Canada | United States | European Union | Brexit | CPTPP | China | Forced Labor | World Trade Organization | Environment | International taxation | Business advice

CMKZ would like to thank Bernard Colas, as well as André-Philippe Ouellet and Éléonore Gauthier, CMKZ Collaborators, for their significant contribution to the preparation of CMKZ’s 2022 Forecast.

The beginning of the year is an opportunity to take stock of the foreseeable developments in international trade law for 2022, which are likely to affect Canadian companies active abroad.

According to these forecasts, 2022 will be particularly marked by:

• Canada’s trade negotiations with the Association of Southeast Asian Nations (ASEAN), the United Kingdom and the countries of the Digital Economy Partnership Agreement (DEPA), and on investment, with Taiwan;
• Canada’s trade frictions with the United States, particularly on solar panels, softwood lumber, meat labelling and eventual subsidies for American electric cars under the Build Better Act;
• The conclusion of the United States-European Union trade agreement on “green” steel and aluminium and the eventual membership of Canada and other countries in this agreement;
• Rising tensions with China and the expansion of the list of Chinese and Russian companies targeted by US sanctions and the development by the European Union of sanctions and countersanctions mechanisms that are likely to be used against China in response to pressure on Sweden and Lithuania, among other countries;
• The implementation by the European Union of trade measures aimed at preventing deforestation in relation to its imports of beef, soy and timber;
• The conclusion of an agreement with the European Union on the movement of goods between the United Kingdom and Northern Ireland;
• The potential accession of countries to the Trans-Pacific Partnership (PTPGP) and possibly that of the United Kingdom;
• The proliferation of bans on the importation of goods resulting from forced labour;
• The postponement of the 2021 WTO Ministerial meeting to 2022, the accession of Timor-Leste and Comoros as WTO members, and progress in fisheries, agriculture and e-commerce negotiations despite the blockages of South Africa and India, as well as the expansion of the MPIA;
• The renegotiation of the Energy Charter and the possible exclusion of fossil fuel investments;
• As for the environment, companies should prepare for the establishment of a carbon adjustment mechanism by the EU in 2022 and its entry into force at the beginning of 2023;
• The consultations initiated by the Government of Canada on the establishment of a carbon adjustment mechanism by Canada;
• The conclusion of an OECD-sponsored agreement to distribute the right to tax the most important multinationals and to set a minimum tax rate of 15% on corporate profits among participating countries. Such an agreement will seek to implement the 2021 OECD declaration of principle regarding the two pillars.

Canadian Offensives in 2022

Canada will begin formal negotiations with the Association of Southeast Asian Nations (ASEAN) in early 2022 to conclude a free trade agreement. It will also begin negotiations with the United Kingdom (UK) to replace the Trade Continuity Agreement in the wake of Brexit, which replicates the Canada-European Union (EU) agreement. In addition, exploratory discussions will continue with the members of the Digital Economy Partnership Agreement (DEPA).

Regarding investment, Canada has also announced its intention to negotiate a protection agreement with Taiwan. Canadian trade policy is therefore clearly in line with the United States (US), the UK and Australia, particularly vis-à-vis China. These negotiations could nevertheless lead to China adopting trade sanctions against Canada in 2022, e.g., in the Canadian agricultural sector, which Beijing has targeted over the last few years.

The Canadian government has also raised the value threshold for Canadian companies that foreign investors can acquire without being subject to review for the year 2022. However, the federal government will most likely amend Investment Canada Act in order to tighten controls aiming at protecting the health and safety of Canadians.

Trade Disputes with the United States

Trade disputes between Canada and the US are expected to multiply in 2022. Indeed, Canada has requested the establishment of USMCA panels on US duties on solar panels and Canadian lumber, such duties reaching 18% in both cases. The panels should submit their respective reports in April and October 2022.

In 2022, the US could also implement a new labelling system for meat and poultry, which would require indicating the country of origin in a similar fashion to the “COOL” system, which caused significant losses to the Canadian beef industry. In addition, the US was successful in the case concerning the dairy tariff quotas allocated to the US. Therefore, the value of US dairy exports should increase slightly in 2022, as part of the quotas will be allocated directly to US dairy producers rather than to Canadian milk processors.

Finally, if the “Build Better Act” is adopted by the US Congress this spring, Canada and Mexico will challenge tax credits for purchasing US electric cars due to rules of origin that unduly favour American content. Canada has already announced that it could suspend dairy quotas allocated to the US and publish a list of goods that would be subject to punitive tariffs, which could penalize companies importing such goods.

Developments in the United States

2022 is also expected to witness developments in the steel and aluminium industries. Indeed, in 2021, the US and the EU agreed to set up a complex system of steel and aluminium tariff-rate quotas to replace the tariffs that had been hitting European producers. As part of this agreement, the US and the EU agreed to later agree on the reduction of those materials’ carbon density by 2024. The duo announced that this “green” agreement would be general in scope and open to other states, including Canada, which is likely to join the deal.

In addition, the United States will expand its “entity list”, which lists companies under American sanctions. A growing number of Russian and Chinese companies are likely to appear on the list, yet even companies established in allied countries could be added; for instance, the US added the Israeli company Pegasus on the list despite close ties between the US and Israel.

European Union

As for the EU, the vagaries of trade coupled with the French presidency of the Union, which began in early 2022, will bring their share of change. The EU will continue to develop its “autonomous” trade defence measures (sanctions and countersanctions) to prevent and remedy economic coercion that EU members face or may face in the future.

These measures have initially been developed in reaction to the aggressive trade policy of former US President Trump. Yet, they could instead aim at China. Indeed, many European countries have been targeted in recent months as European parliamentarians and private individuals have been the subject of Chinese intimidation. The last two victims are Sweden and Lithuania. After having authorized Taiwan to set up a delegation in Vilnius, the latter was subject to dire commercial pressure (suspension of imports and exports).

In this sense, the current EU French presidency should mark a turning point, the country wishing to send a strong signal to Beijing in order to discourage it from intimidating EU members and their nationals. A “sino-skeptic” consensus is gradually emerging in Europe since Germany, usually accommodating, starts to raise its voice. Thence, the EU-China investment agreement, which stalled last year, will be held in abeyance, and not come into force in 2022 except for a change in attitude from Beijing.

In 2022, the EU will also implement trade measures to prevent deforestation, particularly in relation to its imports of beef, soy, and timber. Companies wishing to export these goods to the EU will have to demonstrate that their production has not led to deforestation. The EU plans to classify states under a low, medium and high-risk benchmark and will impose obligations on companies depending on the given risk level. Therefore, it will be necessary to pay attention to the category in which Canada will be classified.

UK: Post-Brexit Developments

The UK will remain in a difficult position in 2022 due to post-Brexit negotiations and issues. The UK has notably raised the possibility of suspending part of the Northern Ireland protocol in order to eliminate sanitary controls between the British Isles and Northern Ireland. However, the UK will not likely cross the Rubicon given the pressure from the Union, but also from the US, which threatens not to scrap its free trade negotiations if the UK compromises peace in Ireland. The EU and the UK should, however, conclude an agreement allowing the movement of goods between the UK and Northern Ireland with less stringent controls in the course of 2022.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

The list of countries wishing to accede to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to which Canada is a party, will grow longer in 2022, the most prominent candidate to join this treaty liberalizing investment and trade being China. CPTPP parties have so far been cautious vis-à-vis the request, in particular Australia and Canada. Although some states such as Malaysia and Singapore support the Chinese request, China is not expected to join CPTPP in 2022. The agreement is at the center of Indo-Pacific tensions and other states that have tense relations with China, such as Taiwan and South Korea, also applied.

The most likely outcome is that no country will accede to CPTPP in 2022. Nevertheless, the UK could join the agreement this year, given the support of its historical partners such as Australia and Canada. Finally, despite its remoteness, the links between the EU and the Indo-Pacific will have to be monitored, with former European Trade Commissioner Cecilia Malmström promoting the idea of ​​the EU joining the CPTPP and the EU is working on deepening its relationship with ASEAN.

Growing Tensions with China

The climate of tension with China should keep deteriorating in 2022. Reports testify of human rights violations, particularly in the Xinjiang region. Therefore, both China and its trading partners will keep implementing commercial and diplomatic sanctions and countersanctions in 2022 as the Communist Party increasingly regulates the Chinese economy.

The Chinese government adopted an aggressive attitude against states questioning its policies or being vocal on China’s alleged responsibility for the Covid-19 outbreak, such as Australia or Lithuania. CANZUS (Canada, Australia, New Zealand and the US) and the EU are likely to increase the pressure on China in 2022.

Under the Biden administration, the US maintains an approach similar to the Trump administration. Indeed, the US will continue to enforce the Phase I agreement (Phase One Deal) concluded between China and the US. China has met about 70% of the targets under the agreement in 2021 and is expected to meet them almost entirely in 2022. Attaining the Deal’s objectives could help improve the relationship between the two countries.

Forced Labor

Canada has begun to enforce its policy prohibiting the importation of goods made from forced labor, a policy partly stemming from Canada’s implementation of a CUMSA provision. After a first interception at the border of a shipment of clothing from China in October 2021, the federal government and a Quebec company recently terminated contracts for medical gloves worth CAD 222 million based on suspicion that these goods were made with forced labor, a decision that made headlines across the country. The company involved, Supermax Healthcare Canada, is a Quebec subsidiary of the Malaysian manufacturer Supermax Corporation, the second-largest producer of disposable gloves in the world. Supermax Healthcare Canada had already obtained contracts for medical gloves worth several hundred million dollars with Canada and Quebec at the beginning of the Covid-19 crisis, which would partly explain the media coverage and the political pressure that ensued. Canada only took action following the rejection by the US of shipments from Supermax. The US keeps its shipment interception lists public (unlike Canada, which keeps its lists confidential). However, the Government of Canada still does business with Supermax Healthcare Canada for sanitary production equipment made in Quebec. The company is currently conducting audits regarding allegations of forced labor in its supply chains. Supermax Healthcare Canada business relationships regarding medical gloves will be reassessed after the audits.

CMKZ predicts that the number of shipments rejected will increase in 2022, but to a lesser extent than in the US, the Canadian ban being less strict. In the US, the burden of proof is based on reasonable but not necessarily conclusive doubts, while in Canada, legally sufficient and defensible evidence must be presented. Canadian investigations can therefore take more than six months to be conclusive. In the US, rejections were numerous in 2021 and the trend is expected to accelerate, particularly in the textile and food sectors.

World Trade Organization (WTO)

The Ministerial Conference that was to take place at the end of 2021 has been cancelled. It should now occur by July 2022 in Geneva as Switzerland has lifted the testing obligations for vaccinated or healed persons entering its territory. Despite the cancellation, it is “business as usual” at the WTO, and the next Ministerial Conference should lead to developments in the negotiations on fisheries, agriculture and joint initiatives. An updated negotiating text should be published on agriculture and progress recorded in the negotiations. The Negotiating Group on Electronic Commerce should also submit a statement to the Ministerial Conference. Moreover, the agreement on investment facilitation prepared by the Joint Initiative on Investment Facilitation should be finalized in 2022; over two-thirds of WTO members currently support this initiative.

Discussions on vaccine equity also continue despite the cancellation of the last ministerial conference. The proposal by India and South Africa to temporarily suspend patents on Covid-19 vaccines is supported by more than a hundred members. This would allow poorer countries to produce generic vaccines at a lower cost to meet the needs of their population and thus delay the appearance of new variants. Indeed, the crisis continues, and African populations remain scarcely vaccinated, only about 8% of Africans being vaccinated. However, a handful of developed countries still oppose the initiative, arguing that it would reduce incentives for research and innovation of vaccines, treatments and diagnostics. A compromise should nonetheless be found in 2022, but the path will not be easy given the need to reach a consensus at the WTO.

Apart from the US still blocking the Appellate Body, South Africa and India have added themselves to the list of spoilsports, blocking or slowing down a growing number of negotiations at the WTO. The attitude of these countries is the main hurdle in negotiations on subsidies on overfishing and illegal fishing.

The Multi-Party Interim Appeal Arrangement (MPIA) will continue to expand in 2022, with 54 members having now joined this appeal mechanism, Peru being the latest one to join. Interestingly, Canada, China and Australia, who have ongoing WTO trade disputes, are all members of AMPA and will probably appeal reports under the MPIA in 2022.

2022 will also be the stage of many negotiations at the WTO. The US-EU-Japan triad is expected to further its plan to impose stricter subsidies disciplines, especially vis-à-vis state-owned enterprises. The regulation of “transnational” subsidies (subsidies from country A to country B, which affect third countries) should also mobilize several players at the WTO in 2022. However, new disciplines on subsidies risk being inefficient if China does not accept them.

Finally, Timor-Leste and Comoros, whose accession were delayed by the pandemic, should normally become members of the organization in 2022 and are likely to be followed by Uzbekistan and Turkmenistan in 2023.

Environment

As for the environment, companies should prepare for the establishment of a carbon adjustment mechanism by the EU in 2022 and its entry into force at the beginning of 2023. This should not directly affect exports from Canada but could affect Canadian companies exporting goods from certain emerging markets. It will also be necessary to follow the ongoing consultations organized by Ottawa on the project to set up such a mechanism in Canada and the lively debates that these mechanisms generate at the WTO.

2022 will also witness developments and progress in the renegotiation of the Energy Charter. Indeed, environmental considerations should be added to the treaty, although much work remains to be done in this direction. The EU is campaigning in particular so that investments in fossil fuels are no longer covered by the Charter, but it is unlikely that the parties will agree on such a modification, at least not in 2022, given the opposition of several parties such as the UK and Switzerland.

Finally, last year Nauru, in partnership with a Canadian mining company, activated a clause requiring the International Seabed Authority, established under the United Nations Convention on the Law of the Sea, to adopt regulations on deep-sea mining by 2023. It is possible that the authority will arrive at a result before the end of 2022; developments should therefore be monitored. This constitutes an opportunity for Canadian companies, but many experts have also highlighted the inherent environmental risks of deep-sea mining.

International taxation and digital businesses

In the course of 2022, the 137 States that have adhered to the OECD declaration of principle regarding the two pillars developed by this organization should reach a formal agreement under the aegis of the OECD.

The multilateral convention that will govern the first pillar (distribution of the taxing rights on the 100 or so leading multinational enterprises) should therefore enter into force by 2023; an implementation plan will be publicly available before the end of 2022. This multilateral agreement will then take precedence over the double taxation agreements in force between the signatories. The provisions governing the second pillar (a minimum tax rate of 15% on corporate profits) are likely to be agreed on in 2022 and come into force in 2023 or 2024. The conventions will enter into force as soon as critical mass is reached.

The conventions will also contain transitional provisions and will only fully apply around 2027 or 2028. Canada will eventually have to modify its laws, in particular with regard to the taxation of the digital industry and avoidance of double taxation. States that have implemented digital taxes will not have to repeal them until the entry into force of the multilateral convention, i.e., by 2023.

Advices to Companies

1. Canadian companies operating in the forest sector will have to pay attention to the disputes relating to US softwood lumber tariffs and will have to keep an eye on the implementation of anti-deforestation measures that will be put in place by the EU this year.
2. Companies should also keep an eye on the persons and businesses that will be added to the entity list by the US government in 2022. Given the current tensions, the number of persons and companies on this list is expected to increase.
3. Meat and poultry producers should also closely monitor the implementation of a new labelling system in the US and be proactive.
4. Companies that import from Asia should increase their vigilance in 2022 by ensuring that the goods they import are not made from forced labour. Companies should be particularly careful if they import goods from a company whose shipments have been rejected by the US, as Canada appears to be lining up with its neighbour on forced labour.
5. Regarding the environment, Canadian companies will have to monitor the establishment of a carbon adjustment mechanism by the EU, which could affect international markets and should participate in the consultations put in place by the Government of Canada.
6. Finally, companies benefit from using the new tools put in place by the WTO, such as the Trade4MSMEs platform, in order to access international markets.

For more information on these developments and the potential impact they may have on your business, please contact one of our CMKZ lawyers specializing in international trade law.