Canada | National Security | Sanctions | Trade Disputes | China | United States | European Union | ESG Standards | Environment and Maritime Freight | World Trade Organization | Intellectual Property and Artificial Intelligence | Affilia Practical Advice

Affilia would like to thank André-Philippe Ouellet, Affilia Collaborator, and Bernard Colas for preparing this forecast.

Halfway through 2024, it is important to take stock of the international developments that will likely affect Canadian companies operating abroad.

The second half of the year will be marked by multiple elections worldwide and their repercussions. Among key trade partners of Canada, France had a snap election, the UK elected Labour, and India re-elected President Modi with a weakened majority. The great unknown, however, remains the outcome of the American election in November 2024, which could have a major impact on the trade relations between Canada and the United States (US). Canadian businesses should factor in these changes and anticipate potential interference in their supply chains and outlets.

Canada’s International Trade Strategy

Canada’s international trade posture is set to become more aggressive in the coming months. The resources of the Canadian Border Services Agency have been increased to include a new anti-dumping unit. Canada announced in its Budget 2024 that it would start implementing reciprocal measures when it believes the treatment of Canadian companies or products abroad is unfavorable and illegal. The question of the legality of such reciprocity measures could arise under WTO law. Still, Canada would not be the only WTO member to implement such measures, e.g., the US and the European Union (EU), with its new enforcement measures.

Canada’s Indo-Pacific strategy will continue to mark progress vis-à-vis negotiations with the Association of Southeast Asian Nations (ASEAN). However, these negotiations will require a few more years to yield results, which is why Canada is stepping up its efforts to negotiate a separate bilateral free trade agreement with Indonesia. The possibilities opened up by such an agreement would be significant, for instance, in terms of investment protection and the liberalization of services. However, Indonesia insists that the environmental or labor standards provisions, which Canada insists on, should not be subject to binding dispute settlement. Canada’s insistence has been bogging down many trade negotiations; the Indonesian proposal could be a promising compromise to keep such obligations within limits acceptable to Canada’s partners. Moreover, the implementation of the Canadian Indo-Pacific strategy is hampered by deteriorating relations with India, which, for instance, opposed Canada joining the IPEF. Otherwise, Canada’s bilateral investment treaty with Taiwan should come into force by the end of the year, and negotiations on a free trade agreement with Ecuador are well underway.

The election of a Labour government in the United Kingdom (UK) could revive talks on a free trade agreement with Canada. However, Canada is unwilling to make any agricultural concessions to the UK. The consequences of the absence of any free trade agreement are becoming tangible. Since March, exporters have been unable to include EU components to qualify under the applicable rules of origin and thus avoid Canadian tariffs. A 6% tariff is now applied to non-qualifying products, such as automobiles and processed food. Finally, despite the election of a new president in Mexico, Canadian investors should remain very cautious in this country, especially in the energy and mining sectors, as the new president belongs to the same political party as her predecessor.

Companies manufacturing and supplying plastic products will be required to provide information about their products as part of a new federal plastic registry. The first declarations will have to be made in September 2025 regarding the year 2024, which means concerned businesses need to start preparing. Adopting such a register echoes the United Nations (UN) negotiations on a plastic pollution reduction treaty, which should be finalized by the end of 2024.

Finally, it should be noted that the modernized Canada-Ukraine Free Trade Agreement came into force on July 1.

National Security

Canada’s business community should pay close attention to the measures set out in the Countering Foreign Interference Act (Bill C-70), which received Royal Assent in June 2024. This Act provides for the creation of a public registry for transparency in matters of foreign interference. It has been adopted in the wake of similar registries set up, e.g., in  Australia, the US, and the UK. Any individual or company acting on behalf of, or in association with, a foreign government (including a company partially controlled or owned by a foreign government) and involved in any way in a political process will have to appear on the register within 14 days of the start of a relationship.

The amended Investment Canada Act (Bill C-34) received Royal Assent during Spring 2024. As a result, Canada must hold consultations, likely during next fall, as this Act allows to enact regulations that will designate sensitive sectors, e.g., media, technology, minerals, etc. New restrictions will also affect specific sectors, such as information technology and video games: foreign investors wishing to invest in these sectors will be subject to more stringent controls. Here again, Canada follows a global trend, with more and more countries introducing controls and limits on foreign investment.

Finally, the US continues to use national security arguments to justify restrictive trade and investment measures. The Biden administration’s recent veto against the sale of an American steel producer to a Japanese company shows once again that even the US closest allies can be targeted.

Economic Sanctions

Canadian sanctions targeting foreign individuals and governments will continue multiplying in the second half of 2024. The passage of the Fall Economic Statement Implementation Act, 2023 (Bill C-59) created a new offense of ‘sanctions evasion’. This legislation also strengthened controls to ensure that assets used for money laundering or terrorist financing do not enter Canada, notably by imposing new reporting obligations where reasonable suspicion exists. The Canadian government has also recently published new information to guide businesses in relation to its sanctions regime.

Canada, like the EU and the US, is likely to proceed with plans to sell Russian assets seized to finance Ukraine’s war effort. However, the sale of uncompensated expropriated assets appears to be contrary to international law. Purchasing such assets could pose a problem if they are later transferred to states that do not recognize such ownership transfers.

Whatever the outcome of the 2024 American election, US economic sanctions will likely multiply in number and intensity. In particular, the US is expanding the spectrum of its sanctions regime. It now specifically targets the technology sector, including cloud computing and software services. Accordingly, companies operating from the US will be prohibited from providing such services in Russia from September 2024. The EU adopted similar measures in its 14th sanctions package against Russia, increasing both the number of individuals targeted and the covered industries. European companies must now obtain authorization before providing services and software in Russia.

Canadian businesses should also keep monitoring the addition of companies to the Entity List (a ban on the sale/purchase of certain US technologies), the Unverified List (companies that will be added to the first list if they fail to comply with US requirements) and the forced labor-related Entity List. Since June, the US has banned American investment in semiconductor, quantum computing, and artificial intelligence (AI) sectors in China. The number of targeted sectors is set to increase. In response, China will continue to add US and Western companies to its Unreliable List, a list set up in response to the listing of Chinese companies on the Entity List.

Canadian companies must be careful to avoid being caught in the crossfire between China and the US.

Trade Disputes Involving Canada

In the second half of 2024, Affilia expects the US to initiate a dispute with Canada over the recent Online News Act (Project C-18), which imposes a special tax on digital giants to finance Canadian media. The aforementioned Economic Statement Implementation Act, which provides for the implementation of a 5% tax on the Canadian profits of tech giants, will also be targeted. In early July, the American Trade Representative said that the US would do everything in its power to prevent Canada from taxing its companies, which should lead the US to seek the establishment of a CUSMA panel. 

Canada is following in the footsteps of France, Italy, and the UK in moving forward unilaterally on digital taxation. This arises from the failure to implement the first OECD pillar on digital taxation, which is partly attributable to US inaction. Canada and its allies plan to repeal their taxes once the first OECD pillar, which aims to redistribute the revenues of large digital companies, is in place. As a reminder, the second OECD pillar providing for a minimum corporate tax of 15% worldwide is marking progress, with more and more jurisdictions complying.

On the investment law front, companies should monitor the outcome of Ruby River Capital v. Canada. This case stems from the rejection of the GNL Québec project by the governments of Quebec and Canada in 2021–2022. The case echoes that of Keystone XL against the US. In both cases, the decision to terminate these projects was taken after NAFTA expired, raising questions about the jurisdiction of the arbitral mechanism under NAFTA.

Trade Tensions With China

Trade tensions between China and the West are growing, especially in relation to products that Western countries consider unduly subsidized. The US has imposed 100% tariffs on Chinese electric cars and photovoltaic cells. For its part, the EU has a basic tariff of 10% in place on cars and will impose countervailing duties ranging from 17% to 38% to mitigate the effect of Chinese subsidies. Canada currently applies a 6% tariff but has just launched a consultation—open until August 1—to jointly determine with the industry the type of measures that should be taken. At the end of this consultation, Canada will have to decide whether to apply tariffs unilaterally, as the USA has done, or follow the EU’s example and use the anti-dumping or countervailing duty procedures, which would be in line with international law. In the latter case, Canada would be less exposed to Chinese retaliatory measures that could be particularly damaging to the Canadian agricultural sector.

However, China is not remaining passive in the context of current trade tensions. American unilateralism appears to be pushing certain democracies to increase trade ties with China despite the decoupling or de-risking approaches advocated for in the US and Europe. Indeed, Japan and South Korea have resumed negotiations on a free-trade agreement with China, which had been deadlocked since 2019 for fear of US unilateralism.

Impact of the US Presidential Election

The highlight of 2024 will be the November presidential election. If Donald Trump is elected, Canada will likely face tariffs and other protectionist measures. Trump’s team, including former US Trade Representative Robert Lighthizer, is proposing to subject all goods entering the US to a uniform 10% tariff on top of existing tariffs. For its part, China would be subject to a tariff of 60% should this proposal materialize.

In such an eventuality, and although Canada should manage to avoid such tariffs as a free-trade partner under CUSMA, Canadian companies should keep diversifying their markets and brace themselves for new tariffs. Even if an additional uniform tariff is not imposed, many Canadian companies will likely face special tariffs, particularly in the metal sector.

Regardless of the election’s outcome, the US recently adopted groundbreaking measures that consider the processes and production methods of goods to determine whether they have benefited from an undue advantage. Although this is prima facie illegal under WTO law, the US Department of Commerce may, from now on, consider weak intellectual property protection, non-compliance with human rights and labor standards, or low environmental standards as indirect subsidies or undue advantages that could lead to the adoption of countervailing or anti-dumping duties.

Finally, Canada is preparing for the first joint review of CUSMA, which is to be renegotiated periodically and is due in 2026.

European Union, CETA, and Carbon Taxes

Canadian companies must keep monitoring the political situation in European countries in relation to the Canada-EU Comprehensive Economic and Trade Agreement (CETA), France in particular. Indeed, the former majority of President Macron had succeeded in pushing back demands in the French National Assembly for a vote on CETA’s ratification, which is currently being applied provisionally by Canada and the EU. The two rising forces, the Nouveau Front Populaire (left, with the largest number of seats) and Rassemblement National (right, with the largest number of votes), both oppose CETA. They may force a vote that could ultimately lead to the Agreement’s termination, affecting businesses on both sides of the Atlantic. At any rate, the Agreement is currently being applied on a provisional basis, which is detrimental to trade between Canada and the EU and hampers its operation, given the impossibility of making technical corrections. Canada will, therefore, have to intensify efforts to convince its European partners to ratify the Agreement.

Companies operating in the metal, chemical (including fertilizer), and cement sectors must continue to declare the CO2 content of their products exported to the EU and must be prepared to pay the European carbon tax (CBAM) based on their emissions. For the moment, States have not agreed on a methodology, although the OECD is currently working on it. The EU has adopted its own in connection with implementing the CBAM. Canada and most developed countries are expected to implement similar measures. The harmonization or mutual recognition of methodologies will be of key importance to our companies.

Environmental, Social, and Governance (ESG) Considerations

ESG reporting requirements and the banning of certain non-environmental-friendly goods are being adopted by a growing number of countries, including Australia, Singapore, and Switzerland, in addition to Canada’s main partners, the US, the EU, and the UK. To maximize their business opportunities and ensure regulatory compliance, Canadian companies operating abroad have a growing interest in complying with ESG principles. In practice, this means that a growing number of companies must produce specific reports or include the ESG impact of their operations in their annual reports.

The International Sustainability Standards Board (ISSB), which took shape at COP26 in 2021, recently adopted new reporting standards, IFRS1 and IFRS2, relating to sustainability criteria and climate change, respectively. The ISSB standards cover reporting greenhouse gas emissions and other environmental information that a company should make public. The ISSB’s counterpart in Canada, the Canadian Sustainability Standards Board, has announced that it will be possible to implement S1 and S2 standards in Canada for companies wishing to do so from January 1, 2025. Complying with such standards can help businesses on the path leading to green growth.

In addition, the aforementioned 2023 Economic Statement Implementation Act tightens the legislative framework to restrict fraudulent practices such as ‘greenwashing’. The law now prohibits representations about environmental benefits or mitigation that are not ‘based on adequate and proper test’. Major banks and insurance companies are now bound to inform their partners about their ESG parameters in order to prevent greenwashing.

In the spring of 2024, the US Securities and Exchange Commission (SEC) adopted new rules for disclosing the climate impact of corporate activities, which will help to increase the transparency and effectiveness of ESG standards. For now, the SEC has decided to suspend the rule’s application due to legal challenges; however, they should become applicable again in 2024. Affilia also wishes to recall the new EU regulation on ESG standards, which provides for twelve standards for which concerned companies have regulatory obligations. The Council of the European Union recently adopted a new directive (CS3D) that lays down due diligence obligations in the supply chains of European companies, particularly with regard to forced labor, the environment, and transparency.

In Canada, companies had until May 31, 2024, to submit their report on measures taken to counter the risk of forced or child labor. However, the government indicated that it is possible to report after ‘the legislative deadline’. The government also indicated in its 2024 Budget that it wished to take new measures to eradicate this type of work from Canadian supply chains.

In the future, Canadian measures should mirror those adopted in the US. The monitoring of forced labor in this country shows that companies must take such obligations seriously. For instance, cars from German brands such as Volkswagen have been banned from import into the US because they contain components produced using forced labor in Xinjiang.

Environmental Initiative in the Maritime Industry

With regard to environmental measures, we will have to keep a close eye on developments within the International Maritime Organization as negotiations continue between States on adopting a possible environmental tax on freight, which is likely to increase the cost of maritime transport over the next few years.

However, it should not be forgotten that environmental measures adopted worldwide can also provide opportunities for Canadian companies. Indeed, in addition to European countries, the US and Canada, more and more countries are making massive investments to accelerate their green shift. These include Australia, which has adopted a mini IRA, and Morocco, which offers numerous prospects in fields such as green hydrogen.

A group of countries—Costa Rica, Iceland, New Zealand, and Switzerland—have just signed an Agreement on Climate Change, Trade, and Sustainability. The Agreement aims to use trade to reduce CO2 emissions and climate change. It provides for the abolition of customs duties on environmental products such as solar panels, turbines, and environmental services and the elimination of fossil fuel subsidies. Canada should join such agreements once it has stopped subsidizing fossil fuels.

World Trade Organization (WTO)

The WTO held its thirteenth ministerial conference in February in Abu Dhabi, when the Comoros and Timor Leste became members. However, there will not be major developments at the WTO before the end of the year.

Joint initiatives such as the ones on fossil fuel subsidies and domestic regulation of services should continue to make progress in 2024. The initiative on investment facilitation, spearheaded by China—expected to result in a plurilateral agreement at the last ministerial conference—was torpedoed by India. India is increasingly obstructing negotiations at the WTO, including in relation to negotiating the second agreement on fisheries subsidies. However, the first agreement regulating this type of fishing should come into force by the end of the year, with 78 members having ratified it out of the 109 required for it to enter into force.

Finally, it should be noted that China has requested the establishment of panels against the US subsidies provided for by the Inflation Reduction Act, which it considers discriminatory, and in relation to restrictions on trade in semiconductors. China is also expected to lodge a WTO complaint against Canada, the EU, and the US in connection with tariffs or duties that have been or may be put in place against Chinese electric cars. However, complaints against the US are only political due to the WTO Appellate Body deadlock. With both Canada and China participating in the alternative dispute mechanism (MPIA), Affilia reiterates the importance for Canada to continue along the path of international legality by respecting WTO Agreements, while helping to preserve the stability of the international trading system.

Intellectual Property and Artificial Intelligence

The second half of 2024 is likely to be marked by new measures concerning artificial intelligence worldwide. In April, the UN General Assembly adopted its first AI resolution, 78/49, to encourage international cooperation in this field. 

The EU adopted the world’s first law on artificial intelligence at the end of May. AI producers, operators, importers, etc., will have additional data protection obligations. Certain types of AI and certain manifestations, e.g., deep fakes, have also been banned. The law also reiterates the obligation for AI operators to respect existing protections for intellectual property, trade secrets, and other confidential information.

AI also raises many questions about copyright since most of the world’s existing laws only protect human rather than ‘autonomous’ creations. For the moment, it is unclear whether this definition will change. Still, the US Patent and Trademark Office has so far confirmed that artificial intelligence creations cannot be protected under US copyright law. Other countries, such as the UK, do, however, grant such protection to works created without human intervention. Companies should keep a close eye on developments in this field and a possible legislative harmonization on the international plane.

In Canada, such creations are not currently protected, but the country has sent out contradictory signals, making its future position unclear. AI is not just a matter of intellectual property law: Canada recently held consultations on the impact of AI on competition in Canada to adapt its legislative regime to this new reality. The government has also launched new consultations on AI and is inviting businesses and individuals to have their say–before September 6, 2024–on the strategy Canada should adopt.

Otherwise, new European States, including Ireland, are expected to join the European Union’s Unified Patent Court, which was established last summer and is made up of 17 European States to date.

Affilia’s Practical Advice

Given these anticipated developments for the second half of 2024, Canadian companies would benefit from implementing the following:

1. Ensuring they have the necessary data to comply with any due diligence requirements, e.g., ESG reporting, foreign agent registry, etc. These requirements should be taken seriously, not only for the sake of regulatory compliance but also to avoid unpleasant surprises, e.g., the seizure of goods at customs or possible import bans;

2. In particular, companies should check whether they are subject to the new Canadian law against forced and child labor, and if so, ensure that they produce the corresponding report as soon as possible;

3. Ensure that they comply with the Canadian sanctions framework (countries, targeted products, etc.) as well as with the EU and American frameworks, including Entity Lists, when they have significant activities in or export to these countries. Companies active in the service sector, especially in the technology and multimedia sectors, should assess whether their activities are covered by new sets of sanctions;

4. Verify this fall whether the industries in which they operate are included in the sensitive sectors to be designated by the Government of Canada under the new version of the Investment Act;

5. Prepare to face Chinese retaliatory measures, including in the agricultural sector, should the Canadian government adopt tariffs on Chinese electric vehicles;

6. Be cautious if acquiring seized assets belonging to the Russian government or individuals of Russian nationality, particularly should these assets be circulating outside Canada or the United States;

7. Keep an eye on developments in the United States following the November election, which could lead to the imposition of new tariffs by the US and a great deal of trade unpredictability;

8. Participate in relevant Canadian government consultations, e.g., on whether it is appropriate to impose duties on Chinese electric cars and on which sectors should be designated as ‘sensitive’ or artificial intelligence;

Affilia is ready to assist companies that have any doubts about their obligations in relation to ESG disclosure, forced labor, sanctions regimes, or national security obligations, e.g., foreign agent registration, or should they wish to participate in ongoing consultations by the government of Canada. Please do not hesitate to contact our team for more information on these developments and their potential impact on your company.