The proliferation of trade sanctions and other trade-restrictive measures is a headache for businesses. States are resorting to it more and more: let us think of American sanctions toward China, European sanctions toward Russia, or even Japanese sanctions toward South Korea.
For each sanction, a countersanction: for example, to the surtaxes imposed by the United States on goods from China valued at US $ 550 billion, the latter retaliated by imposing surtaxes on US $ 185 billion in goods from the United States. Likewise, to the tariffs promulgated in 2018 by the United States on steel and aluminum from the European Union, the latter has implemented countermeasures of a corresponding value, i.e., 6.4 billion euros.
Economic sanctions can significantly affect companies, whose activities can be disrupted by sanctions, particularly Canadian, US, European or Chinese, both in terms of the cost of inputs, market access, technology transfer as the development and maintenance of links with business partners abroad. Some are permitted by international agreements or international law; the majority are not.
Lawful and Unlawful Measures
Among the trade restrictive measures instituted by states, some are lawful, others, unlawful. Let us note that the legality of a trade restrictive measure depends on the decision of a judicial body, such as the WTO Dispute Settlement Body.
Regarding lawful sanctions, the WTO, on October 14, 2019, authorized the United States to apply retaliatory measures amounting to nearly US $ 7.5 billion against the European Communities and certain Member States, after they were found guilty of subsidizing the aircraft manufacturer Airbus. The United States has thus proceeded to impose surcharges, or “punitive tariffs” on products as diverse as wines, cheese, planes, industrial parts and construction machinery. The United States even planned, in early summer 2020, to “rotate” the list of products subjects to tariffs every six months, in order to disseminate the consequences of the sanctions on several sectors of the European economy. Subject to a punitive 25% tariff on its exports to the United States, the Scottish whisky industry has seen them fall by nearly a third since last year, representing a loss of US $ 300 million.
On the other hand, although negotiations for a trade agreement between China and the United States are progressing well, several goods imported into the United States from China remain subject to a 7.5% to 25% surtax. These sanctions, which are still in effect, may affect Canadian companies sourcing products from China but transiting through the United States. On September 15, 2020, a WTO panel ruled in favour of China against the United States in concluding that the tariffs imposed by the latter on imports of Chinese products violate international trade rules. This WTO panel finding concerns US $ 234 billion worth of Chinese products, out of total Chinese imports of US $ 370 billion to the United States.
Other illicit sanctions also affect Canadian companies, foremost among them the numerous US sanctions. Tensions between the United States of America and its trading partners are in fact not about to subside: every month, the Trump administration announces the imposition of sanctions against foreign states, which can relate to goods and thus result in new tariffs or concern people or technologies.
On August 6, 2020, President Trump announced that the United States will reinstate 10% tariffs on certain aluminum products from Canada. In response to these measures and for an amount proportional to the amount of Canadian aluminum products that would have been affected by US tariffs, Canada intended to impose surtaxes (“countermeasures”) of 3.6 billion Canadian dollars on imports of aluminum and products containing aluminum from the United States. Canada appealed to companies to choose the sectors that would have been the subject of Canadian countermeasures against the United States: the list of products that the Canadian government was considering overtaxing included a variety of goods, including appliances, industrial parts, doors, windows, furniture, bicycles, livestock trailers and golf clubs. This example speaks volumes for the instability of international trade relations: on September 15, 2020, just over a month after announcing the imposition of tariffs on Canadian aluminum, the Trump administration announced its suspension.
The United States on September 19, 2020, unilaterally proclaimed that the United Nations sanctions against Iran are back in force. These sanctions were lifted in 2015 in return for Iran’s commitment not to acquire atomic weapons. The Trump administration is threatening to deny access to the US market and financial system to any country or entity that violates UN sanctions, even if the United States alone believes they are in effect. Indeed, the majority of countries consider that these UN sanctions are still not in force.
Although negotiations for a trade agreement between China and the United States are progressing well, several goods imported into the United States from China remain subject to a 7.5% to 25% surtax. These sanctions, which are still in effect, may affect Canadian companies sourcing products from China but transiting through the United States. On September 15, 2020, a WTO panel ruled in favour of China against the United States in concluding that the tariffs imposed by the latter on imports of Chinese products violate international trade rules. This WTO panel finding concerns US $ 234 billion worth of Chinese products, out of total Chinese imports of US $ 370 billion to the United States.
Relations between Japan and South Korea remain tense: let us recall that the Japanese authorities, in the fall of 2019, removed South Korea from the list of countries benefiting from preferential treatment: in concrete terms, southern companies Korean women will now have to apply for a permit to import products into Japan.
Canada maintains its disapproval of the annexation of Crimea by the Russian Federation in 2014; let us remember that the Canadian government then introduced sanctions targeting Ukrainian entities and citizens who participated in this territorial annexation. Canada on January 29, 2020, added six individuals to the list of persons and entities with which Canadians cannot conclude transactions. Regarding European sanctions in response to the crisis in Ukraine, on June 18, 2020, the European Union extended until June 23, 2021, the bans on imports, exports, provision of services and restrictions on trade and investments from, to or in the territory of Crimea or Sevastopol. Regarding the European economic sanctions targeting trade with Russia in specific economic sectors and having the effect of restricting or prohibiting certain transfers of European technologies to Russia, they have, for the time being, been extended until January 31, 2021.
Technology Transfers Become More Complicated
On August 17, 2020, the US Department of Commerce further restricted Huawei’s access to US technology. It also added 38 international subsidiaries of the Chinese telecommunications giant to the list of companies subjects to sanctions by the United States (“the Entity list”), and which must obtain a specific license in order to do business. If Canadians wish to sell their business to a company included in the Entity List, the Canadian government may block the transaction.
US sanctions can thwart technology transfers from Canadian companies: the latter must guarantee that they intend to comply with the rules relating to US economic sanctions. They must also ensure that they do not sell or export technologies to countries under sanctions, nor for military or armament purposes and that they will apply for export licenses if they intend to export specific technologies to certain countries, especially if they are intended for government entities. The countries concerned include Armenia, Azerbaijan, Cambodia, North Korea, People’s Republic of China, Cuba, Georgia, Iraq, Iran, Laos, Libya, Macao, Russia, Syria, Ukraine and Vietnam.
China passed a National Security Law in May 2020, which prohibits subversion, sedition and secession in Hong Kong territory. As soon as the bill was announced, pro-democracy protests erupted over fears that the law would violate the autonomy and freedoms of the Hong Kong people provided for in the terms of the handover in 1997; these demonstrations were quickly put down. While the United States hastily instituted sanctions targeting individuals involved in suppressing pro-democracy protests, Canada has not imposed sanctions. Global Affairs Canada has nevertheless announced that applications for export permits for sensitive goods and technologies will be further examined. This could lead to the imposition of additional conditions for exporters of goods and technology to Hong Kong, in addition to causing longer processing times for export permit applications. Exporters of technologies intended for both civilian and military use could be particularly affected by this measure.
Sanctions and other trade restrictive measures are commonplace today and pose a real headache for Canadian companies operating internationally. The technique of rotating sanctions, which consists of “rotating” the list of products subjects to customs duties, reinforces this uncertainty. However, there are ways to prevent unforeseen events: vigilance, of course, but also the drafting of appropriate contracts, containing well thought out force majeure clauses. Moreover, companies can diversify their suppliers and sourcing countries or find substitute suppliers in the event that sanctions increase their input costs.
CMKZ lawyers follow the development of sanctions, remain on the lookout for measures that may affect companies ‘business activities and ways to mitigate their impact on the development of companies’ international activities.