Western Economic Front | Intellectual Property | Energy | Trade Agreements | Canada’s Trade Disputes | United States | European Union | United Kingdom | Forced Labor | Digital Taxation | CMKZ’s Advice
CMKZ would like to thank André-Philippe Ouellet and Bernard Colas for preparing this blog.
Half through 2022, CMKZ’s forecast is an opportunity to take stock of developments anticipated by CMKZ for the second half of the year that will have an impact on Canadian companies operating abroad.
Putin’s maneuvers in Eastern Europe, particularly in Ukraine, have added to the problems caused by the Covid-19 pandemic and supply chain difficulties, which were already slowing the recovery of global trade. While more serious violations of international law regarding state sovereignty and territorial integrity are at stake, international trade law will also be affected, as the situation strongly impacts trade flows and the commercial legal order.
In addition to the direct effects of the war, its indirect effects will be felt even more strongly by Canada and its partners, mainly because of the risk of famine caused by a shortage of Ukrainian grain and oilseeds on the markets. The rearmament of the world adds up to the immediate crises, as the money used for armaments is not used for other purposes, such as the green transition or the strengthening of supply chains.
Despite these vicissitudes, the recent progress within the WTO system, despite not solving all the system’s problems, is a lighthouse in the storm and provides reason to remain optimistic. This fortunately shows that system is not totally blocked, and while members recently pledged to bring back a fully operational WTO, the MPIA remains functional and has issued its first appeal.
Considering the current context, CMKZ anticipates the following developments in the second half of 2022:
- New sanctions by Western countries against Russia and Russia’s response consisting, among other things, of patents and trademarks violations belonging to companies located in allegedly unfriendly states, including Canada;
- The likely exclusion by several European states of fossil fuel investments from the Energy Charter protection and the inclusion of carbon capture and storage technologies;
- The advancement of the discussions related to a trade agreement between Canada and the UK and an early-progress agreement with India; trade discussions will also progress with Indonesia;
- Continued offensive on Canada’s milk quota system and Canada’s potential tax on digital services;
- The intensification of the new US-Canada softwood lumber trade negotiations that began in late June 2022;
- The implementation of the Partnership for Global Infrastructure and Investment launched by the US with the support of G7 leaders;
- The establishment of the Indo-Pacific Economic Framework, which should serve as a negotiating framework for the US and its allies in the Indo-Pacific region, which presently gathers together 14 participating states, including Australia and Japan;
- The UK’s pursuit of “soft” trade negotiations with US states, including Texas and California, given the reluctance of the US to quickly reach an agreement with the UK;
- The adoption by the European Union of new “autonomous” trade measures to counter trade-distorting subsidies, including subsidies originating from third countries;
- The adoption of additional measures by Canada and the European Union prohibiting the import of products from Xinjiang unless the importer can prove that the product is not the result of forced labour. Those measures will likely resemble the new US Uyghur Forced Labor Prevention Act, even though these measures may intensify the supply chain problems that the world is now facing.
Unity and Disunity Over Ukraine
The West remains united under the leadership of the US, Canada and the European Union (EU) before the war in Ukraine. Nevertheless, this Western unity undeniably highlights what could be described as indifference from the rest of the world to the conflict.
While Canada, the US and many other Western countries have stopped applying the GATT’s most-favoured-nation clause to Russia and implemented a range of economic sanctions, much of the world has preferred to remain neutral. Accordingly, most African, Asian and Latin American countries have not joined the Western consensus on this issue as most countries from these continents did not partake in sanctions against Russia.
Those countries seem to be adopting a “non-aligned” posture, reminiscent of a Bandung 2.0, while others even adopted an attitude favourable to Russia and China, which are seen as antagonistic to the former colonial powers. Recent trips to Africa by senior French and Russian officials demonstrate the competition between the two countries on the African continent.
Canada should make sure not to leave all space occupied by other powers in the developing world, particularly in Africa and Asia, regardless of whether other active states are allies or hostile. However, the new Global Partnership announced by the US and the G7 (discussed below) could help maintain and enhance Canada’s strategic positioning in these regions.
Russian Expropriation of Intellectual Property
Canadian companies should be extremely cautious with their intellectual property as Russia has allowed its companies to disregard patents registered in states deemed unfriendly, including Canada. The measure also extends to patents owned by companies doing business with states deemed unfriendly or with companies originating from such states. A similar decree has also been issued by the Russian administration with respect to trademarks, allowing Russian companies to use trademarks in a similar fashion. The companies most affected are expected to be those with patents registered in Russia.
The Russian decrees could be subject to WTO dispute settlement proceedings, as they likely violate the TRIPS agreement and intellectual property protection treaties.
It should be noted that such restrictions on intellectual property were common in the past (e.g., the US seized German patents during World War II) but remain uncommon today.
Amendments to the Energy Charter: Fossil Fuels
At a time when Europe is facing an energy crisis, partly due to tough environmental conditions, the legal framework governing energy investments in Europe, the Energy Charter, is set to change. Indeed, the parties to the Charter reached an agreement in principle at the end of June 2022 on the modernization of this legal instrument. One of the main objectives of such modernization is to align the treaty with the Paris Agreement’s goals, as the majority of investments covered by the treaty relate to fossil fuels such as coal, gas and oil. The Charter has been widely used by oil and gas companies to sue governments for adopting environmental policies.
The new agreement should maintain existing safeguards for fossil fuel investments for ten years in the EU and the UK. Still, it should not affect the protection of such investments in the other state parties, which will remain free to exclude fossil fuels in the future. Fossil fuels should be excluded from EU and UK protections as early as 2024 and any new investments as early as 2023, but important exceptions are likely to be made for gas.
In addition to these changes, the updated Charter would facilitate and protect green investments, including biomass, hydrogen and carbon capture and storage technologies, as well as strengthening labour standards and require environmental impact assessments before certain investments. The proposal would also give states more flexibility by strengthening the exceptions that can be invoked to protect public health or the environment.
These changes could be adopted in November at the Energy Charter Conference, but some states could still block the treaty amendment by vetoing it, as amending the Charter requires unanimity. It should be noted that once adopted, the amendment will only enter into force among those parties that subsequently ratify it and this once ratification by three-fifths of the members has been achieved, yet the amendment could be provisionally applied.
The modernization of the Energy Charter is, therefore, both a risk and an opportunity for Canadian energy companies operating in Europe or planning to do so in the future. Canadian companies active in this sector should therefore be cautious about their existing or future investments.
Canada-India Trade Negotiations
One of the key Canadian negotiating fronts that does move forward due to the current economic context is with India, with whom negotiations have recently resumed after several years of stagnation. Minister Ng has indicated that Canada is seeking to reach a partial trade agreement or “early progress agreement” with India during the negotiations, the ultimate goal being to reach a global trade agreement.
Such an agreement—albeit with a limited scope at first—would be a significant step forward for Canadian companies. The international context seems to have changed India’s attitude since this country had been extremely reluctant to enter into new agreements until very recently. Yet, India is now very active, looking to partner with the EU and the UK in addition to Canada.
Negotiations are also progressing with Indonesia, with this country and Canada having sent positive signals on the negotiation prospect.
Canada’s Trade Disputes
Canada’s supply management system continues to be a contentious issue on account of the way Canada administers the milk quotas available to US exporters. Despite a favourable CUSMA ruling earlier this year, the US believes that the measures taken by Canada to remedy the situation still do not bring the quota management into compliance with the agreement.
Likewise, Canada will have to defend the management of the milk quota system—and indirectly the supply management system—before the first panel ever established under the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP), as New Zealand initiated proceedings against Canada.
A new dispute could also arise between the US and Canada should Canada adopt the Digital Services Tax Act, which the US claims is discriminatory. Canada plans to impose a 3% levy on certain digital services, normally from 2024 on. Canada is not alone in this situation; other states, such as France, are also planning taxes which would mostly impact US digital companies.
Finally, on the demand side, Canada joined the US in a dispute against Mexico under CUSMA. The Mexican government announced that 56 per cent of all energy production must be reserved for domestic companies. Canada and the US consider Mexico’s energy policies to be discriminatory. If the panel deems Mexico’s measure to be legal, it could negatively affect Canadian energy investments in Mexico.
The US and Canada began new negotiations on softwood lumber in late June 2022. The high inflation rate affecting the US appears to be pushing decision makers to be more flexible, as increased imports of Canadian lumber—subject to duties ranging from 6% to 20%—could help ease the pressure. The Americans are nevertheless pressing Canada to offer concessions to increase the level-playing field between Canadian and American players. The US still considers that access to public forests constitutes an unfair advantage for Canadian producers.
The Biden administration and G7 leaders also launched the Partnership for Global Infrastructure and Investment to gain more ground in developing states. This US-G7 project purports to make major investments in developing states in order to keep China’s Belt and Road Initiative from gaining too much ground. The Partnership notably focuses on sectors such as the environment, health and telecommunications infrastructure (5G). The plan is expected to provide hundreds of billions of US dollars to increase security, create sustainable infrastructure and strengthen supply chains. The US has pledged to invest US$200 billion over five years and the rest of the G7, US$400 billion.
The Biden administration has also extended the US tariffs on solar panel imports put in place under the previous administration for an additional four years. However, Canada and Mexico should benefit from an exemption as CUSMA partners.
Finally, the US recently announced the establishment of the Indo-Pacific Economic Framework (IPEF), whose nature remains unclear. The “Framework” appears to be a symbolic instrument and should serve as a negotiating framework for the US and its allies in the Indo-Pacific region. The IPEF aims to increase trade and make it fairer and greener, make supply chains more resilient, and combat corruption and tax evasion. Fourteen states, including Australia and Japan, are currently participating. IPEF doors remain open, Canada might therefore want to join in the future.
The EU continues its efforts toward trade liberalization as it recently concluded a free trade agreement with New Zealand. Although New Zealand remains a small partner, key provisions of the agreement are indicative of the EU’s future trade policy. The agreement for instance provides that parties can take trade sanctions if another party violates the Paris agreement. In addition, New Zealand pledges to respect European protected designations of origin such as FETA cheese. The treaty’s key provisions are likely to be emulated, being among the most environment-friendly clauses to date in trade agreements.
So-called “autonomous” trade defence measures designed during the EU’s French presidency continue to take shape. In addition to traditional trade defence measures, the EU should implement measures to counter trade-distorting subsidies, including transnational subsidies (subsidies from country A to country B that affect country C; one can think of Chinese investment in another country having a negative impact on European producers). The EU would thus have the power to make a determination as to whether foreign subsidies are having an effect on its domestic market and, if so, to take remedies or to request a given company to take action. These new measures also purport to tighten mergers and acquisitions as well as public procurement rules. Before entering into force, these instruments will need the Council and the European Parliament’s approval.
It is worth bearing in mind that the US is studying these measures with interest and will probably take a similar path as both trading blocks have recently put significant emphasis on the notion of level-playing field in trade.
Finally, it will be important to monitor the proceedings initiated by the EU at the WTO against China regarding retaliatory trade measures that have been implemented against Lithuania—an EU member—on account of its stance on Taiwan. The outcome of the dispute could have significant repercussions for other countries that have suffered Beijing’s trade wrath over the past few years, including Canada and Australia, which have exercised their third-party rights in the dispute.
The UK is continuing its efforts to replace its so-called continuity trade agreements with real trade agreements. Negotiations on a new deal with Canada launched this spring are otherwise progressing well, with Canada being the UK’s third-largest trading partner. Nevertheless, Canada is determined to obtain more concessions from the UK than from the EU, particularly in the agricultural sector. The UK will probably offer concessions to Canada in the meat sector by allowing imports of hormone-treated meat. Failing that, Canada is expected to block the UK’s attempt to join the CPTPP. A brand-new agreement between Canada and the UK could therefore offer more interesting trade opportunities to Canadian exporters when compared to the EU-Canada agreement that currently applies mutatis mutandis between the UK and Canada.
It is worth noting that, in response to the US reluctance to quickly negotiate a UK-US trade agreement, the UK is pursuing “soft” trade agreements with some 20 US states, including Texas and California. Despite the limits to such agreements under the US constitution, US federate states can enter into informal agreements, often taking the form of “Memoranda of Understanding” or MOUs, which are mostly symbolic instruments to increase cooperation. These MOUs could increase inter-industry mobility and the establishment of new businesses but do not directly address issues such as trade barriers or tariffs, which are the prerogative of the US federal government. The economic impact of these instruments is expected to be low, but their existence probably aims at sending a strong signal to the US administration.
Canadian companies internationally active must remain extremely vigilant with respect to their imports from China, especially when they export to the US. A new US law aimed at countering forced labor came into effect (the Uyghur Forced Labor Prevention Act) at the end of June 2022. The law goes further than existing provisions by banning the import of any goods from Xinjiang or containing components produced in the region unless the importer can prove that its production chain is not linked to Xinjiang or that no-forced labour has been used in the production of the goods.
The potential impact on US businesses and consumers is extremely high. Products will be subject to the measure even when containing a very small percentage of Xinjian-produced material, as the law does not provide for a de minimis exception. Around 10% of the world’s manufacturing companies are likely to be affected in some way by this new law. The losses could reach billions of dollars as many consumer and intermediate goods are produced in Xinjiang, such as solar and wind energy components, textiles, and agriculture (cotton, nuts, vegetables, etc.). This law will likewise intensify the supply chain problems that the world is currently facing. The importing procedures can be a real headache for companies given the lack of information or cooperation of the Chinese authorities. Many companies are therefore expected to fully exclude this province from their supply chain.
Canadian companies must also keep a close eye on Canadian measures. Although since 2021, Canada has only intercepted a few shipments—while the US has intercepted hundreds—the country is likely to implement new measures in 2022. In addition to its obligation under general international law, Canada must also comply with its obligations under the CUSMA, under which Canada, the US and Mexico committed to banning imports of products made thanks to forced labour into their territories. For the time being, two “private bills” are under consideration and are likely to be adopted given the support of the Trudeau government and, more broadly, MPs and senators. Canada will probably apply a system comparable to the one initially in place in the US. Over time, it is also possible that the government will introduce a presumption of non-compliance (presumption that goods are the products of forced labour) for goods originating in Xinjiang, thereby shifting the burden of proof onto importers. One of the bills provides for a ban on all imports from Xinjiang, but this is unlikely given the size and number of products made in Xinjiang.
It is important to note that both the US law and the forthcoming Canadian measures are not only aimed at Xinjiang, but their most severe provisions apply to goods from that region.
Within the EU, things are moving albeit slowly. The Union is expected to adopt further measures in 2022, with European Commission’s President Ursula Von der Leyen making this her top priority. However, the EU is still far behind the US and Canada in terms of forced labor, as implementing measures could impact the internal EU market since the International Labour Organization estimates that about one million people are victims of forced labor within the EU.
The prospect of the OECD-sponsored digital deal with a 15 per cent minimum corporate tax being implemented this year is shrinking due to the difficulty of getting internal US approval. In spite of Biden administration’s support, the OECD taxation plan does not enjoy unanimous support, even among democrats. Nonetheless, the measure is expected to move forward in the EU by the end of 2022, with opposition from reluctant members such as Poland on the way to being lifted. Yet, other members, such as Hungary, could still veto the agreement. All in all, the agreement is not expected to enter into force until 2024, despite OECD originally planning its entry into force for 2023.
In this context, Canadian companies should:
- Keep an eye on the modernizing process of the Energy Charter and measures currently being studied by Mexico, particularly with respect to fossil fuels;
- Monitor trade negotiations with India, Indonesia and the United Kingdom to find trade opportunities that may arise;
- Remain extremely cautious vis-à-vis Russia’s intellectual property infringements that probably violate international law;
- Be prepared to seize procurement and investment opportunities that will arise as a result of the new Global Partnership launched by the US and G7 leaders;
- Be aware of the risk posed by new “autonomous” and other EU trade measures that could affect them, particularly those receiving subsidies;
- Pay particular attention to developments surrounding the US tariffs on photovoltaic panels;
- Be extremely diligent and cautious about sourcing from China due to new US legislation and future Canadian and European measures, especially for companies exporting to the US.
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.