Canada | United States | United Kingdom | Europe | China | World Trade Organization | Environment | Digital Tax | Public Health

For the first time, CMKZ is releasing midyear forecasts that complement its traditional early-year 2021 Forecasts. They provide an update on developments anticipated by CMKZ at the start of 2021 and midyear trends that will have an impact on Canada and its businesses.

Highlights

1. Canada is exploring the possibility of negotiating a free trade agreement with Indonesia as well as participating in the Association of Southeast Asian Nations (ASEAN) and the Digital Economy Partnership Agreement (DEPA). Discussions have started to conclude a free trade agreement with the United Kingdom that would replace the continuity agreement described in our 2021 Forecast.
2. Under USMCA, the United States challenged Canadian dairy tariff rate quotas and alleged violations of Mexican trade union rights. The US maintains the pressure on the softwood lumber issue. More trade disputes with the US are to be expected.
3. In an arbitration involving Alberta, TransCanada is claiming more than $15 billion against the United States over the abandonment of the Keystone XL project.
4. The new version of the “Buy America Act” is taking shape. There is good hope that Canadian businesses will benefit from certain exemptions.
5. The United Kingdom continues to conclude trade agreements and works on finalizing its negotiations with the European Union following Brexit.
6. Commercial and technological pressure from Western countries is increasing on China, whose response particularly targets Australia and Canada. The WTO will be called upon to settle several disputes arising from this crisis.
7. The European Union has suspended the process of ratifying its investment agreement with China.
8. Despite the state of paralysis in which the WTO finds itself due to the US, progress is expected from the Ministerial Conference at the end of the year as well as from the multiple joint initiatives on which like-minded Members are working.
9. The United States and the European Union have reached an agreement on Boeing and Airbus disputes, and Brazil is expected to join the WTO Agreement on Government Procurement.
10. There should be progress on environmental protection and the fight against climate change in 2021, particularly at the COP26, which will be held in November and through the implementation of trade measures.
11. There is broad support for the OECD’s plan to establish a global minimum corporate tax rate, and discussions on the taxation of digital giants (GAFA) continues.
12. Measures are being taken to eliminate restrictions deemed unnecessary to fight the pandemic and to distribute doses of vaccines to the poorest countries, whose vaccination rates is only 1%.

Canadian trade relations

In addition to the measures anticipated at the start of the year, Canada began bilateral talks with Indonesia at the end of June 2021 regarding a potential free trade agreement. The first rounds of negotiations should take place in the fall, and an agreement could be reached in 2022 or 2023. At the same time, Canada is continuing exploratory discussions regarding its participation in the Association of South Asian Nations (ASEAN), which are not going as fast as expected. Canada also held consultations between March and May 2021 on whether to join the Digital Economy Partnership Agreement (DEPA) between Chile, New Zealand and Singapore.

Canada recently published a new bilateral investment treaties model agreement. It replaces the previous model from 2014. The changes concern, in particular, the definition of investment, new environmental provisions, and changes to arbitration procedures.

The Impact of the Biden Administration

The coming to power of the new administration improved the climate between the US and Canada. It should be noted, however, that many trade disputes remain active. Numerous disputes resurfaced in May 2021. As announced in the forecast at the start of the year, the United States is once again questioning certain parts of supply management and has thus requested the establishment of a panel under USMCA. The US notably challenges the administration of dairy tariff quotas that have allegedly been improperly allocated to processors rather than to US dairy producers.

The lumber saga also continues. After a lull following the latest WTO ruling on softwood, the United States cut tariffs to just under 9%. However, the country reimposed preliminary tariffs of 18% on lumber in May 2021. With prices and demand set to decline, the tariffs could have major repercussions. Producers have already deposited significant sums (currently $4 billion) because of the duties. As for the new labor law provisions in USMCA, the United States has already relied on them twice against Mexico for alleged violations of workers’ union rights. A deal on softwood lumber remains unlikely in 2021; the US trade representative recently accused Canada of blocking negotiations while saying the US remains ready to negotiate a softwood lumber agreement.

On the USMCA side, CMKZ predicts that trade disputes will increase in the coming years. For the second half of 2021, CMKZ expects additional panels to be set up at the request of the United States in connection with the tax treatment of American firms operating in the technology sector. Canada will likely seek the establishment of a panel to challenge the 18% tariffs recently imposed by the US on imports of Canadian solar panels.

Implementation of the new “Buy America”

The new version of the “Buy America Act” and its implementation by the “Made in America Bureau” are gradually taking shape. President Biden’s Executive Order updated the “Buy America” provisions of 1933 and 1982. Furthermore, the Biden administration issued guidelines in June to increase purchases of American goods and services. Celeste Drake, a former union leader, has been appointed to head the Bureau. The Executive Order already applies to more than 100 US agencies. The Bureau will grant rare exemptions, especially if costs are too high, materials are unavailable, or if the enforcement of the order violates trade agreements. Canadian companies risk being excluded from certain contracts, but could benefit from exemptions, particularly in connection with existing trade agreements.

Arbitration Regarding Keystone XL

Finally, as predicted by CMKZ, a Notice of Arbitration under Chapter 15 of NAFTA was filed in early July by TransCanada, claiming more than $15 billion due to the abandonment of the Keystone XL project by the United States. Interestingly, Alberta, as an investor, is keen to become directly involved in the proceedings alongside TransCanada, so this could be the first time a government joins an investment arbitration under NAFTA.

Gradual Return to “Normal” for the United Kingdom (UK)

Before Brexit, the UK had concluded around 40 so-called “continuity” agreements covering more than 70 states. In addition to the current continuity agreements with Canada and other partners, the UK has extended the scope of its continuity agreement with Lichtenstein, Iceland and Norway and entered into new agreements with Australia, Albania and Japan. The US and the UK have not yet concluded a free trade agreement, but the two states have signed a “New Atlantic Charter” to strengthen their relationship. Canada, for its part, has entered discussions with the UK in order to conclude a formal free trade agreement. The discussions should lead to tangible results by the end of 2021, but CMKZ does not expect a deal to be reached until 2022.

Further, as a beacon of hope for trade, trade between the EU and the UK has returned to pre-Brexit levels early in the summer; the situation should remain stable. However, “rebalancing” measures have been considered against the undue delays caused by the UK in the implementation of the Northern Ireland Protocol. However, the two sides agreed to extend the deadline until the end of September 2021.

During 2021, the UK is expected to continue entering into formal or enhanced “continuity” agreements. However, the state should not be able to conclude an agreement with the US before 2023. The end of 2021 should also be marked by negotiations with the EU on the amount of the “bill” for the divorce between the two blocs. The parties have so far failed to agree.

Friction Points with China

Tensions between China and the West have also increased in the first half of 2021 and are set to persist. The friction points are particularly at the level of Taiwan, maritime traffic in the South China Sea and the treatment of the Uyghur minority. China has responded to Canadian and Western criticism of the management of the Covid19 pandemic and of the human rights situation in the country by imposing tariffs or banning the import of certain goods.

As announced by CMKZ, the pressure has also increased on the Chinese giant at the time of the G7, transformed into D10 (including Australia, India and South Korea). During the meeting, President Biden succeeded in bringing the group together around a joint strategy to contain China, by ensuring that developing countries have access to Covid19 vaccines, introducing minimum taxes in order to fight against tax evasion and by helping developing countries to develop their infrastructures to counter the influence of China.

Trade Disputes with China

At the moment, the two preferred targets and the most affected countries are Australia and Canada. China has initiated numerous WTO complaints against Australia to challenge Australia’s long-standing anti-dumping duties on products such as wind turbines and railway equipment. The Chinese complaints were filed in response to proceedings initiated by Australia against anti-dumping duties imposed by China on Australian wine and barley.

Canada initiated proceedings against China over the suspension of imports of Canadian canola and requested the establishment of a WTO panel at the end of June. The Chinese measures have so far caused more than $2 billion in losses for Canadian producers. Unless parties come to mutually agreed solutions, the proceedings could last between two to four years. The proceedings are not, however, undermined by the paralysis of the WTO Appellate Body, with China, Australia and Canada participating in the MPIA, an interim arbitration mechanism. Under the MPIA, however, parties to disputes still need to sign arbitration agreements, so it will be interesting to monitor whether China will keep its word.

Sanctions for the Treatment of the Uyghur Minority in China

Moreover, in addition to the EU, Canada and Australia, the US has implemented a system prohibiting imports of goods made from forced labor. Under such a system, customs can reject shipments based on a “reasonable suspicion” to avoid the provisions of the law being inapplicable. The application of the provisions in question is becoming more frequent: the US announced a ban on the import of photovoltaic components and to some agricultural products and textile materials. Australia is also considering putting in place new measures based on an evidence mechanism like that employed in the US. Under the Biden administration, the US also extended the “Entity List” list.

Canada, for its part, has not yet started to enforce the ban on the importation of goods made from forced labor, a ban adopted in July 2020. In any event, the Canadian Border Services Agency said it could take up to six months to document the origin of imported goods properly. At the end of June, Canada mobilized some 40 countries to pressure China to allow international observers to visit Xinjiang. China, for its part, threatens companies that refuse to source Xinjiang cotton from not being able to do business in China, for instance H&M.

In connection with the situation of Uyghurs in China, the United States Senate unanimously adopted a bill in mid-July, which would establish a rebuttable presumption that goods produced in China’s Xinjiang province were produced with forced labor. The text still has to be adopted by the House of Representatives, which is expected to adopt it by the end of the year. This could have major consequences for the world economy and particularly for the textile industry. Xinjiang produces 80% of Chinese cotton and, therefore, about a quarter of the cotton available on the world market.

The situation of Uyghurs in China could also have direct consequences at the WTO. In view of the import restrictions imposed by the West, the Asian country may challenge certain measures at the WTO. Some Members are likely to rely on GATT Article XX that enables Members to restrict trade in goods manufactured in prisons. It is also possible that other Members challenge Xinjiang forced labor on account of the distortions caused to the world cotton market, distortions caused by the artificially low cost of labor in the region.

China’s Mixed Influence

China’s influence has grown in its role as an adjunct to developing countries in connection with the Covid19 crisis. However, it has shrunk in its relationship with the West. In May 2021, the EU announced the “suspension” of the ratification process of the EU-China Comprehensive Agreement on Investments due to the prevailing political climate between the two blocs. If the process resumes, the European Parliament is expected to seek assurances regarding human rights in China, including by raising its labor standards and stopping human rights violations against the Uyghur minority. CMKZ does not expect the Agreement to enter into force before 2023.

Progress at the World Trade Organization (WTO)

The WTO dispute settlement system remains in a deadlock despite the change of administration in the US. The US Trade Representative, Katherine Thai, indeed stated that trade would be one of the few lines of continuity between the Trump and Biden administrations. The US again reiterated the importance of resolving the substantive issues inherent in the Appellate Body before relaunching it. The MPIA quorum rose by only one member, with Peru joining the ranks of participating Members.

The recent G7/D10 summit, however, brought a wave of optimism to the WTO. Indeed, in the group’s statement, the parties expressed their wish to return to a functioning dispute settlement system. They also presented the multilateral trading system as one of the cornerstones of the D10 community of values ​thanks to its role in promoting democracy and the rule of law. The US and the EU have also reached an agreement to suspend their cross-tariffs on Airbus and Boeing for the next five years and have established a working group on large aircraft, highlighting their willingness to face together Beijing in this sector.

WTO Ministerial Conference

The Organization will also hold its next Ministerial Conference between November 30 and December 3 in Geneva, Switzerland, as conditions do not allow the conference in Kazakhstan as initially planned. The working groups working on the accession of Bosnia and Herzegovina and Comoros should move forward in their work. Thanks to pledges of technical support from other Members, Sudan has also relaunched its accession process, which had been idle since 2017. Brazil, meanwhile, is expected to join the Agreement on Government Procurement (GPA) by 2022 or 2023, as the country has entered into solid-based discussions with Members participating in the GPA.

Progress of Joint Statement Initiatives (JSI) at the WTO

As for new agreements and joint initiatives, WTO Members presented a revised text on fisheries at the occasion of the July ministerial meeting. An agreement on subsidies for illegal and unregulated fishing should be presented in November. In addition, the negotiation of a new agreement on agriculture is making progress and is expected to be presented at the twelfth ministerial conference in November. An agreement on lifting export restrictions related to World Food Program commodities is also expected to be unveiled. However, discussions on a potential special safeguard mechanism are likely to be separated from the rest of the project. Meanwhile, the joint investment task force has announced its intention to achieve a “concrete result” by the next ministerial conference. Moreover, at the request of certain Members, including Canada, the working group on small businesses should also issue a statement at the next Ministerial Conference in order to encourage more members to join the group. Finally, the now 86-member e-commerce group is also expected to see some development in the second half of 2021. India and South Africa, however, have threatened to block JSI. These States should normally seek to improve the treatment given to them without completely blocking initiatives.

On the environmental front, discussions on trade and environmental sustainability as well as a dialogue on plastics at the WTO have also started and could eventually lead to a declaration including measures related to tariff barriers, a reform of fossil fuel subsidies and the promotion of a global circular economy.

Environmental Protection

On February 19, 2021, the US rejoined the Paris Agreement after the United Nations accepted President Biden’s request. On the European side, as forecasted by CMKZ, the Commission submitted in July a dozen bills aiming at reducing greenhouse gases and reiterating the objective of carbon neutrality by 2050. These projects include a carbon market reform, a ban on the sale of gas and diesel-powered cars by 2035, a tax on kerosene for air traffic, and a carbon tax on imports of certain goods, such as cement, aluminum and steel. The project is very ambitious, but it will probably be revised downwards given the need to obtain the consent of the Member States. In any case, these projects will contribute to raising existing environmental standards.

In November 2021, the COP26 on climate change will be held in Glasgow under the presidency of the UK, in partnership with Italy. COP26 is the first summit that will assess the progress made since the 2015 Paris Agreement. We will see whether States will adhere to stricter standards aimed at limiting carbon emissions, the objective being to limit global warming to 1.5 degrees. The various natural disasters recorded this year could bring water to the environmental mill and serve as a catalyst for negotiations. In this regard, the post-Covid19 situation offers the opportunity to rethink our economic systems positively: time will tell if States manage to take advantage of this opportunity.

International Taxation: OECD and Digital Tax

One hundred thirty-two States have joined the G20 in its support to the OECD’s plan to establish a global minimum corporate tax rate. The OECD project is made up of two pillars, the first aiming at distributing the taxation rights of the largest digital companies and the second aiming at imposing a minimum and general corporate tax of 15%. Under the first pillar, part of the tax revenue collected from the profits of the world’s top 100 multinationals would be redistributed among partners. However, amongst others, companies exploiting natural resources and financial services are excluded from the first pillar and the maritime transport industry from the second pillar. Nonetheless, nine of the 139 countries involved in the talks refused to sign the declaration, including some developing states and Ireland.

The EU, in the face of US pressure, has also announced that it is suspending the implementation of its plan to tax digital giants but still indicates that it wishes to complete the OECD initiative. Nonetheless, some European states like France have announced that they will maintain their tax until the OECD project enters into force, normally in 2023. In general, the European and French projects go beyond measures envisaged by the OECD. In some economic circles, OECD’s plan is also denounced as a “clever move” by the United States that will probably not result in a significant increase in the tax rate on GAFA as it is the state of nationality of the company that will recoup the taxes rather than the states where the profits are made.

New Public Health Challenges

Although restrictions have generally been eased in developed countries thanks to vaccination campaigns, some restrictions, including at borders, remain due to the emergence of increasingly worrying variants such as the Delta. It remains to be seen how countries will use the vaccination passport, not only at borders but also internally, i.e., to access certain places or activities. The question of the compulsory nature of vaccination for certain segments of the population is in the air; France recently imposed it on its health workers.

While more than 25% of the world’s population is now vaccinated, the percentage is only 1% in the world’s least developed countries. The Covax platform—powered by states, NGOs and the private sector—is redistributing doses of vaccines to the 92 poorest countries in order to increase their vaccination rate. Following distribution delays, especially from India—an important center of production—Covax now predicts that it will be able to distribute vaccines to around 23% of the population in these countries by the end of the year. The platform has also signed six new advance purchase agreements with vaccine manufacturers, including Chinese (Clover, Sinovac and Sinopharm), and received the vaccine surplus of some rich countries.

In addition, China and Russia are well advanced in vaccine diplomacy, supplying vaccines to several dozen states. In addition to its contribution to Covax, China has numerous bilateral agreements with developing, especially in Asia-Pacific and Latin America. Russia, with Sputnik V, has mostly received orders from Brazil, India, South Korea and China.

Covid-19

In light of the difficulties and inequalities surrounding the distribution and access to vaccines and other medical products, a group of countries, including Canada, is currently circulating a draft declaration in the WTO, which aims at fighting the pandemic by eliminating restrictions deemed superfluous, including vis-à-vis vaccines. While there are hopes of a rapid trade recovery in the short run, the overall long-term outlook remains clouded by the spread of Covid19 variants and by inequities in the distribution of vaccines to the poorest countries.

For more information on these developments and the potential impact they may have on your activities, do not hesitate to contact Bernard Colas or one of our other CMKZ lawyers specializing in international trade law. CMKZ would like to thank André-Philippe Ouellet and Éléonore Gauthier, CMKZ Collaborators, for their important contribution to the preparation of these mid-year forecasts.