CMKZ 2023 International Trade Law Forecast

On February 5, 2023, Posted by , In En,International Analysis,

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Canada | Indo-Pacific Region | National Security | Intellectual Property | China | Trade Disputes | Energy | United States | Buy America | European Union | World Trade Organization | Private Law | Corporate Advice

CMKZ would like to thank André-Philippe Ouellet, CMKZ Collaborator, and Bernard Colas for preparing this outlook on 2023.

The beginning of this year is an opportunity to review the developments in international trade law to be anticipated in 2023, which are likely to affect our Canadian companies operating abroad.

The year 2023 will be marked by the redefinition by Western countries of economic alliances and measures designed to increase their supply chains’ resilience and limit their overreliance on products and resources from rival Powers as well as risks posed to their national security.

Canada

Building on its new Indo-Pacific Strategy, unveiled in November 2022, Canada’s ambition this year is to increase its economic ties in this region while enhancing its national security.

  • Strengthening Economic Relations in the Indo-Pacific Region

One of the pillars of Canada’s Indo-Pacific Strategy is to expand and strengthen trade, investment, and supply chain resilience. To do so, Canada will build on existing agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and negotiate new agreements with partners in this region. In the same vein, Canada could support Taiwan’s desire to join the CPTPP. This should lead to further US and Canadian decoupling from China due to similar US initiatives.

In 2023, Canada will intensify its negotiations for a free trade agreement with the Association of Southeast Asian Nations (ASEAN), which would foster trade with new partners such as Indonesia, the Philippines, and Thailand. Accordingly, Canada informally adjourned bilateral negotiations with these countries to focus on its negotiations with ASEAN. The other pillar of the Indo-Pacific Strategy is India, which has recently started running an international agreement marathon after years of protectionist isolationism. Canada aims to conclude an Early Progress Agreement with India this year. This interim agreement would cover specific goods and services and should eventually become a comprehensive partnership agreement.

It is worth noting that, on account of rising tensions in the region, many Asian States, spearheaded by Singapore, are appealing to the Bandung spirit. These countries want to create a bloc of non-aligned countries wanting to avoid the throes of a trade war between China and the West. The formation of a bloc of non-aligned countries could undermine the Canadian and American strategies in the region.

Outside of Asia, Canada will hold domestic consultations to explore the possibility of negotiating a free trade agreement with Ecuador. Canada thus has a more active free trade policy than the United States and should be able to capture market shares in many States while the Americans delay negotiations.

  • More Extensive Sanctions and Canada’s National Security

The Canadian government is one of the most active in terms of sanctions. Thus, businesses should keep paying attention to new sanctions adopted by Canada in 2023. Companies with either direct or indirect ties to Iran should be cautious. Due to unrest in this country, Canada has implemented new sanctions and reactivated ones suspended after the 2016 détente.

In addition, the federal government will amend the Investment Canada Act by adding several criteria related to national security. Thus, foreign investors acquiring firms operating in sensitive fields, e.g., technologies, personal data, or critical metals, will need to have their investment approved by the government. Such a notice will also need to be filed when an investor takes control of a given firm. The government will be able to impose (i) penalties on companies and investors that fail to comply with the law, (ii) conditions that must be met during the review of their application, and (iii) conditions that must be met for an investment to be accepted, or sheerly veto the investment. The law’s final version is expected to be ready in the spring of 2023.

The same applies to companies importing inputs from China and other high-risk countries. Goods from China are expected to come under increased scrutiny in 2023 with the adoption of stricter rules against forced labor. It should be noted that the federal government can now terminate any government contract if it discovers that certain goods result from forced labor. In addition, Bill S-211 is expected to be adopted in the spring of 2023. This bill would impose additional obligations on covered companies (e.g., those making over $40 million in annual revenues). Those companies will need to implement a due diligence regime and submit reports to ensure they are not using goods produced with either forced or child labor. This strengthening of Canadian law is in line with the international trend, with the United States seizing an increasing number of shipments, and Germany implementing a requirement for companies to follow a due diligence process to prevent environmental and human rights violations, including forced labor.

Companies should also keep an eye on the development and implementation of a Carbon Border Adjustment Mechanism by Canada, which, depending on its configuration, could affect their input supply.

  • Intellectual Property Protection

Pursuant to the Canada-United States-Mexico Agreement (CUSMA), Canada has extended the term of copyright protection by 20 years as of December 30, 2022. Works will now be protected for 70 years after an author’s death rather than 50 years under the previous law.

Canada will likely engage in strengthening its intellectual property regime to align with the Protecting American Intellectual Property Act passed in January 2023. This new US law makes it easier for American companies to report trade secret theft. The ramifications are expected to be significant, as any entity found to be involved in trade secret theft, e.g., by providing goods and services to this end, may be subject to sanctions, including export bans, banking restrictions, and asset freeze. Canadian companies should avoid doing business with entities or individuals who will be on the list to be established under this law to avoid facing sanctions themselves.

Tensions with China

Trade relations between China and Canada are expected to become increasingly strained in 2023 due to Canada’s Indo-Pacific strategy, which China perceives as aggressive. Although China is loosening its grip on Australia—wine and coal imports are expected to resume gradually—the reprisals against Australia show this country’s sensitivity. In this regard, it is worth recalling that Lithuania faced strong punitive trade measures following the opening of a Taiwanese delegation in Vilnius in 2021. Although Canada is a bigger international player than Lithuania, it will likely be subject to retaliatory trade measures in 2023.

In addition, Canadian companies should pay close attention to Chinese companies added to the US Entity List, especially when doing business in the United States.

Trade Disputes Involving Canada

In terms of trade disputes, 2023 will be an eventful year for Canada. First, there are numerous ongoing or revived disputes with the United States. On the demand side, as usual, US softwood lumber tariffs will be on CUSMA’s agenda. Canada and Mexico recently won a victory over the United States in the automotive sector. A CUSMA panel ruled in favor of a broad interpretation of the local content requirement so that more automotive parts would count towards the 75% local content requirement for vehicles to be exported duty-free between the three countries. Canada should therefore be partially protected from American auto protectionism, although the US is not ruling out taking further action or opposing the decision. In addition, Mexico has announced that it will severely restrict imports of genetically modified corn, which could push Canada and the US into a new CUSMA dispute.

On the defense side, in 2023, Canada will likely have to defend its digital reform under consideration (Bill C-11), as the US believes that local content obligations for streaming platforms could violate CUSMA as it would discriminate against American companies like Netflix and Google. This also holds for the management of Canadian milk quotas in the US; the United States remains dissatisfied with the latest decisions rendered under CUSMA. The main point of contention concerns the entities holding the quotas. Canada believes that its processors can choose whom they import from, while the Americans believe US producers should manage the quotas themselves.

Energy Measures

Although the Mexican President has stated that there are no longer problems in the energy field, Canadian companies operating in Mexico should be cautious due to protectionist measures. This includes the apprehended nationalization of companies in the mining and energy sectors, particularly in relation to lithium extraction. This is a severe blow, as many Canadian companies and investors could be affected, given they heavily invested in these sectors following the short-lived liberalization of 2013. These reforms put green investments in Mexico at particular risk. Canada and the United States should resort to CUSMA’s dispute settlement mechanism, as should Canadian investors who are directly affected, under the CPTPP investor-State arbitration provisions.

Canadian energy companies with subsidiaries in States parties to the Energy Charter—a Treaty, that inter alia provides for binding arbitration between investors and States—should closely follow the demise of this agreement. Indeed, despite discussions on turning the Charter “green”, ever more States will withdraw in 2023. On account of green considerations and the war in Ukraine, States such as France, Germany, Poland, the Netherlands, and Spain announced their withdrawal. A new treaty that would be more respectful of environmental considerations and exclude Russia should replace the current Charter over time.

In the wake of Canada’s agreement in principle with Germany on the supply of hydrogen—providing that Canada would export hydrogen to Germany from 2025 on—it is worth mentioning that the EU revised the criteria for hydrogen to obtain “green” certification. The criteria now being less stringent, most Canadian hydrogen should benefit from this certification.

The United States Multi-Purpose Trade Policy

The United States will refine its Indo-Pacific Economic Framework for Prosperity (IPEF) Strategy in 2023. Unlike a traditional trading bloc or agreement, the IPEF is intended to serve as a communications framework and to set the stage for new binding agreements between the 14 participating States. Canada will likely join the IPEF later this year.

Likewise, the Americas Partnership for Economic Prosperity (APEP)’s outline is to be unveiled by President Biden in the first months of 2023. This partnership involving Canada and countries in the Americas is expected to be more like the IPEF than a traditional agreement. This type of trade agreement, sometimes described as “multi-purpose”, will likely multiply in the coming years. Indeed, many governments, especially in the West, are no longer willing to favor trade at all costs as they increasingly consider other objectives, such as national security or supply chain resilience.

United States Trade Protectionism

The United States announced a broad offensive in the semiconductors field on account of the security risks inherent in outsourcing production in Asia (e.g., in China and Taiwan). The US administration aims at increasing the supply of semiconductors produced domestically or through close partners. Canada’s role via the IPEF and CUSMA has yet to be defined, but it should mainly consist in supplying rare metals to produce electronic chips, including indium. The massiveness of this subsidy scheme increases tensions with China but also with the EU, due to US unilateralism.

In addition to the semiconductors subsidies, the other, no less massive, automobile subsidies and green stimulus will be a major source of tensions and lead to uncertainty in 2023. Most tension will arise between the US and China. However, tensions will also rise with the EU and Japan, which, although part of the Western bloc, have not received guarantees equivalent to those granted to Canada, e.g., in the automotive sector.

As of January 2, 2023, infrastructure projects financed by the US federal government are subject to the Build America, Buy America Act (“BABAA”) preferences. The Act requires recipients to purchase only US-made iron and steel, as well as manufactured goods (with +55% of US components) and construction equipment. To date, Canada has not received any exemptions. In 2023, general and specific waivers are expected to be adopted to avoid BABAA preferences under certain circumstances. Before the adoption of any waiver, US federal agencies publish proposed waivers for public comment and then submit the request to the Made in America Office for adoption.

The European Union Trade Strategy

With the implementation of the EU Border Carbon Adjustment Mechanism by October 2023, companies producing steel, aluminum, and other covered products will be required to file a declaration containing the estimated carbon density of products they export to the EU.

A preliminary agreement on trade and deforestation has been reached, which will require companies exporting wood products to the EU to conduct due diligence checks to prove their products are deforestation-free. Tropical producers will be primarily affected, but Canadian companies exporting wood products to Europe could also be affected by the law, which is expected to be passed in 2023.

In 2023, the EU is likely to sharpen its anti-coercion trade instruments, which it will likely use in response to US protectionist measures, including the US Inflation Reduction Act, which largely subsidizes the American automotive industry. This will fuel uncertainty in the international trading system, as the EU might implement sanctions or subsidies of its own to boost its automotive sector. The anti-coercion instruments should also serve the EU in its dispute with China over the unfavorable treatment of Lithuania.

The ratification of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) is progressing, with Germany having recently ratified it. CETA ratification is a key step, as it is now only provisionally applied. This provisional application excludes key aspects of the agreement, including investor-State arbitration. However, CETA may remain provisionally applied for many years due to opposition from Italy, France, and the Netherlands, amongst others. Other EU members, such as Ireland, which is supportive in principle, may also take time to ratify the agreement as a referendum might be needed to confirm the investor-State arbitration part of the agreement, which is a sensitive constitutional issue.

Finally, it is worth noting that the EU might ratify its free-trade agreement with Brazil in 2023 given the warming of relations between the EU and Brazil following the election of the new Brazilian government.

World Trade Organization (WTO) Trade Disputes

Trade restrictive measures taken on national security grounds will multiply in 2023. Over the past years, the GATT security exception has been invoked in several cases, including those concerning the US steel and aluminum tariffs, which resulted at the end of 2022 in many panel rulings against the United States. The last steel and aluminum panel is expected to report shortly on the case between Russia and the United States. This last panel will likely justify the US measures against Russia on account of serious international tension between the two countries. To be continued!

Despite the unchanging WTO dispute settlement deadlock, the MPIA has issued its first arbitration decision and is expected to hear a growing number of appeals in 2023. The United States does not participate in this interim appeal mechanism; thence, the panel reports condemning its steel and aluminum tariffs will doubtlessly go unheeded. Regardless of more than 60 reform proposals, the WTO dispute settlement system should not be the object of serious reform in 2023.

The proceedings initiated against China by the EU—two members participating in the MPIA—regarding the unfavorable treatment of Lithuania following its rapprochement with Taiwan, as well as proceedings on alleged violations of European intellectual property in China, will be interesting to follow.

In addition, China initiated consultations regarding the US semiconductor measures, which it considers discriminatory. This subsidy program seems prima facie incompatible with the WTO covered Agreements. However, even if WTO panels were to find a violation of the WTO Agreements, this would have little practical consequences given the WTO dispute settlement deadlock and the fact that the United States is not participating in the MPIA. However, as a participant in this interim agreement, Canada will have to be very careful about its participation in the US semiconductors scheme.

Progress at the WTO

Within the WTO framework, Canada will closely monitor the implementation of the Joint Initiative on Services Domestic Regulation, which will likely become effective in 2023. This initiative, in which Canada participates, has 59 participants representing almost 90% of world trade in services. Members participating in the initiative agreed to reduce operating costs for service providers, including in licensing, qualification, and technical standards. However, these commitments cannot be implemented until the national certification procedures of all participants are completed. It nevertheless remains possible that India and South Africa will delay their certification procedures in order to obtain additional concessions, as has been their modus operandi in recent years.

Most of the other joint initiatives will continue their work in 2023. Still, they should not have tangible results, but for the initiative on investment facilitation for development, which should at least lead to a negotiating text.

WTO Members also keep working on expanding the TRIPS Decision, which grants an intellectual property waiver for COVID vaccines, so as to include diagnostic and therapeutic equipment.

In 2023, Brazil will normally become a party to the Agreement on Trade in Civil Aircraft. Since Canada is a party to this agreement, the participation of Brazil constitutes both a risk and an opportunity, as this agreement eliminates tariffs on parts, such as engines, and related equipment, such as flight simulators.

Finally, Timor Leste is expected to join the WTO in 2023, while Uzbekistan and Curaçao are expected to make progress on their accession procedures.

Private law

Concerning private law, a UNIDROIT protocol on international interests in railway rolling stock is expected to enter into force in 2023. In addition, progress is expected in adopting the model law on factoring, principles of effective enforcement (of judgments), and a project on the jurisdiction of courts.

Conclusion

Thus, in 2023, companies should pay due consideration to the following:

  1. The implementation of Canada’s Indo-Pacific Strategy, trade discussions with ASEAN, India, and Ecuador, and Canada’s interest in the IPEF (Indo-Pacific) and IPEP (Americas) promoted by the United States;
  2. The expansion of (i) sanctions against Iran, Russia, and China, (ii) the list of products and technologies covered by export bans to high-risk countries, (iii) the strengthening of the ban on the import of goods produced by forced or child labor, and (iv) the entities added on the US intellectual property infringement list;
  3. The mandatory approval of foreign investment in Canada in sectors deemed sensitive or in the event of a corporate takeover;
  4. Canada’s action against Mexico’s protectionist measures in the mining and energy sectors and against the imports of GMO products such as corn;
  5. The US domestic preferences in federal funding schemes for infrastructure projects and construction as well as semiconductors, automobiles, green stimulus, and responses to these measures by Canada, the European Union, Japan, and China;
  6. Frictions with the United States on softwood lumber, milk quota management, local content requirements for automobiles, and Canada’s digital reform;
  7. The deforestation and carbon density declarations and due diligence procedures that the European Union plans to impose on importers of deforestation-related and high carbon density products (e.g., steel and aluminum), respectively;
  8. Progress in WTO Members’ domestic implementation of their commitments under the domestic regulation in services initiative; and progress in the WTO negotiations on (i) investment facilitation for development and (ii) an IP waiver on COVID diagnostics and therapeutics;
  9. Potential opportunities for the Canadian aerospace sector in Brazil;
  10. MPIA decisions and WTO disputes, particularly against countries that have adopted trade restrictions on national security grounds;
  11. Developments relating to railroad and factoring security interests, the jurisdiction of courts, and the enforcement of foreign judgments.

For more information on these developments and their potential impact on your business, please do not hesitate to contact Bernard Colas or one of our other CMKZ lawyers specializing in international trade law.

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