Here is my recent BNN interview of what seems to be looming for Canada in international trade with the Trump presidency likely to take a nationalistic and protectionist approach, not only regarding the ill-fated Trans-Pacific Partnership Agreement but also in bilateral matters under the NAFTA. http://bit.ly/2fxxbaQ
Author Archives: Lawrence Herman
Trump and Trade – Whither NAFTA
As we try to come to grips with all the implications of the Trump ascendency, there are some important points for Canada to contemplate when it comes to bilateral trade matters.
First, Trump will move quickly to demand re-negotiation of the NAFTA and while his acrimony is focused on Mexico, as a trilateral agreement Canada will be directly and immediately involved. There’s no way around that. If Trump wants to open the NAFTA, it’s impossible for Canada to refuse to be at the table.
Second, re-negotiating the NAFTA means opening up parts of the deal that will directly concern Canada – such as duty-free entry or low tariff rates. You can’t raise duties on Mexican goods without changing the same duties on Canadian goods. Such as autos, chemicals, foodstuffs. You name it. That’s what happens under most-favoured-nation (MFN) treatment.
Third, while there’s a view that abrogating the NAFTA – assuming the Americans want to go that far – will then resuscitate the 1988 Canada-US Trade Agreement, it is almost certain that the US will want to change that agreement as well. If Trump as president is as aggressive on trade as he was on the hustings, there’s reason to be worried that he’ll re-jig the entire bilateral trading relationship with Mexico as well as Canada, meaning the old FTA is up for grabs as well.
Fourth, as was made clear during the campaign, regional trade deals like the TPP and the proposed US-EU agreement are effectively dead in the water. And there is unease about how the Trump administration will approach multilateral obligations under the WTO and whether it will show commitment, let alone leadership, in that critical forum as well.
Finally, with Republican control of both houses of Congress, Trump can move quickly to get his senior trade policy staff in place and won’t face lengthy delays of 9 or 10 months or more getting Senate confirmation of his nominees. And with Congressional control, getting trade bills passed (which will be needed to change the NAFTA and the FTA) won’t pose a significant challenge.
All of this means the lights will be on late on Sussex Drive (and on Bay Street) as policy makers and business leaders try to plan options and strategies as we enter this new and unsettled era in trade matters.
Rescuing CETA – Yes, It’s Possible
The investor-State dispute settlement (ISDS) part of the CETA is the focus of Wallonia’s objections to the deal. We can actually solve that roadblock.
ISDS was never a sine qua non for Canada. We replicated the NAFTA model (making some later improvements) without any real thought or analysis of whether the Canadian investment community saw ISDS as an essential part of the agreement – they don’t.
Why would they? There is no concern in the Canadian business community about risks of investing in France, Spain, Germany, Italy, Ireland or the UK (as long as it remains in the EU). There are significant Canadian investments in each of these countries and there’s never been an issue requiring investment protection.
The fact is that Canadian business doesn’t need, and never pressed for, foreign investment protection in any of these major EU economies.
And Canada already has bilateral foreign investment protection agreements (FIPAs) with many of the smaller EU members: the Czech and Slovak Republics, Hungary, Poland, Romania and Croatia. For those other EU countries where Canada doesn’t have these bilateral agreements, they can be negotiated (in my view, without much difficulty).
And I dare say, European companies never insisted on ISDS when it comes to investing in Canada.
Taking all of this on board, there’s definitely a way to rescue the CETA. If the EU can do their bit and get their act together and get the Germans and Belgians to agree, we could remove the ISDS provisions with an agreed protocol that calls for its further review of those articles. Both sides could then agree to provisionally implement the critical parts of CETA, most importantly the tariff reductions that Brussels alone has control over.
Full ratification (with or without ISDS) could come later when all 28 EU members approve it under internal EU procedures. In the meantime, forward progress would be made in opening trans-Atlantic markets.
Some might argue that it’s too dangerous to open up an agreed treaty text because the consequences are unforeseen and could lead to the entire structure crumbling. But this really isn’t a renegotiation of the agreement. It’s a matter of removing a part of it for further study. And without embarking on some kind of rescue mission like this, the whole CETA venture could die anyway.
CETA is too important for both sides to have it go down in flames over a particular part of the agreement that neither side considers essential.
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Addendum: This proposal would side-track the ISDS part only but keep intact the other provisions in the CETA investment chapter, including the obligations on both Parties (meaning Canada and the EU member States) to ensure that foreign investors and their investments are treated in a non-discriminatory manner and on an equal footing with national investors.
The result would that Canada or the EU could still bring a Party-to-Party dispute to arbitration if these treaty obligations were not complied with. The proposal would also keep intact the proposed investment court which would handle these Canada-EU disputes.
Canada-Europe Trade Agreement and the Walloons
There was a most unfortunate development in October 2016 preventing the European side from approving the Canada-EU trade agreement, formally known as the Comprehensive Economic and Trade Agreement (CETA).
On 24 October, tiny Wallonia refused to allow Belgium to agree to the CETA, resulting in a cancellation of the planned treaty signature the same week between Canada’s Prime Minister and the President of the European Commission.
The CETA had actually been negotiated by the previous Canadian Conservative government and those negotiations ended in 2014 with an agreed text. Since then, the text has been legally “scrubbed” and translated into all the official EU languages. However, while the text has been agreed, the treaty has never been officially signed by either Canada or the EU, let alone ratified to bring it into force legally.
While the CETA was a Conservative initiative, it’s been fully supported by the Liberal government under Mr. Trudeau. His team, led by Chrystia Freeland, Canada’s trade minister, have been bending over backwards to assuage elements of opposition to the CETA in Europe.
Earlier in 2016, Canada agreed to changes to the CETA text to significantly modify the provisions on investor-State dispute settlement (ISDS), moving away from the traditional approach and creating an independent and impartial investment Tribunal or “court” (as opposed to the usual ad hoc panels) and establishing an appeal mechanism to review investment panel decisions.
As well as these treaty amendments, Canada and the EU also hammered out a Joint Interpretative Declaration in October 2016, setting out how the two sides will apply the CETA and clarifying the meaning of certain of its more controversial provisions.
Critically, the Declaration makes it clear that the CETA does not limit the right of governments to provide public services and to regulate for the public interest, including changes those laws even if it impacts on a foreign investment.
Even with these changes and solemn commitments, it wasnt enough to satisfy tiny Wallonia, which under Belgium’s constitution, prevents that country from agreeing to the CETA and, as a result of the EU’s internal arrangements, prevents the EU from signing the deal and from applying it even on a provisional basis.
Whether the CETA is dead remains to be seen. It certainly seems to be in the emergency ward. Some initial comments from the European side have indicated that it may still be possible for this debacle to be turned around.
We’ll have to await developments. In the meantime, you can read my commentary in the 24 October 2016 Globe and Mail Report on Business here. http://bit.ly/2en03EP
Canadian Trade, Mrs. Clinton & the Democrats
Here is the link to a commentary of mine in the Globe & Mail Report on Business, 27 September 2016. It was written following the first presidential debate.
In it, I say Canadians must not be naive to think our trade relations will be all sweetness and light under a Democratic administration. The protectionist mood in the US is growing and the Democratic party is historically less favourable to open markets than the Republicans.
Export Controls & Economic Sanctions – 2016
Together with the 2016 Trade Remedies Primer, we’ve prepared a basic outline of Canada’s Export Controls and Economic Sanctions, to explain in clear and, hopefully, in non-legalistic terms how the system works. Like the trade remedies companion piece, it’s boiled down to the main ingredients. To get the primer, just click on the link below.
Wither TPP
My commentary in the 23 August 2016 edition of the Globe & Mail’s Report on Business suggests – from all the signals coming out of Washington – that the likelihood of US approval of the TPP Agreement is fading. See it here:
There may be a glimmer of hope but with key Congressional leaders in both houses clamouring for changes to the deal, it seems less and less likely it will survive the mis-named “fast track” process.
A Basic Trade Remedy Primer
Clients and friends of the firm have asked for a basic outline of the Canadian trade remedy system – meaning all about anti-dumping and countervailing duties. Here is that outline as a kind of primer, written in what I hope is plain English and with as little legal jargon as possible. Just click on the link.
https://hermancorp.net/wp-content/uploads/2016/08/Canadian-Trade-Remedy-Primer-2016.pdf
World Energy Council’s Latest Trade Report
The World Energy Council (WEC) has a group of experts that examines trade and investment issues of significance to the energy industry, focusing on ways to reduce barriers to trade and investment in the sector.
I’ve been a part of this group for a decade.
Its most recent effort is a report on ways to reduce or eliminate non-tariff barriers in the sector. It was released on 18 August 2016 at a meeting of APEC. To see the report, just clikc here: http://bit.ly/2b3DqpG
BC’s Non-Resident Home Purchase Taxes and International Trade
Comments have been made in some quarters about the recently-announced 15% tax imposed by the BC government on non-resident purchases of residential property to the effect the measure might offend Canada’s obligations under the NAFTA.
These come as a surprise, since few would have thought that an internal measure like this would even remotely involve matters of international trade and investment.
But it’s true that the NAFTA basically requires equal tax treatment of nationals and foreign investors, in this case, investors from the US and Mexico. The TPP agreement, recently signed by Canada (although not yet ratified), contains similar provisions.
However, like all things legal, it’s not nearly as cut-and-dried as might first appear.
For starters, there are exceptions for tax measures under Article 2103 of the NAFTA that could apply to the new BC measure as an “equitable and effective” tax that doesn’t “arbitrarily” discriminate between resident and non-resident persons.
Given the background, it may be difficult to prove the tax is “arbitrary”, a term that means – take your pick – autocratic, dictatorial, undemocratic, despotic, tyrannical, authoritarian, high-handed. Does any of this apply in this case? This is a possible defense should a NAFTA challenge be launched.
That’s the lawyer-like, technical response. But there are other reasons why any NAFTA issue (like any concerns under the TPP) is quite theoretical and likely not much of a real concern to the BC government.
First, NAFTA rights, if any, only apply to US investors. Chinese-based persons that are BC home buyers, which seem to be the major focus of concern, have no rights under the Agreement. Even if the newly-signed TPP eventually enters into force, it won’t apply to investors from China, which is outside the TPP region.
Second, the US government isn’t going to challenge the BC tax under the NAFTA. Why?
Because there are US states that have similar non-resident taxes and many have outright restrictions on non-resident property ownership. Many, for example, prevent any purchase of agricultural land by non-residents.
So the US is hardly likely to open the door to NAFTA litigation involving non-resident ownership rights, taxes or other restrictions.
Third, even in the highly remote possibility that the US government took this to a NAFTA panel, it would have to show that US trading interests – as opposed to those of private interests – have been “nullified or impaired”. Clearly not so. What we have here are merely individual, personal financial interests being affected.
Finally, as to American home buyers challenging the tax, each dispute under the NAFTA investment chapter has to be brought separately by each individual investor, alleging that their investments have been unfairly treated.
The taxes here are just not large enough to warrant any American purchaser considering such a move. A tax of a few hundred thousand dollars would pale in comparison to even the first round of legal fees in getting a case started, let alone the millions involved in proceeding to arbitration.
Added to the enormous legal expense involved is the not inconsiderable hurdle noted earlier that potentially exempts the BC tax from NAFTA coverage anyway.
The result is that while there may be some highly theoretical NAFTA issues here, I wouldn’t think there is anything of major concern to the BC or Canadian governments.