United States | Europe and Asia-Pacific | World Trade Organization | Economic sanctions | Tax | Climate change | International arbitration
The beginning of the year provides CMKZ with an opportunity to inform companies trading internationally of any developments that may affect their activities and strategies.
According to CMKZ, 2017 will be particularly influenced by:
Relations with the United States
As the new Trump Administration takes office, Canada will pay particular attention to the maintenance of its relations with the United States. Although it is unlikely that the whole of President Trump’s election promises will be fulfilled, the implementation of some of them would have serious economic consequences on our companies. The first being the renegotiation of the North American Free-Trade Agreement (NAFTA), with which Canada and Mexico have expressed their support. It is to be expected that these negotiations will mainly cover trade in goods and will take several months, given the diverging opinions on the changes and concessions each country will expect from the others in order to modify NAFTA and/or conclude new sectorial bilateral agreements.
Canada will surely take advantage of this renegotiation to overcome the challenging issue of softwood lumber trade, a sector currently excluded from the Treaty. Canadian softwood lumber exporters should have to pay preliminary anti-dumping and countervailing duties, starting from March and May 2017, respectively. The Canadian government has little time to enter into an agreement in this regard, no more than the Quebec government which would like its lumber resource allocation system excluded from the American anti-dumping and countervailing duty procedure currently underway.
Uncertainties related to the American trade policy, the effects of which are already being felt in the American border services and the imposition of a border tax and a tax reform also call for our attention. The government’s envisaged tax reform, reducing corporate income tax rates from 39% to 15%, could have an impact in Canada, particularly on the competitiveness of Canadian businesses and the incorporation of American subsidiaries.
Opportunities for Canada
In 2017, Canada could take advantage of the United States’ commercial isolation to put forward and advocate its open economic exchange policy, immigration and progressive trade agenda.
The Canadian Ministry of Innovation, Science and Economic Development announced on December 19th, 2016 that Canada will review the threshold in enterprise value for investments to directly acquire control of a Canadian business from $600 million to $1 billion in 2017 for non-Canadians (and to $1.5 billion upon entry into force of CETA for some countries), in accordance with the Investment Canada Act.
- Europe
The Comprehensive Economic and Trade Agreement (CETA), signed on October 30th 2016 between Canada and the European Union, might provisionally and partially (only the trade related part of the Agreement, not the one relating to investment) enter into force in spring 2017. Indeed, the CETA implementation legislation is to be adopted shortly by the Canadian Parliament. The European Parliament should vote on its provisional application as of February 15th, 2017.
The final ratification of CETA remains a treacherous process: no less than 38 national and regional assemblies of the EU Member States will give their consent, many of which shall be subject to elections such as Germany, France and the Netherlands, and as a result, the road to implementation could take years. However, this situation could change if the European Court of Justice, in a long-awaited decision regarding the European Union-Singapore Free Trade Agreement (EUSFTA), determines that said Agreement (which resembles CETA) falls under the exclusive competence of the European Union. If that is the case, the Member States’ ratification won’t be required because the European Union would be the only competent body to ratify CETA.
Canada should quickly initiate exploratory discussions in order to formally negotiate a bilateral free-trade agreement, inspired by CETA, with the United Kingdom, once it has left the European Union. By March 2017, the British Parliament should adopt pertinent legislation to initiate its withdrawal from the European Union. This withdrawal process could take up to two years. On the basis of the outcome of these negotiations, the United Kingdom will want to conclude a free-trade agreement with the European Union and ensure the continuity of trade relations with the many third countries that have concluded free-trade agreements with the European Union. In this context, Canadian businesses should expect to pay the same custom duties and be subject to similar British market access conditions.
- Asia-Pacific
In 2017, Canada and China will pursue their exploratory discussions, which started in September 2016, regarding the possibility of entering into a free-trade agreement. A meeting is planned for that purpose in February 2017. The two countries also announced their goal of doubling bilateral trade by 2025.
In 2017, Canada will work to strengthen its ties with the Pacific Alliance; a regional integration created in 2011 by Chile, Colombia, Mexico and Peru to promote the free flow of goods, services, capital and people. A partnership agreement between Canada and the Pacific Alliance was signed in 2016.
As a result of United States’ withdrawal from the Trans-Pacific Partnership (TPP), Canada will have to review its commercial strategy with Asian and Pacific countries, signatories of the TPP, and will have to take position in relation with the negotiation of the Regional Comprehensive Economic Partnership (RCEP), initiated by China. The negotiation of this Partnership started in 2012 between the 10 Member States of ASEAN and six other countries (Australia, China, India, Japan, New-Zealand and South Korea). The RCEP seeks the reduction and the abolition of tariff and non-tariff trade barriers. Should it enter into force, it would strengthen China’s position and contribute to the United States’ isolation, especially in Asia.
World Trade Organization (WTO)
On January 23rd, 2017, the Amendment to the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) entered into force after being ratified by two thirds of WTO Members. Said Amendment provides developing importing countries facing public health issues, with limited or no pharmaceutical production capacity, the ability to procure generic versions of patent-protected medicines, produced by third countries under “compulsory licenses”.
With 6 outstanding ratifications required out of the 110 needed, it is more than likely that the WTO’s Trade Facilitation Agreement will enter into force. This would reduce the deadlines and costs associated with custom and border formalities in developing countries.
At the WTO Ministerial meeting in December 2017 in Argentina, it is expected that the Comoros will have completed its accession negotiations to the WTO, and that the WTO Members will have come to agreements, especially on export credits for agricultural products, exports from least developed countries, public stockholding and agricultural safeguard mechanisms resulting from decisions adopted in Nairobi in December 2015. However, ongoing negotiations are suspended, pending the United States’ position.
Finally, in 2017, the WTO Dispute Settlement Body will continue to be very much in demand. Discriminatory American customs practices may lead to disputes at the WTO, especially with emerging countries such as Mexico and China.
Economic sanctions
It is likely that Canada will maintain and further strengthen its trade sanctions against Syria and North Korea, especially if the latter continues to undertake nuclear testing.
We do not expect that Canada will re-impose sanctions on Iran, except if it reinstates its nuclear program. However, it is highly unlikely that Iran will violate the Joint Action Plan entered into by the five permanent members of the United Nations Security Council and Germany, because of the advantages Iran is benefitting from the lift of sanctions, especially with Europe. Nonetheless, Canadian businesses should pay special attention to American sanctions and other foreign extraterritorial provisions. Those that transact with Iran will need to find banks that will agree to make financial transactions with Iran.
We are faced with an uncertain future regarding Russia. American senators proposed notably a bipartisan bill, Countering Russian Hostilities Act, which codifies the sanctions imposed by President Obama on Russia since April 2015. Should the bill be enacted, it will halt President Trump’s plan to amend or withdraw the sanctions imposed by his predecessor. If the American sanctions are maintained, Canada and the European Union will likely maintain theirs against Russia.
Tax treaties
As per an agreement established between Canada and Switzerland, entered into in December 2016, in accordance with the OECD Convention on Mutual Administrative Assistance in Tax Matters, amended by its 2010 Protocol, the tax administrations of these two countries will collaborate and share information to combat tax avoidance and evasion on an international scale, with respect to tax periods starting on January 1st 2017, and thereafter.
On January 1st 2017, the new Israeli-Canadian Convention took effect in order to avoid double taxation and prevent fiscal evasion with respect to income taxes; as well as Canadian Trade Office in Taipei and Taipei Economic and Cultural Office, Canada, with respect to taxes withheld at the source on amounts paid or credited to non-residents beginning on or after January 1st 2017, and thereafter.
Climate change
As part of its ongoing commitment to reduce methane emission associated with the oil and gas sector by 2025, from 40-45% compared to 2012 levels, Canada should adopt in 2017 regulations in order to reduce methane emission associated with the oil and gas sector and combat against the evacuation and fugitive emissions of methane. Canada’s requirements are expected to cover emissions originating from the same sources as those that are subject to current and proposed American statutory requirements, and to also require Canadian source reduction, like heavy oil.
At the provincial level, Alberta is imposing since January 1st 2017 a carbon tax of 20$/ton. This carbon tax is applied to the purchase of fossil fuels, which, when combusted, release greenhouse gas emissions (for example: gasoline, diesel fuel, natural gas, propane). Ontario is applying since January 1st 2017 new regulations regarding the quantification, reporting and verification of greenhouse gas emissions. These regulations, as well as the integrated guidelines, are applicable to all operations carried out by its participants. It is to be noted that in 2018, Ontario is planning the first auctioning of emission rights. Ontario’s cap and trade program for emission rights will be implemented through the Western Climate Initiative (WCI), the world’s largest carbon market in North America, of which Quebec and California are members.
International arbitration
After Canada’s ratification, on December 13th 2016, the United Nations Convention on Transparency in Treaty-based investor-State Arbitration (Mauritius Convention on Transparency) needs to be ratified by just one more country to come into force. The Convention is an instrument by which parties to investment treaties concluded before April 1st 2014 express their consent to apply the United Nations Commission on International Trade Law (UNICITRAL) Rules on Transparency in Treaty-based Investor-State Arbitration.
Furthermore, the International Court of Arbitration of the International Chamber of Commerce (ICC Court) announced that the ICC Rules of Arbitration would be amended. Said amendments are coming into force as of March 1st 2017, with the objective of reducing time and costs of international commercial arbitrations, regarding claims of less than US$ 2 million. Said amendments will apply to any arbitration agreements signed after March 1st 2017. If the parties wish to do so they can (i) waive their right to an expedited arbitration when the sums involved are lower than US$ 2 million (opt-out) or (ii) agree to the application of said rules when the sums involved are more than US$ 2 million (opt-in).
Finally, Ontario is about to pass a law which would implement various treaties in the province: the 2005 Hague Convention on Choice of Court Agreements, the 1985 UNCITRAL Model Law on International Commercial Arbitration, amended in 2006, the United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005), the 1985 Hague Convention on the Law Applicable to Trusts and their Recognition and the United Nations Convention on the Limitation Period in the International Sale of Goods (New York, 1974), amended in 1980. Other Canadian provinces that have not yet done so will probably follow Ontario’s example, which would allow Canada to ratify international agreements, which are useful tools for our businesses.
Recommendations
In light of these developments, in 2017 businesses will have to keep a close eye on:
- The provisional entry into force of CETA and the development of privileged trade relations between Canada and Asian-Pacific countries, such as China and signatory countries of the TPP;
- The renegotiation of NAFTA provisions, especially rules of origin and procurement, to maintain Canada’s privileged access to the American market, and continue benefitting from infrastructure projects;
- The consequences of the United Kingdom’s withdrawal from the European Union on their contracts, their intellectual property and their access to British and European markets;
- The American trade sanctions against countries like Iran and other provisions with extraterritorial application;
- The international tax environment which will become more transparent, and, despite the resistance demonstrated by some countries, the economy’s progressive decarbonisation.
For further information on these developments and on the potential impact they may have on your activities, please do not hesitate to contact Bernard Colas or one of our other lawyers at CMKZ specialized in international trade law.
