CMKZ 2021 International Trade Law Forecast

On February 8, 2021, Posted by , In International Analysis,

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Canada | United States | United Kingdom | European Union | World Trade Organization | Environment | Public Health | GAFAM | CMKZ Advices

The beginning of the year is an opportunity to take stock of the foreseeable developments in international trade law for 2021, which are likely to affect Canadian companies active internationally.

2021 will be the stage of the consolidation of a tripolar world, starkly influenced by the United States, the European Union (EU) and China, which will reinforce their influence on their respective influence spheres by resorting to either alliance strategies or further sanctions. However, the renewed American leadership on transatlantic relations will facilitate the achievement of consensus on the importance of reforming the WTO, access to vaccines and medical equipment, rules on GAFAM, and potentially, more stringent local procurement. In any event, collaborating with China will be necessary to respond to the challenges posed by climate change.

Defending Canada’s interests

In this context, in 2021, Canada is likely to:

  • Continue to defend its economic interests; notably, vis-à-vis increasing protectionist pressures from its American neighbour;
  • Reinforce is trade relations with the United Kingdom (UK), following its departure from the European Union;
  • Work hand-in-hand with the EU and its other allies so as to:
  1. Coordinate action to put pressure on China and other countries which Canada considers to be violating Human Rights;
  2. Update the disciplines of the WTO and provide it with renewed leadership;
  3. Protect the environment and face increasing public health challenges;
  4. Regulate GAFAM and ensure the payment of a fair tax contribution;
  5. Keep actively participating in the modernising of international private law.

With regards to bilateral trade negotiations, Canada should be able to complete the modernisation of the Free Trade Agreement reached with Ukraine in 2017 and possibly reach an agreement on an updating of its agreement with the European Free Trade Association (EFTA), which consists of Iceland, Liechtenstein, Norway and Switzerland. In addition, Canada launched bilateral consultations with Indonesia on a prospective trade agreement.

It is worth noting that the African Continental Free Trade Area (AfCFTA) Agreement entered into force on January 1, 2021; this Agreement now binds the 34 ratifying states out of the 54 signatories.

Renewed American Leadership

The inauguration of the Biden-Harris administration on January 21, 2021, points to a re-engagement of the United States on the multilateral scene and greater predictability in trade relations.

However, those encouraging signs could be overshadowed by protectionist and nationalistic inclinations, which will probably outlive the Trump Administration. As of January 25, 2021, President Biden had already signed an Executive Order intended to strengthen US federal procurement laws to favour American-made goods and services and to ensure increased transparency over their application. What is more, a Made-in-America office is soon to be set up by the White House and the US are likely to seek adjustments of the WTO Public Procurement Agreement—of which Canada and the EU participate—to avoid potential breaches of the agreement non-discrimination provisions. Infuriated, the EU has already threatened to reciprocate and restrict American businesses’ access to its public procurement.

Businesses are also likely to face additional shortcomings in 2021. The new US Trade Representative, Katherine Tai, indicated that she wanted to ensure and further the compliance with the Canada-United-States-Mexico Agreement (CUSMA) provisions on environmental, labour and human rights standards which may lead to tensions that Canada may try to smooth out within CUSMA Free Trade Commission and committees.

Moreover, several disputes are likely to arise between the United States and Canada on the management of Canada’s dairy quotas and the United States and Mexico the application of minimum labour standards in Mexico. Canada initiated disputes on export duties applied by the US on solar-energy components and vis-à-vis the outcome of American investigations on alleged dumping and subsidisation of Canadian softwood. Likewise, President Biden’s hasty cancellation of Keystone XL pipeline’s construction permit will most likely result in a legacy arbitration claim under chapter 11 of NAFTA .

The United Kingdom’s return

The UK and Canada agreed on December 9, 2020, on a Trade Agreement Continuity deal which ensures the provisional application of certain parts of the Comprehensive Economic and Trade Agreement (CETA) so as to maintain trade flows between the two countries despite the UK’s withdrawal from the European Union on January 1, 2021.

This Continuity Agreement wholly reproduces CETA disciplines while adapting provisions whenever needed to adapt it to a bilateral rather than to a multilateral setting and provides for 3-year transitional arrangements and an obligation to begin negotiations to reach a formal agreement within one year from the Agreement’s entry into force likely to be in March 2021.

The UK will likewise carry on with the negotiation of continuity deals with its other partners; most of the deals concluded by the UK already entered into force on January 1. The UK notably aims to conclude an agreement with the US, but the talks may last several years since the US has shown no hurry in concluding a trade deal with the UK. Regardless of continuity agreements, the UK is making most out of its ‘recovered’ economic sovereignty and sought accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and recently signed trade agreements with three members thereof (Japan, Singapore and Vietnam) which should enter into force later this year.

Cooperation with the European Union

It is worth mentioning that after intense discussions, the UK and EU have succeeded in concluding a trade agreement at the end of December 2020, which is to be provisionally applied until February 28, to provide the European parliament with a reasonable period to complete the ratification process.

Pursuant to the new Agreement, trade in goods is subject to customs control between the EU and the UK, except for Northern Ireland which continues to apply European rules to avoid a ‘hard’ border between the two Irelands. In addition to trade in goods, the Agreement, moreover, covers the movement of natural persons, services and the freedom of establishment as well as hitherto unseen ‘rebalancing’ measures which the EU can impose in case the UK acts inconsistently with the agreed labour, environment, climate protection and subsidisation standards which are mirroring EU’s internal standards.

Additionally, in 2021 the EU will attempt to renew with productive cooperation with the US on a range of subjects of interest to the two blocs, and will, under the leadership of the Portuguese presidency of the Union, relaunch the adoption process of the Free-Trade Agreement between the Union and MERCOSUR countries (Argentina, Brazil, Paraguay and Uruguay) concluded in 2019.

Pressuring China

In 2021, China will face increasing pressure. President Biden is expected to maintain Trump administration’s approach vis-à-vis China, including tariffs and other sanctions imposed under former leadership. Technology and human right based sanctions are likely to increase over the next months to obtain concessions on IP-related issues, the US trade deficit, the Uyghurs’ situation, Hong Kong, Taiwan and the Chinese ambitions in the South China Sea. All in all, globalisation might slow down in the Pacific region due to US volition to ‘contain’ China with the help of its European and Asian allies.

Alongside the UK and Australia, Canada pledged in early January 2021 to adopt measures aiming to defend the rights of Uyghurs in China by preventing the import and use in global supply chains of goods being produced by forced labour. The implemented measures notably include refusing to grant export licenses when there is a risk that such exports will result in serious human rights violations and a ban on importing goods produced by forced labour. However, there is a risk of seeing those measures challenged at the WTO or having China imposing retaliatory measures.

Other countries are likely to fall into step. The UK will notably host a Group of Seven (G7) meeting in Cornwall, in June 2021, and has further invited Australia, India and South Korea to attend to form a “D10”, i.e., a group of 10 democratic countries, to coordinate and design strategies to address challenges to democracy, including human rights violations in China.

The Persisting Influence of China

The Investment Treaty concluded between the EU Commission and China on December 30, 2020 and published on January 22, 2021, should be prepared in 2021 for its ratification likely to occur in early 2022. The Agreement has been supported above all by the German industry, which aims to increase its investment in China. Yet, despite the Chinese human rights and labour standard commitments, the Agreement has been criticised on account of human rights violations, and notably vis-à-vis the Uyghurs treatment by the Chinese government.

In 2021, regardless of criticism, China and the remaining fourteen signatories of the Regional Comprehensive Economic Partnership (RCEP) should initiate the ratification process of the Agreement signed on November 15, 2020. The Agreement reduces tariffs on more than 80% of products traded within the free-trade zone and uniformises the rules of origin among the zone Members, which account for more than 30% of the world GDP. The Agreement’s ratification indeed constitutes one of China’s principal assets to maintain and increase its influence in the Asia-Pacific region.

Reforming the World Trade Organization

With the recent US volte-face on the candidacy of Nigeria’s nominee Ngozi Okonjo-Iweala, the WTO should have a new Director General by next General Council in early March 2021. Amid current circumstances, it is difficult to predict with certainty when WTO Members will succeed in appointing sitting members to the Appellate Body, which has been paralysed since December 2019 due to US obstruction. Even though there is no unblocking guarantee from the new administration, the US ambassador to the WTO sent positive signals by expressing the new administration’s goodwill vis-à-vis the reform of WTO at the occasion of the last informal meeting of the General Council in January 2021.

Despite the current system’s deadlock, WTO Members mostly kept using the multilateral system to ensure compliance with trade disciplines. 2021 will even be the theatre of the first arbitration ‘appeals’ under the Multi-party Interim Appeal Arbitration Arrangement (MPIA) set up in 2020 by some WTO Members to overcome the Appellate Body’s paralysis. The recent Chinese unilateral measures against Australia and Canada should ultimately end-up before MPIA arbitrators as the three countries are MPIA-participating Members.

At any rate, the WTO will be the object of very intense negotiations in the year to come. Notably, Canada, with the support of 13 Ottawa-Group Members, including the EU, will continue in 2021 to support the WTO reform process, which is especially important in times of pandemics and actively participate to new agreements’ negotiations.

The next Ministerial Conference in June 2021 is liklely to lead to tangible results. In particular, an agreement on subsidies on illegal and unreported fishing as well as a reform of the Agreement on Agriculture should be presented. In addition, the joint initiatives, in which members participate in smaller settings, will likely bear fruits since the initiative on investment facilitation should reach an agreement and the initiative on electronic commerce present a first consolidated negotiated text.

Finally, Comoros should normally become WTO’s 165th Member at the occasion of the next Ministerial Conference. Subject to progress in the negotiation of its accession package, Uzbekistan could likely follow Comoros at the end of 2021 or in the course of 2022. In 2021, China could eventually lose its developing status in the WTO, which has been hardly criticised by other economies given the importance of the Chinese economy.

Protecting the environment

2021 will also be a turning point in the fight against climate change. Accordingly, on February 20, 2021, the US will join the Paris Agreement, and in November 2021, the COP26 on climate change will meet in Glasgow under the chairmanship of the UK.

The protection of the environment will also be an important issue within trade circles. Among other things, several WTO Members, including Canada, have committed to work in 2021 to increase environmental protection through revised trade rules.

The EU Commission should, moreover, submit a draft directive for the establishment of a carbon adjustment mechanism at the borders in June 2021 and the US should further its proposal to amend the Agreement on Subsidies and Countervailing Measures (SCM) to protect better the environment, made in a draft Ministerial Decision at the end of December 2020. Pursuant to this draft decision, WTO Members could impose countervailing duties on products proceeding from Members having lenient environmental standards.

Although most developing countries risk opposing environmental modifications of the WTO covered Agreements, industrialised WTO Members will join forces to strengthen environmental protection either through the multilateral trading system or unilateral action. The ‘heated’ debate to come will therefore constitute an additional challenge for the multilateral trading system and the WTO.

Public Health Challenges

In 2021, travel restrictions are expected to be maintained or even tighten amid the propagation of new variants of the virus. In addition, a shortage of vaccines and other medical and protective equipment will most likely give rise to further control and trade-restrictive measures by industrialised countries. To prevent unilateralism and protectionism and ensure fair access to essential goods during pandemic times, Canada and other members of the Ottawa group will seek to convince other WTO Members to reduce trade barriers so as to ensure the proper functioning of international supply chains which are necessary for the distribution of medical goods.

Despite apparent goodwill from developed economies, developing countries will have limited access to vaccines. The Covax platform of the World Health Organization (WHO), of which the US has been reinstated, should undertake the distribution of vaccines financed by WHO members and various NGOs to the world’s 92 poorest countries. China and Russia notably plan to use their research and production capacities to become indispensable partners and major suppliers of vaccines to the developing world. China will accordingly keep expanding its Bilateral Trade and Investment Agreements with African and Latin American countries while Russia will buttress its influence in the Balkans and Eastern Europe.

Regulating GAFAMs

2021 will also be a challenging year for GAFAMs (Google, Apple, Facebook, Amazon and Microsoft). Regulatory changes in Europe will involve greater accountability for information platforms with regards to their content and entail more limitations on companies whose market dominance threaten to distorn free competition.

Likewise, more and more countries will set up taxes or fees on large corporations’ services in reaction to the current low fiscal contribution to the nationality states of users. To this effect, the European Commission is supposed to present a new ‘digital fee’ in March 2021, following the failed attempt to secure consensus on GAFAM regulation in 2018.

Intending to avoid seeing more countries imposing unilateral measures and the corresponding risk of retaliation by the US, 137 countries are currently negotiating under the aegis of the OECD/G20 which hopes to reach an agreement in 2021. Such an agreement aim to determine a connection with a given jurisdiction where a business conducts its activities and to set a minimum digital tax threshold in all contracting parties.

Facilitation of Private Law Rules for Economic Operators

Regarding private law, the UNCITRAL Assembly should adopt at the occasion of its June 2021 meeting (i) provisions on expedited arbitration which could be attached as an annexe to UNCITRAL Arbitration Rules, (ii) UNCITRAL Mediation Rules and UNCITRAL Notes on Mediation that will foster private parties and practitioners’ understanding of mediation and different approaches thereof, and (iii) new provisions on legal aspects of international identity management and trust services which apply in the course of commercial activities.

With respect to UNIDROIT, the organisation’s secretariat published explanatory notes on the application of various private law instruments applicable in pandemic context, including UNIDROIT principles on international commercial contracts. Such instruments cover, e.g., remedies in case of non-performance of contracts, guides on drafting contracts in pandemic times, and notes to help arbitrators apply such principles correctly. Such texts’ popularity might thus increase in 2021, given the inherent flexibility of instruments that can be swiftly adapted.

Finally, on January 1, 2021, the Revised arbitration rule of the International Chamber of Commerce entered into force. The revised rules facilitate arbitration proceedings, notably as regards virtual proceedings, extended scope of application of the expedited procedure to arbitrations with an amount in dispute of up to USD 3 million and new provisions specifically designed for disputes arising under bilateral investment treaties.

CMKZ Advices

  1. Companies interested in public procurement in the United States should closely monitor the to-come developments of the Buy American Act and search for ways to overcome eventual limitations;
  2. Those having relations with Indonesia could participate in Canada’s consultations on the conclusion of an eventual free-trade agreement;
  3. Increasing western pressure against China and corresponding Chinese countermeasures will have an impact on the technological and commercial leeway and business decisions of private operators. It is adviseable to verify if the Chinese partners are subject to US sanctions, especially in the technological sector;
  4. Businesses will also have to analyse the impact of import and export restrictions from Canada and a growing number of Western countries based on the protection of human rights, particularly vis-à-vis the Uyghurs’ situation;
  5. Thanks to the Continuity Trade Agreement between Canada and the UK, both countries’ economic relations will continue to be governed by a free trade agreement. Although the country is no longer an EU member, operating in the UK could still be a strategic choice for Canadian businesses;
  6. As long as the WTO Appellate Body remains paralysed, non-MPIA participating countries will remain able to ignore the WTO’s international trade rules, posing a risk to businesses affected by retaliatory tariffs. The provisional appeal mechanism mitigates this risks for Canada, but a multilateral solution would provide higher security and predictability given the limited number of participating countries to the provisional appeal arrangement;
  7. In the future, companies should be mindful before importing products from countries having lenient environmental standards since industrialised countries are on the verge of imposing additional customs duties on products with high environmental footprint. The same warning applies to products proceeding from countries not respecting human rights;
  8. Businesses will continue to be affected by travel restrictions. They should support initiatives to ensure global and unhindered distribution of vaccines and other essential medical goods that will accelerate the lifting of these restrictions;
  9. The conclusion of an agreement on a digital business tax negotiated under the aegis of the OECD/G20 will allow countries to generate additional taxes on the activities of digital giants and a global minimum tax threshold. Until now, countries that introduced such taxes on GAFAMs have been subject to dissuasive US pressure.
  10. Finally, international trade practitioners always benefit from acquainting themselves with the latest texts and instruments from international institutions for the standardisation of private law which, this year, especially dealing with arbitration, mediation, electronic commerce and international contracts.

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

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