Canada's heavily protected dairy industry has ended up in the crosshairs of foreign farm groups from Europe to the United States to Australia, with these lobbies now pressing their respective governments to launch a new trade challenge at the World Trade Organization.

The farm groups charge that planned measures by Canadian dairy producers to displace milk imports would violate Canada's obligations under both the North American free-trade agreement and at the WTO – a body that referees global commerce.

A win for foreign complainants at the WTO would enable some of this country's biggest trading partners to slap punitive tariffs on Canadian goods and could ultimately force changes to Canada's sheltered market for milk production.

Story continues below advertisement

In Canada, tariffs slapped on foreign dairy products can run as high as 300 per cent.

International Trade Minister Chrystia Freeland, speaking from Wolfsburg, Germany, where she was promoting the Canada-European Union free-trade deal, played down the matter, saying the notion of filing a trade complaint against the Canadian government is still just talk at this stage.

She noted the Canadian dairy industry's plans are not yet in place, and put distance between Ottawa and the measures under development, noting the plans are an "industry-led initiative."

Still, asked whether she could defend these practices, Ms. Freeland said she supports the dairy industry. "It's my job to support our producers wherever I go. And I do that with real enthusiasm."

Dairy-industry groups from the 27-member EU, the United States, Mexico, Australia and New Zealand wrote an open letter to their political leaders last week saying that Canada's "increasingly protectionist policies … are in conflict with the principles of free markets and fair and transparent trade." They urged the filing of a complaint at the WTO as soon as the intricate details of a new deal negotiated between Canada's dairy producers and processors are revealed.

The matter was triggered by rising U.S. imports of diafiltered milk, which have managed to evade the crippling duties Canada normally imposes on foreign dairy products. The processed milk is concentrated and high in protein, but lacking much of the fat in regular milk. It is imported as an ingredient. Canadian farmers estimate they lost as much as $231-million annually as food processors bought the cheaper U.S. milk instead – mostly to make cheese.

In the name of stability, the federal government restricts imports of a number of farm goods such as dairy products with a massive tariff wall; domestic production of these items is set by quota in a command-and-control approach to the farm economy that dates back to the mid-20th century.

Story continues below advertisement

To combat U.S. diafiltered milk, Ontario's dairy industry earlier this year established a new class of milk and pricing for milk destined for processing that would enable the province's producers to undercut U.S. imports.

All signs are that the Dairy Farmers of Canada and the national dairy processors association have struck a similar countrywide arrangement, although details have yet to be released. The groups in July announced "a national agreement that includes the creation of an ingredients strategy."

Canadian trade lawyer Lawrence Herman said the foreign dairy farmers have a point. "This is all about the contortions that we in Canada have to go through to maintain a Soviet-style system for dairy products," he said.

"What they're saying is here is Canada again manipulating the market in order to allow protected dairy producers to compete with legitimately priced imported product."

The Dairy Farmers of Canada called the complaint by foreign farm groups an effort to intimidate Canadians. "They are trying to bully the Canadian government with this letter," spokeswoman Isabelle Bouchard said. "By the way, the U.S. is imposing a $2 tax on an imported pound of butter right now, so they are not respecting international trade … they are throwing rocks while living in a glass castle."

Ms. Bouchard declined to discuss the national dairy strategy, saying it's still yet to be approved. "The agreement is in front of our members and until it is ratified, we won't speak publicly about it. Everybody needs to respect our democratic process."