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Canada | Sanctions and National Security | Force Labor | Trade Disputes | United States | China | European Union | Climate | World Trade Organization | International Taxation| Authentication of documents | CMKZ Advice

CMKZ soon to become Affilia would like to thank André-Philippe Ouellet, CMKZ Collaborator, and Bernard Colas and the whole team for preparing this 2024 outlook.

The beginning of this year is an opportunity to review the developments in international trade law to be anticipated in 2024, which are likely to affect our Canadian companies operating abroad.

The year 2024 will be marked above all by Canada’s greater involvement in Asia, the unknown outcome of the US presidential elections, increased trade tensions and sanctions, and regulatory obligations to reduce carbon footprints, protect human rights and strengthen ESG standards.

Canada

In 2024, Canada will keep steering towards Asia thanks to the development of its Indo-Pacific Strategy. In 2023, Canada signed a strategic partnership with the Association of Southeast Asian Nations. Therefore, Canada should conclude a full trade agreement with this group of countries by 2024 or 2025. A close eye should also be kept on provinces such as Quebec, British Columbia, and Ontario, which are also setting up strategies to increase their presence in Asian markets. In 2024, Canada will also assume the chairmanship of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Commission, which will enable it to be particularly active in Asia. The UK’s accession to the CPTPP is expected to take effect in mid-2024.

Like the United States, Canada signed an investment protection agreement with Taiwan in 2023, which should come into force later this year.

India is one of the pillars of the Indo-Pacific strategy, but trade negotiations with this country will not resume until political tensions ease, delaying the conclusion of an early progress trade agreement with India. Other economies, such as Australia and the EU, will likely precede Canada in striking deals with India.

On the European side, it is worth noting that the Continuity Agreement concluded between Canada and the UK following Brexit, and which temporarily replicated the Canada-EU Agreement, expired on December 31, 2023. The negotiations between Canada and the UK have stalled over British concerns about Canadian beef. The UK is also struggling to conclude new trade agreements. In practice, the end of the Continuity Agreement means that quotas for products under supply management, such as cheese, that were allocated to the UK have been redistributed to EU countries. Thence, in 2024 there will be fewer British products on Canadian shelves.

Finally, the new Canada-Ukraine Free Trade Agreement, adopted by the Canadian Parliament on February 6, 2024, is expected to enter into force this year and replace the previous agreement of 2017.

Sanctions and National Security

Sanctions targeting individuals and governments will continue to multiply in 2024 on account of the cooperation between Canada and its allies. At the end of 2023, Canada followed its economic partners in banning the sale of diamonds and related products from Russia.

The same applies to sanctions aimed at increasing respect for human rights through the application of the Justice for Victims of Corrupt Foreign Officials Regulations. In 2023, Canada listed individuals from Chechnya, Myanmar and Iran. The number of targeted individuals in various countries is set to increase given the numerous situations of human rights violations around the world, including in Haiti, where several members of its economic elites have been sanctioned by Canada in 2023.

On the national security front, a new version of the Investment Canada Act (Bill C-34) is expected to be adopted in 2024. If the amendments on the table are adopted, the government will have more leeway to exclude foreign investments in sectors deemed sensitive (e.g., aerospace, infrastructure, critical minerals) and increase the severity of penalties for non-compliance. The number of targeted companies will increase significantly due to the abolition of thresholds and new powers granted to the Minister (e.g., the possibility of opening investigations even when an investment was not targeted from the outset). Canada wants to prevent scenarios like the Norsat acquisition by Chinese investors from happening again.

The effectiveness of such measures is reinforced by stricter disclosure requirements imposed on companies, particularly targeting the individuals composing them. For example, to enhance transparency and effectively combat money laundering, companies incorporated under the Canadian Business Corporations Act must now submit personal information to Corporations Canada, starting from January 22, 2024, regarding any Individual exercising Significant Control (ISC). This information includes, among other things, the citizenship and tax residence countries of these individuals. The concept of ISC is similar to that of the Ultimate Beneficial implemented in March 2023 in Quebec under the Act respecting the legal publicity of enterprises (LPLE), as well as the concept of Beneficial Owner in France.

Forced Labor

In 2024, companies must be much more cautious when dealing with forced and child labor, to avoid having products made from it end up in their supply chains. The Act to Enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act (S-211) came into force on January 1, 2024. By May 31, 2024, at the latest, targeted companies will have to comply with increased due diligence obligations. In particular, they will have to provide a first annual report on measures taken to avoid or mitigate the risk of goods derived from forced labor entering their supply chains.

Other countries, such as Germany, have recently extended this type of obligation to other human rights issues and environmental protection. Canada will likely follow this trend, leading to an increased administrative burden on companies.

Trade Disputes

2024 will also see the emergence or development of a few trade disputes involving Canada. First, the softwood lumber saga is likely to continue this year, with the United States recently ignoring a late 2023 NAFTA panel which sided in Canada’s favor. With the US maintaining 7.99% duties on softwood lumber, Canada will likely launch new proceedings under CUSMA or at the WTO.

Second, on the supply management front, new disputes cannot be ruled out in 2024. In fact, a CUSMA panel considered the measures put in place by Canada to improve the management of milk quotas—in order to comply with a previous decision—were now in line with the agreement, causing a wave of protest in the United States. Canada also lost a dispute against New Zealand, as a CPTPP panel ruled that Canada’s quota management system violated this agreement.

Third, Canada has also joined the United States in challenging Mexico’s decision to ban the imports of GMO corn for human consumption under CUSMA. The panel will issue its report later in 2024. In any event, it is encouraging to note that CUSMA panels are working approximately two to three times faster than their predecessors under NAFTA, which helps foster the predictability of the trading system.

Finally, further disputes with Mexico cannot be ruled out, as the CDPQ has recently initiated an investor-state dispute under CPTPP (temporarily suspended to allow for negotiations) against Mexico due to its nationalization-like measures in the energy and mining sectors. It is also possible that the United States initiate proceedings against Canada for its measures against its tech giants, e.g., in relation to the obligation for those companies to compensate Canadian media.

United States

The November presidential election is the decisive event in the United States for 2024. If Donald Trump is elected, Canada will likely face additional protectionist measures, partly justified under the guise of national security. In the same fashion, the election’s outcome could undermine the stability and predictability of the multilateral trading system.

Yet, regardless of the election’s outcome, in 2024, US economic sanctions should increase in number and intensity. In late 2023, the US reintroduced ‘pure’ extraterritorial sanctions, prohibiting companies producing semiconductor-related equipment with no US connection (the ‘direct effect’ doctrine) from exporting to China, wherever they may be located. Both China and affected companies might challenge these measures.

The same applies to the addition of companies to the Entity List (prohibiting the sale/purchase of certain US technologies), the Unverified List (companies that will be added to the first list if they fail to comply with US requirements) and the Entity List established specifically in connection with the Uyghur Forced Labor Prevention Act. Most of the companies listed are Chinese; no Canadian company has yet been added, but the addition of several European companies in 2023 shows the risks incurred by companies dealing with states deemed hostile by the United States. In 2024, it is likely that being added to one of these lists will entail new legal consequences, including the impossibility of registering patents in the United States, and will render inoperative those already granted to targeted companies under the Prohibiting Adversarial Patents Act currently being examined by the US Congress.

The United States will also continue to develop its new, less formalized mode of negotiation and trade relations via the IPEF (Asia) and APEP (Americas), which do not contain formal obligations. For the time being, Canada has not been admitted to the IPEF despite its declared intention to do so, which seems attributable to tensions with India. The IPEF has so far led to the conclusion of an agreement on supply chains and is expected to lead to new sectoral agreements in 2024. It would, therefore, be in Canada’s interest to join IPEF as soon as possible. Canada is, however, involved in APEP, which is expected to grow in terms of participants this year.

Finally, Canadian companies registered to do business in the United States and their subsidiaries in the US have until January 1, 2025, to file a declaration under the Corporate Transparency Act. New companies must file such a declaration within thirty days of their creation or registration.

China

In 2024, companies operating in China will have to remain cautious due to the Chinese Communist Party increased control over the economy and tensions between China and the West. The American approach to China aims for ‘Decoupling’ the US economy from China, while the European Union aims for a lesser degree of separation, favoring ‘De-Risking’ or risk mitigation. They aim to reduce their companies’ production in China, especially in areas deemed sensitive. In practice, the departure of Western companies seems to be accelerating, as they are more inclined to sell their assets when an opportunity arises and leave the country.

Therefore, Canada will have to develop its own strategy towards China in 2024, an approach which should be halfway between the United States and the European Union but closer to ‘De-Risking’ to avoid the scenario of complete decoupling.

Trade tensions between China and the EU will be on the rise in 2024, not least due to the opening of an anti-dumping investigation against Chinese electric vehicles. Tensions will also increase on account of some countries’ plans, including France, to limit their subsidies to electric vehicles whose production resulted in the lowest greenhouse gas emissions, de facto excluding Chinese vehicles. China started to retaliate and targeted European spirits and is expected to extend the scope of its countermeasures later this year. Both measures are likely to be cross-challenged at the WTO.

Finally, China will probably add American or Western companies to its Unreliable List during the year. This list was set up in reaction to the addition of Chinese companies to the American Entity List. For now, China has only targeted American companies active in the arms and aerospace sectors.

European Union

The biggest commercial change in the EU concerns its border carbon adjustment mechanism, which obliges companies exporting certain goods to the EU to file their first carbon content declarations by the end of January 2024. In connection with this mechanism, discussions are still ongoing in the United States regarding the introduction of a taxation mechanism for imported products that pollute more than their American equivalents. Concrete proposals are expected in the second half of 2024. Canada will likely wait to see what the United States do before acting.

Canadian companies should also monitor Canada’s classification in the European anti-deforestation mechanism, which will classify countries as low, moderate or high risk by December 2024. Canada and developing countries such as Brazil and Indonesia will continue to stand united against these measures, which they consider unnecessary and complex to implement. Even if Canada is classified as low-risk, companies exporting timber to the EU will face a greater regulatory burden. The EU is expected to extend the list of covered products by 2025.

In addition, Canadian companies could be obliged to inform the EU of any subsidies received from a third country when operating in the EU. They will have to notify the EU when participating in European public procurement or, in the event of an acquisition or merger with a European company, when reaching established financial thresholds. Canadian companies active in Europe should be ready for this possibility in 2024.

Several elements of European trade policy will depend on the outcome of the 2024 American election, including the possible conclusion of a Steel Pact (which Canada is expected to join) with the United States. The same applies to whether the currently suspended US tariffs on steel, which the EU would like to see abolished, will be legally challenged.

In 2024, it will also be important to pay attention to how the EU applies the enforcement and anti-coercion measures that form part of its trade defence arsenal, which it intends to use against countries that fail to comply with international trade law. One of the first countries to be targeted is likely to be Indonesia, because it ignored a WTO ruling in favor of the EU. The United States could also be targeted.

Finally, the Agreement on Cross-border Data Flows between the EU and Japan will come into force in 2024. In the future, this type of agreement is likely to multiply and form part of Canada’s trade strategy.

Climate

Canada should follow the example of its partners and become more involved this year in setting up the COP28-agreed ‘Loss and Damage’ fund to compensate developing countries for their contribution to the fight against greenhouse emissions. These compensations aim to offset the historical carbon ‘debt’ of developed countries.

The EU has also adopted a regulation on ESG standards in 2023, defining twelve standards for which targeted companies have regulatory obligations from 2024 onwards. In 2025, these companies will have to produce a sustainability report for 2024. The number of companies covered will gradually increase until 2029.

World Trade Organization

In 2024, the WTO will bounce back, although its dispute settlement system will not become fully operational. The increase in the WTO budget in 2023, the first in twelve years, sends a positive signal for multilateralism.

The WTO will hold its thirteenth Ministerial Conference in February 2024 in Abu Dhabi. Although no major breakthroughs are on the agenda, the organization will show progress in negotiating joint initiatives. For example, the initiative on investment facilitation for development will present a draft agreement partly aimed at increasing transparency and combating corruption. The initiatives on e-commerce and the integration of small economies are also expected to present projects, and the initiative on plastic pollution and environmentally sustainable plastics trade is expected to present a declaration at the ministerial conference. Other initiatives, including the one on fossil fuel subsidy reform, should also continue to make progress in 2024.

The most contentious initiative is the one on e-commerce in relation to data flows, with the United States having recently withdrawn from the group of negotiating countries. However, there may be a Ministerial decision on e-commerce, at the very least, to renew the moratorium on the imposition of customs duties on electronic transmissions.

Dispute settlement is not expected to become fully operational again. Still, the MPIA continues to provide an alternative to the 55 participating members, including Canada, by preventing a member from evading its obligations by appealing a panel report. This mechanism has notably enabled the EU to challenge China’s trade intimidation measures and its lack of respect for intellectual property. Panel reports on those two disputes should be available in the second half 2024. This mechanism has also enabled Australia to challenge similar measures, avoiding the ‘appeal into the void’ scenario.

On the accession front, Comoros and Timor Leste are on the right track after some postponements and should join the WTO at the next Ministerial Conference. Finally, in 2024, Uzbekistan, Turkmenistan and Azerbaijan will be making progress in their accession applications.

Finally, there will be more trade-restrictive measures in 2024, but the WTO has recently shown that liberalization measures are multiplying even faster. Brazil will likely become part of the Agreement on Trade in Civil Aircraft in 2024, and Costa Rica has applied to accede to the Agreement on Government Procurement. Both situations constitute opportunities for Canadian companies.

International Taxation

The OECD’s second tax pillar, a minimum corporate tax of 15% to address tax challenges related to the digitization of the economy, came into force in early 2024 in most participating states, mostly in Europe and Asia. In 2024, an agreement on the first pillar, aimed at redistributing the revenues of large digital companies on international scale, should also be finalized. This agreement will then likely enter into force in 2025 or 2026.

Canadian companies should also monitor developments within the International Maritime Organization in 2024. This organization may impose an environmental tax on freight in order to achieve its goal of halving emissions from the shipping sector by 2050. The outcome, however, is uncertain, with two factions: one led by France and small island states favouring such a measure, while China and developing states positioned themselves against it. The imposition of such a tax would increase the price of imported goods.

Authentication of documents

It should be noted that the Apostille Convention established by The Hague Conference on Private International Law and which simplifies the authentication of documents (the legalization process), to which Canada acceded last year, entered into force for Canada on January 11, 2024. Canada’s accession provides Canadian businesses and citizens with many benefits, i.e., Canada’s participation greatly reduces the bureaucratic barriers in dealing with foreign countries.

CMKZ Advice

In light of this forecast, in 2024, Canadian companies should:

1. Take into account the limitations and investigations surrounding the sale of Canadian companies to foreigners or even the acquisition of a minority stake in companies operating in sectors deemed strategic by the Canadian government;
2. Verify whether they are subject to the new law against forced and child labor, and if so, ensure that the corresponding report is produced by May 2024;
3. Ensure that they comply with the Canadian sanctions framework (countries, products targeted, etc.) and the United States framework, including Entity Lists, when they have significant activities in or export to that country;
4. Keep an eye on developments in the United States following the November 2024 election, which could lead to the imposition of new tariffs by the US;
5. Be cautious vis-à-vis the energy and mining sectors in Mexico, monitor developments in Mexico’s regulatory regime, and if necessary, take legal action to protect their investments;
6. ‘De-Risking’ their presence and activities in countries with strained relations with Canada and prioritizing resettling in allied states that are part of Canada’s extensive network of free trade and investment protection agreements;
7. For companies active in the European Union (subsidiaries, major sales, operations, etc.):

• • Ensure that they assess and document the carbon footprint of their products when operating in one of the EU-designated industries;
  • Check whether they have ESG reporting obligations and, if so, comply with them;
  • Document the total value of subsidies received from various governments in order to respond to any requests from European authorities;
  • For companies exporting timber to the EU, make sure their extraction processes respect EU standards and be prepared to document their supply chains.

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.