a first-come, first-served basis for their first year
3. Equal Share: All eligible applicants receive an equal allocation
4. Domestic Market Share: All eligible applicants receive an allocation proportional to their respective domestic market share
5. Hybrid: The allocation method combines two or more of the above approaches

Eligibility criteria

The eligibility for each quota varies and is used to determine who is eligible to obtain an allocation or a permit under a quota to export products that are controlled under the Export and Import Permits Act.  

In some cases, there is only one eligibility criterion, which is that the applicant must be a “resident of Canada.” “Resident of Canada” is defined as meaning, in the case of a natural person, a person who ordinarily resides in Canada and, in the case of a corporation, a corporation having its head office in Canada or operating a branch office in Canada. 

Often, there are additional eligibility criteria depending on:

• the type of product
• the amount of production undertaken in Canada
• country of manufacture and origin of raw material
• whether it is destined for retail sale or for manufacturing purposes
• the number of applicants who are interested in exporting that product

Eligible applicants could include exporters, processors, or distributors.

Return policy

Quotas are administered on an annual basis and allocations are valid only for the year in which they are granted. In addition, applicants who seek to obtain an allocation in the following year may be assessed on the basis of their performance in the current year. A return policy is a provision that allows allocation holders that are unable to substantially utilize their allocations to return all, or part, of that allocation by a specific date. The amount that is returned can then be made available to other eligible applicants that are able to utilize the allocation, which contributes to maximum utilization of the quota. It also allows an allocation holder that is unable to substantially utilize the allocation in any one year to avoid facing an under-utilization penalty the following year.

Return penalty

Allocation holders that return a significant portion of their allocation may face a return penalty if they apply for an allocation in subsequent years. The details of the return policy, including what is meant by a “significant portion”, vary by quota. Generally, the applicant’s allocation will be adjusted downward in proportion to the amount returned in the previous year. The purpose of the return penalty is twofold: to direct allocations to applicants that can fully utilize them and to encourage maximum utilization of the quota by industry.     

Under-utilization penalty

The purpose of the under-utilization policy is to encourage maximum utilization of the quota by directing allocations to applicants that will utilize these. Applicants that are unable to substantially utilize their allocations, and do not make use of the return policy, will have their allocations in the following year adjusted downward in proportion to the amount they did not utilize. The threshold below which an allocation is considered under-utilized varies by quota. In some quotas, allocation holders that have utilized 85% or more of their allocations are considered to have fully utilized their allocations and will not be subject to an under-utilization penalty in the following year. In other quotas, the threshold may be as high as 95%.

Transfer policy

Under many TRQs, an allocation holder may transfer any portion of their allocation to other allocation holders within the same TRQ. Some restrictions may apply depending on the TRQ. The Minister may allow the transfer of allocations between allocation holders. All requests for allocation transfer must be referred to Global Affairs Canada for consideration.