Canada | Forced Labor | Trade Disputes | China | United States | European Union | National Security | World Trade Organization | International Taxation | CMKZ’ Advice

CMKZ wishes to thank André-Philippe Ouellet and Bernad Colas for preparing this blog together with the team.

Half-through 2023 constitutes an opportunity to upgrade the developments forecasted by CMKZ at the beginning of 2023, which will affect Canadian companies active abroad.

Canada

The biggest trade event for Canada will be the signing of an “Early Progress” Trade Agreement with India expected to take place by the end of 2023 or early 2024. This initial agreement will focus solely on sectors such as critical minerals, clean technologies, renewable energy and artificial intelligence. This initial agreement is expected to be followed by a comprehensive treaty alongside specific service agreements, e.g., the opening of university campuses in India. Canada has also initiated discussions with Taiwan in the wake of the agreement signed between the island and the United States. The first rounds of negotiations are scheduled to begin by the end of 2023. Otherwise, other negotiation processes appear to be stalling. Negotiations with the Association of Southeast Asian Nations (ASEAN) appear to wind down on account of Canada’s desire to include gender considerations and minimum labor standards in the deal. However, Australia and New Zealand have managed to reach an agreement with ASEAN by making certain concessions, which could inspire Canadian negotiators as they pursue their discussions.

The same applies to negotiations with the United Kingdom who just acceded to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

The Government of Canada, through the Bill Act C-47, proposes to expand the scope of economic sanctions to include more businesses controlled by Designated Persons by expanding the definition of “control.” The text is currently being examined by the Senate.

And good news for internationally active companies, Canada has formally joined the Apostille Convention that will come into force on January 11, 2024 which will greatly facilitate the authentication of Canadian public documents such as export and corporate documents.

Forced Labor Prevention

Companies operating in or importing goods into Canada will soon have an increased duty of care. Indeed, as of January 1, 2024, companies meeting two of the following three criteria ($20 million in assets, more than 250 employees and/or more than $40 million in revenues) will have additional reporting obligations in relation to forced and child labor within their supply chains. Bill S-211 aims to facilitate the implementation of the United Nations Guiding Principles on Business and Human Rights. Several other Western countries impose similar obligations on their companies.

Trade Disputes Involving Canada

In the second half of 2023, Canada will again need to defend how it manages dairy importation quotas. Canada will first cross swords with the United States, which has initiated new CUSMA consultations. The United States believes that a recent ruling in its favor has not been properly implemented. Canada will also have to defend the management of its dairy quotas in the first dispute under CPTPP, initiated by New Zealand. Lastly, a US challenge to the Online Streaming Act cannot be ruled out.

In addition, Canada is expected to engage in two disputes with Mexico. The first relates to Mexico’s nationalisation policies in the energy and mining sectors, which threaten Canadian investments. The second concerns Mexico’s ban on using GMO corn for human consumption. Canada does not export GMO corn but joined the consultations initiated by the United States to prevent Mexico from extending this policy to other agricultural commodities, e.g., canola.

With regard to investor-state arbitration, it will be interesting to follow the dispute between Keystone XL and the United States government. The United States has raised jurisdictional objections, arguing that Keystone’s investment is not covered by the sunset clause of NAFTA/CUSMA, as the United States terminated the project after NAFTA’s termination.

China

Canadian companies operating in China should be extra careful, especially if they also operate in the United States. China has drawn up a list of “Unreliable Entities”, which so far includes two American companies active in the aerospace and defence sectors. This list is seen as a response to the American “Entity List”. Some Chinese observers have also called for including all Western companies that comply with US sanctions. In the same vein, China could introduce export restrictions on electronics to mirror United States restrictions.

It will also be interesting to follow the analysis of WTO panels set up at the request of the European Union, which, on the one hand, challenge China’s trade blockade against Lithuania (which authorized the opening of a Taiwanese representation) and, on the other, the protection of intellectual property in China.

United States

On the United States side, it is first important to recall that Canada did not succeed in obtaining an exemption for its companies under the Buy America Act (BAA). The American content requirement for funded projects reaches 100% for construction materials and 55% for the rest. However, Canadian companies can qualify if they can demonstrate that using an American product would be 25% more expensive. Canada thence introduced various measures in its most recent budget to support affected companies. Second, Canadian car and battery manufacturers, unlike companies in other sectors, will be able to benefit from the Inflation Reduction Act (IRA). Under this law, vehicles whose batteries are made from a certain percentage of US critical minerals or a free-trade partner are eligible for subsidies. Japan has concluded a sectoral agreement, and the EU and the UK are currently negotiating with the United States.

Finally, a United States Supreme Court decision could have repercussions for Canada, as the Court ruled that California could ban the sale of pork “confined in a cruel manner” to increase environmental and animal welfare protection. This may be lawful under US law but probably contravenes WTO law, which does not allow for consideration of how goods are produced. The debate about taking into account processes and production methods has been going on for several years with regard to environmental protection. It will be interesting to see whether this discrimination ground will be retained under international trade law.

European Union

The EU has just signed a free trade agreement with New Zealand that contains ambitious environmental commitments.

The unitary patent has just taken effect on 1 June 2023 in 17 EU Member States participating in enhanced cooperation and which have ratified the Agreement on a Unified Patent Court. It is expected that other EU Member States will ratify this Agreement in the coming years, so that eventually Unitary Patents will make it possible to get patent protection in up to 25 EU Member States by submitting a single application with the European Patent Office. Furthermore, the EU has published a draft regulation that would facilitate the introduction of compulsory licensing in the event of crises (e.g. in connection with Covid). Among other things, the regulation would apply to pharmaceutical patents and patents under examination.

Regarding anti-deforestation measures, Canadian timber producers will have to keep a close eye on the new related European law, as they will bear additional reporting obligations. The burden could prove significant if Canada is classified as a high- or medium-risk country. Canada has not succeeded in excluding boreal forests from the law, as it succeeded in doing so in relation to similar New York and Californian laws. Other states, such as Malaysia and Indonesia, have already implemented retaliatory measures against the EU.

With the EU’s new Foreign Subsidies Regulation coming into force in July, foreign companies operating in the EU and receiving subsidies could find themselves in the crosshairs of the European authorities. The development of the “Green Deal Industrial Plan”, a response to the American IRA, should also be monitored. Lastly, the EU, like the USA and Canada, will likely ban 5G equipment from Huawei and other companies that present risks due to links with foreign governments.

It should also be noted that the EU’s border carbon adjustment mechanism will be implemented from October 1, and that exporters of certain goods (e.g., steel, aluminium, fertilizers) will have reporting obligations during the transition period, after which they will have to pay a carbon tax. China and other developing countries are likely to challenge this mechanism at the WTO. In theory, Canada could benefit from a recognition agreement if its carbon market is deemed equivalent.

National security

The debate surrounding national security exceptions in trade agreements goes on. Indeed, the United States still needs to comply with the criteria set by the WTO for invoking national security. It will be interesting to read the conclusions of the panel set up at Russia’s request against the American tariffs on steel and aluminium. This is likely to be the only case in which the WTO rules in favor of the United States on national security, whose tariffs against other states have already been deemed illegal.

The interpretation given to these exceptions is of the utmost importance, as the United States Trade Representative recently said that a reinterpretation of security exceptions in line with the American vision was essential for the United States to stop blocking the Appellate Body. The United States will likely ask for an authentic interpretation of security exceptions, but with no real chance of success given the opposition of other members to an interpretation that would render international trade highly unpredictable.

World Trade Organization

The second half of 2023 will also be the occasion of some progress at the WTO. Firstly, more than 110 WTO members should be able to finalize an agreement on investment facilitation, as contentious issues have been set aside. There will also be progress in plastic pollution negotiations involving 75 members representing 75% of world trade. Participating members are expected to present a preliminary agreement by February 2024. Negotiations on e-commerce are also progressing, with the 88 members involved aiming to complete them by the end of 2023. Negotiations on electronic transmissions should also be monitored, with members maintaining a moratorium on tariffs for the time being. This moratorium is increasingly being called into question by developing countries. Members are expected to reach an agreement by February 2024.

The ratification process of the Agreement on Subsidies for Illegal, Unreported and Unregulated Fishing is progressing, with Canada and the United States having submitted their ratification instruments. The agreement will enter into force once 2/3 of WTO members have ratified it. The second part of the negotiations has also begun and should proceed smoothly since would a final agreement not be reached within four years, the first agreement will expire. This second agreement will regulate fishing more generally in order to protect fish stocks and ensure their sustainability.

Two new states, Timor-Leste and Comoros, are expected to join the WTO by the next Ministerial Conference in early 2024. Uzbekistan’s accession process will continue to make headway, as will that of other countries in the region. Azerbaijan relaunched negotiations, and Turkmenistan announced it would initiate an accession process.

On the dispute settlement front, the United States continues to block the Appellate Body, and Japan joined the MPIA due to an ongoing dispute with China.

International Taxation

The OECD has published a technical guide to facilitate the implementation of the 15% effective minimum tax rate (the second pillar of the agreement). The Agreement’s implementation is progressing, with countries such as Korea and the UK set to begin applying it as early as 2023, while the EU is giving its members until the end of the year to include the tax in their domestic law. Other states, such as Switzerland, have adopted it by referendum. Canada is expected to announce its implementation plan by the end of 2023.

CMKZ’s Advice

In light of these anticipated developments, CMKZ recommends Canadian companies to:

1. Closely monitor trade negotiations between Canada and India to take advantage of any opportunities that may arise as a result of this agreement;
2. Exercise increased caution when importing inputs or selling products from countries where forced or child labor is practised;
3. Pay attention to trade disputes in which Canada is involved, particularly with regard to companies active in the agricultural, mining and energy sectors;
4. Keep an eye on the development of rules related to processes and production methods in the United States, particularly in the meat production sector due to new animal welfare laws in some American states;
5. Remain vigilant if operating in both China and the United States, given the existence of the US Entity List and the Chinese Unreliable Entities List, the same recommendation applies vis-à-vis Russia;
6. Monitor US programs such as the IRA and BAA to see if their products or services qualify, and find strategies to make the most of these financial opportunities;
7. Take advantage of the European unitary patent and monitor the developments in EU related to compulsory licensing of pharmaceutical patents;
8. Ensure that the wood they produce and export to Europe is not the result of deforestation as defined by the European Union;
9. Be prepared to take on new reporting obligations relating to the carbon content of certain products exported to the European Union, such as steel, aluminum and fertilizers;
10. Check that any subsidies received do not contravene the new European rules for companies operating in this market;
11. Be prepared for a general increase in corporate taxation for companies not already subject to a 15% corporate tax.

For more information on these developments and their potential impact on your business, please contact Bernard Colas or one of CMKZ lawyers specializing in international trade law.