Trade’s New Realities

If it feels like the tariff and trade rules are changing every day, it’s because they are
For lawyers working in international trade law – not to mention their clients – it’s a strange new world indeed.

“We’ve been working forever in an atmosphere of liberal trade, and we’ve never seen anything like the current climate before,” says Louis Amato-Gauci in Miller Thomson LLP’s Toronto office. “That’s what makes the practice so challenging.”

At first, caution was the buzzword when advising clients.
 
“When Trump came to power and all this began, and even as the NAFTA negotiations made their way through fits and start, we were advising clients not to radically revise their supply chain because it was costly to do so and it might not be necessary in the long run,” Amato-Gauci says. “Now we’re not so sure.”

As it turns out, some clients don’t even have that option. 

“Not all of our clients are able to look at new markets or seek out alternative sources for raw materials, and even if they could, they have to weigh longer delivery periods and increased shipping costs into the mix,” Amato-Gauci says. “All of this makes for a very uncertain and tough environment.”

Things look particularly grim for some businesses affected by the steel and aluminum tariffs imposed by the Trump administration and the retaliatory surtaxes that marked the Trudeau government’s reaction.

“A 10 percent tariff for aluminum is a big number for the industry and 25 percent for steel is virtually an embargo,” says Darrel Pearson, co-head of international trade at Bennett Jones LLP in Toronto.

The longer it goes on, the greater the impact — especially for the smaller players.

“I don’t think it’s sustainable for small and medium enterprises to see their profit margins eroded through these measures,” Amato-Gauci says. “There will be businesses that don’t survive, job losses that have already been sustained and more to come, and the inevitability of increased costs for consumers.”

Even rumours that Washington is contemplating rescinding the steel and aluminum tariffs are cold comfort. 

“The uncertainty will persist even if that happens, because experience shows that we’re only one tweet away from things changing yet again,” Amato-Gauci says.

Meanwhile, the focus of international trade practice has changed considerably. 

“Instead of urging clients to take full advantage of trade liberalization, trade lawyers are spending a great deal of their time looking for ways around the various surtaxes and tariffs that have emerged,” Amato-Gauci says.

More than ever, trade lawyers must stay abreast of developments. 

“The key is to stay on top of the changes and communicate with clients in a pragmatic way,” Pearson says.

Among the more popular solutions is tariff engineering, which amounts to structuring products so that they receive favourable duty treatment. 

“We’ve been unbelievably busy with clients who come to us for help about the most advantageous way to procure goods and build products in ways that will mitigate the effect of the tariffs to the greatest extent possible,” Pearson explains.

The difficult thing is that it’s not always clear whether a particular product is caught by the tariffs or the related exemptions. And with the World Trade Organization’s (WTO) dispute resolution mechanism at a standstill, guidance is stalled, leaving the uncertainties to linger.

“The WTO is frozen at the appellate level because the Americans have not agreed to any new appointments and there aren’t enough adjudicators to hear the cases,” Pearson says. 

Currently, there are only three individuals on the appellate tribunal with two of them due to leave in December.

“That is going to create problems because the WTO is the most effective dispute resolution mechanism for trade issues,” says Greg Tereposky of Tereposky & DeRose LLP in Ottawa. “In fact, there are many disputes that can only be dealt with at the WTO — even the new Canada-United States-Mexico Agreement [CUSMA] incorporates the WTO process by reference.

The worst part is, there’s no end in sight.

“The US has not been transparent about what it will take to resolve the standstill,” Tereposky says. “To the extent that they’ve used the issue to create leverage, they’ve created it, and it’s time for them to come forward, engage and propose a solution.”
To Tereposky, the ongoing trade wars reflect an even larger problem. 

“Many of these tariffs and surtaxes have been widely regarded as protectionist, lacking a clear legal basis and more in the way of political and economic retaliation,” he says. “To me, that’s an indicated that we’re pulling back from the rule of law.”

What appears to have happened is that the US, clearly the protagonist on this issue, has prompted smaller countries such as Canada to follow suit. 

“The Canadian Border Services Agency is now increasingly relying on ministerial discretion as a way of punishing foreign exporters,” says Peter Kirby in Fasken Martineau DuMoulin LLP’s Montréal office. “We’re seeing decisions, particularly anti-dumping decisions, that we never would have seen in the past.”

In the long run, Kirby maintains, that’s not a good thing. 

“As a small nation, we’re absolutely dependent on a rule-based system,” he says. “Although we’re trying to diversify our trading partners, the reality is that we’re so subject to the whims of the US that we can’t do it in the short term and it’s not even clear that we’ll do it in the long term.”

The bright spot, Tereposky believes, is that the mindset in North America isn’t the norm. 

“The system may be breaking down here, but most of the rest of the world is trying to preserve certainty and predictability surrounding the rule of law,” Tereposky says. 

Still, Kirby isn’t sure that the pendulum will swing back should US President Donald Trump lose the next election. 

“The system’s been undermined,” he says.

To be sure, there’s a bright spot in the fact that the Canadian, American and Mexican government signed CUSMA in November 2018. But there remain significant political hurdles to overcome before it is ratified – particularly in the US – and comes into force.

However that may be, the fact is that CUSMA does not purport to resolve the dispute over steel and aluminum tariffs. Trump retains his authority under the enabling legislation, section 232 of the U.S. Trade Expansion Act of 1962, which allows him to restrict imports of goods that are “a threat to national security.

Still, if and when CUSMA comes into force, the landscape will change yet again. Although most of the North American Free Trade Agreement’s (NAFTA) provisions remain intact, particularly duty free treatment for almost all goods and retention of the binational panel dispute settlement mechanism, there are important changes that will govern cross-border trade between Canada and the US.

One of the most significant changes is the phasing out of NAFTA Chapter 11’s investor-state dispute resolution mechanisms. The parties to CUSMA, however, can challenge violation of investment protection by way of the state-to-state dispute settlement process described in Chapter 31.

“These changes mean that Canadian or American investors are limited to adjudicating future disputes in domestic courts or before other international arbitration tribunals,” Pearson says. “And state-to-state dispute settlement may not provide redress for damages suffered by private investors as a result of CUSMA violations.”
Most surprising, perhaps, is the fact that the procurement provisions of CUSMA do not cover Canada. Instead, government procurement between Canada and the US continues to fall under the WTO’s Government Procurement Agreement (GPA), to which both Canada and the US are parties.
“The difference is that the GPA has higher thresholds than NAFTA did, which reduces the number of contracts that US and Canadian firms are eligible to bid on in each government’s respective procurement markets,” Pearson says.

US attorneys and in-house counsel seeking to prosecute or enforce their clients’ intellectual property rights in Canada will also notice CUSMA’s impact.

In the trademark arena, the USMCA will align the minimum duration of copyright in Canada (and Mexico) with the “life plus 70 years” term that currently exists in the US.

The agreement also changes how internet service providers (ISPs) deal with users’ copyright infringement. Here, Canada will keep its “notice and notice” system under which the ISP forwards to its subscribers any notices of alleged infringement that it has received from a rights holder.

The USMCA also provides ISPs with a “safe harbour.” ISPs who remove material they know to be infringing and cooperate with copyright owners to deter illegal storage and transmission of copyrighted materials will be protected from liability for infringement. 

Under the agreement, Canada must also provide protection against the circumvention of digital locks and watermarks on copyrighted material and make those who engage in such behaviour subject to civil and criminal sanctions.