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.
Author Archives: Lawrence Herman
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.
Brexit and CETA – The Way Forward
CETA Held Hostage
On Brexit again, what’s clear is that even with a new U.K. government in place, things are still unclear. There’s no roadmap on how all of the issues surrounding the UK leave scenario will be sorted out.
In the meantime, the Canada-EU Comprehensive Trade and Economic Agreement (CETA) is held hostage to fortune, languishing in treat limbo following a decision by the EU Council that the CETA is a “mixed agreement” and requires approval by the 28 EU member states to enter into force.
What complicates things is that, as long as the UK remains a member of the EU, it is included in the 28 member CETA ratification process. And indications are that it will take many months – possibly years – for the groundwork to be laid before Britain triggers the formal withdrawal notification process and the two-year cut-off in the Lisbon Treaty begins for completing that withdrawal.
This has implications for the future of the CETA, with indications in European capitals that final EU action on the CETA has to be suspended until the UK situation resolves itself.
Provisional Application
Some suggestion of progress on the CETA front, however, was indicated last month when Canada’s trade minister, Chrystia Freeland, and her European counterpart. Cecelia Malmstrom, talked about possible provisional implementation of the deal, pending member country ratification.
Clearly, provisional application is the way to go. Here are some further points of clarification on this idea.
Provisional application means all or parts of a treaty can be applied by the parties while the full ratification process remains to be completed. This is specifically allowed under international law. The Vienna Convention on the Law of Treaties – yes, there’s a treaty that even deals with treaties – provides for this. It’s fully legal.
There are good examples of treaties that have been provisionally implemented for years without being fully ratified. The most noteworthy is the General Agreement on Tariffs and Trade (GATT), which had been included as part of a larger multilateral agreement concluded in 1947 called the Agreement on the International Trade Organization (ITO).
The ITO was never approved by the U.S. Congress (sound familiar?), so the GATT was applied provisionally by all signatories, thereby by-passing the U.S. system. This situation lasted for almost 50 years, until the World Trade Organization Agreement came into being in 1994.
This illustrates that parties have a pragmatic option when it comes to treaty implementation, a way to avoid getting bogged down in technical, jurisdictional issues and allows for forward progress where mutual interests dictate. This should apply in the case of the CETA.
Critical Mass Within Brussels’ Competence
Comment has been offered to the effect that something like 90% of the CETA is within the exclusive competence of the EU organs – European Council and Parliament – and that these parts don’t require member State approval.
I’m not sure about the 90% figure, but under Article 3 of the Treaty on the Functioning of the European Union (TFEU), the EU bodies in Brussels have exclusive authority over the following matters: customs and tariffs; competition rules; monetary policy for the Euro area; conservation of marine biological resources under the common fisheries policy; and, importantly, all aspects of commercial policy.
While those specific aspects of the CETA that fall within these domains would have to be sorted out, there’s enough here to allow for significant parts of the CETA (maybe even 90%) to be provisionally implemented by Ottawa and Brussels alone.
Take customs matters. Brussels alone has the power to implement changes to the EU Common External Tariff, meaning, of course, all tariff reductions agreed to in the CETA. So these could be put into effect now, without needing any action by the member States.
In commercial policy and competition law, CETA provisions in these areas are outside the competence of EU member countries and so Brussels aloe could legislate any needed changes to bring CETA obligations into effect throughout the EU.
Gains Across the Atlantic
On the Canadian side, the federal cabinet (i.e., the Governor-in-Council) alone has the constitutional authority to negotiate and conclude treaties and, where internal implementation is concerned, Parliament can enact the necessary legislation. In matters of trade affecting Canada as a whole, there is no constitutional requirement for provincial legislation for Canada to ratify an international treaty.
In any event, all 10 provinces and three territories were at the negotiating table and signed on to the deal two years ago, so there are few issues on the ratification and implementation side in Canada. The problems are on the other side of the Atlantic.
Provisional application of the CETA is the pragmatic solution. The potential gains for the EU are real, not only in securing preferential access to the Canadian market for European goods and services (not inconsiderable, even though Canada is a small economy in relative terms) but in showing the world that the Brexit turmoil doesn’t impede real progress on the trade front.
Another WTO Aircraft Battle?
According to the media, the Brazilian aircraft manufacturer Embraer is threatening another WTO case against Bombardier, challenging the $1 billion equity infusion provided for the C Series by the Quebec government and, possibly, another $1 billion under consideration from the Feds.
The following are some initial impressions from reading these recent reports.
Only Brazil Can Bring a Case to the WTO
First, Embraer itself can’t bring a case to the WTO. Only the Brazilian government can do that. Still, one suspects that Embraer executives wouldn’t be rattling sabres like this unless they had some solid assurances from the Brazilian government about a possible WTO complaint.
We’re probably a long way from an actual case being filed. Even so, statements like this indicate there’s fire where the smoke is.
The second point is a corollary of the first. If Brazil does launch a WTO dispute, it would be against Canada, not Bombardier. Canada would be the respondent, even if the money was provided by Québec.
That’s because Canada alone is a member of the WTO: as sub-federal units, the provinces are not. On the international plane, Canada at large is the responsible party. But WTO cases can still be filed against Canada for actions by the provinces.
These Cases Are Highly Political
Forget the niceties of trade law. WTO cases are always based on a country’s strategic interests. In this case, challenging Canada would be a signal to the world that Brazil will go to great lengths to defend its own geopolitical and commercial reach.
Should Brazil file a case against Canada, the Canadian government will certainly respond with a complaint against Brazil. Embraer is subsidized to the hilt by the Brazilian government. That’s a risk Brazil may be prepared to take, betting on the possibility that a WTO case will put a damper on Bombardier’s global sales activities.
Is It A Subsidy?
To succeed at the WTO, Brazil would have to demonstrate that the equity purchase by Québec or Canada is indeed a subsidy under the WTO Subsidies and Countervailing Measures (SCM) Agreement.
Most illegal subsidies are in the form of grants, tax concessions or concessionary loans given by governments. We don’t have that in the Bombardier case.
True, equity infusions are possible subsidies under the SCM Agreement’s definition. But the Agreement also stipulates that a benefit must be received by the equity provider that wouldn’t otherwise be there if the government hadn’t acted.
So the first question will be whether the equity purchased by the Quebec or Federal governments is a benefit to Bombardier as opposed to what it would have been if Bombardier has raised the cash on the market.
Any benefit wouldn’t be the total $1 billion (or whatever the total value of the infusion by both levels of government). The benefit would be the difference between the value of the equity infusion by the government versus what a private investor would have paid.
Equity infusions aren’t like recurring tax concessions or annual grants, for example. As a one-time cash infusion, assuming there is one, its value would be amortized over the life of the C Series program and applied to each aircraft sold.
So, even if the first number of hurdles facing Brazil could be overcome, the extent to which the $1 billion in equity is a benefit over the course of the project will have to be calculated.
Has Brazil or Embraer Been Materially Injured?
Assuming the case went so far as a Brazilian victory, Brazil’s rights against Canada would be circumscribed by the impact that benefit had on Brazil’s trade interests. Subsidies are not actionable under the SCM Agreement unless they cause serious prejudice to another WTO member or material injury the domestic industry of that member.
That requires Brazil to show that the equity purchased by Canadian governments has been the direct cause of damage to Embraer – by either taking sales from Embraer or by causing significant price reductions to Embraer’s own aircraft sales.
The point is it’s not a matter of simply alleging that a subsidy exists. There has to be injury to the complainant’s trade interests, meaning not only a direct causal connection between the subsidy and the alleged injury, but injury to the same or directly competitive product.
If lost sales or price reductions are the result of other factors, there is no such causal connection.
And whether any of these “serious prejudice” effects exist can only be shown if the alleged prejudice involves Brazilian like products.
It’s true that, at first blush, Bombardier’s CS-100 and CS-300 occupy much of the same commercial space in the industry as the Embraer E195, in either its 100 or its 124 passenger configurations.
However, with the major technological advances in the C Series, including its high percentage of sophisticated composite materials and the improved Pratt & Whitney PW1500G geared turbofan engines, there’s an argument that the E195 and the C Series are not like products. i.e., not directly substitutable in the market. If that can be shown, Brazil would not be able to sustain its WTO case.
A Long Way to Go
The obvious conclusion – there’s a long, long way to go before anything is settled through WTO litigation. In the Canada-Brazil aircraft battles two decades ago, there was an eventual standoff and in the end, neither government retaliated. The cases were settled with changes to each sides’ government loan programs.
The difference in the Bombardier case this time is that we’re not dealing with government grants or loans but with equity infusions, a different beast altogether,
With this history as a guide, should Brazil proceed and file a case, we can expect five years of WTO litigation. Whether that will have any effect on the C Series and its sales prospects is highly unlikely.
Investment Arbitration – Important Developments in Tobacco Litigation
The huge multinational tobacco conglomerate, Philip Morris (PM), was bounced out of court on 14 July 2016, in a highly controversial investment claim against tiny Uruguay, a country with a population of 4.5 million and GDP a fraction of the US$80 billion annual revenues of the US-based tobacco giant (Philip Morris v, Uruguay, Award: http://www.italaw.com/cases/460)
Although headquartered the US, pm used a Uruguay-Switzerland bilateral investment treaty (BIT) to launch its claim against that country’s tobacco control measures. This was possible because PM had subsidiary Swiss companies that could file the case, invoking the rules of the International Convention for the Settlement of Investment Disputes (ICSID).
The litigation centred on Uruguay’s cigarette packaging rules, requiring that only one variant of cigarette brand per family could be sold (the so-called Single Presentation Requirement or SPR) and that 80% of the package had to consist of health warnings.
PM argued that these regulations irreparably harmed its cigarette distribution business in Uruguay, effectively expropriating its patent rights, and were arbitrary and discriminatory, offending the rule enshrined in the BIT requiring “fair and equitable treatment” (FET) of foreign investors and their investments.
In defense, Uruguay said that it was following the rules contained in the WHO’s Framework Convention on Tobacco Control (FTFC) and that the regulations were legitimate public health measures, were reasonable and proportionate and were fully within the FET concept.
Fair and Equitable Treatment
FET is embedded in literally hundreds, if not thousands, of bilateral investment treaties around the world. It is amongst the most highly-litigated concepts in dozens and dozens of investor-State dispute settlement (ISDS) arbitrations.
The FET obligation is in Canada’s foreign investment protection agreements (called FIPAs), including the NAFTA and the Canada-EU trade agreement (CETA) currently awaiting ratification by the European Parliament and the legislatures of EU member States.
As a treaty obligation, FET comes into play when State regulations are alleged to be arbitrary, discriminatory, unreasonable or disproportionate, impacting negatively on the proprietary rights and other guarantees for foreign investments recognized under these bilateral agreements.
Critics assert that FET as a legal concept is skewed in favour of private interests and that successive arbitration panels have interpreted the rule far too broadly and favoured those interests over the public good. Critics argue that laws and regulations enacted for legitimate public policy reasons shouldn’t even be subjected to claims under these ISDS treaty provisions.
In a carefully and thoroughly reasoned decision, the Philip Morris panel upheld the right of Uruguay to pass its regulations, deciding 2-1 that the measures didn’t offend the FET principle.
The decision represents an important precedent in these investment arbitrations, notwithstanding some commentators claiming that its significance is less because panel decisions are not biding on subsequent tribunals.
The panel concluded that the measures were not arbitrary. It said (in para. 390) that according to the International Court of Justice in the 1989 ELSI case (United States v. Italy), arbitrariness is defined as “a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety.” Nothing of the sort existed here.
Citing the ELSI decision, the panel said (at para. 353),
- For regulatory measures to be deemed arbitrary, some important measure of impropriety [must] be manifest, reflecting the absence of legitimate purpose, capriciousness, bad faith, or a serious lack of due process. Consequently, measures undertaken in good faith cannot be considered arbitrary unless there is a manifest lack of rational relationship between the measure and its objective, i.e., unless there is no logical connection between them.
As demonstrated by Uruguay’s legal team, these measures were well-founded on scientific and public health grounds, were not arbitrary or discriminatory and were solidly within the FET ambit.
In light of the health-related evidence and internationally accepted standards, “the SPR was a reasonable measure, not an arbitrary, grossly unfair, unjust, discriminatory or a disproportionate measure” and that it “was an attempt to address a real public health concern, that the measure taken was not disproportionate to that concern and that it was adopted in good faith.”
With respect to the 80% package warning requirement, the panel concluded (at para. 418):
- The fair and equitable treatment standard is not a justiciable standard of good government, and the tribunal is not a court of appeal. Article 3(2) does not dictate, for example, that a 50% health warning requirement is fair whereas an 80% requirement is not. In one sense an 80% requirement is arbitrary in that it could have been 60% or 75% or for that matter 85% or 90%. Some limit had to be set, and the balance to be struck between conflicting considerations was very largely a matter for the government.
Rejection of Investor’s So-Called “Legitimate Expectations”
PM had argued that Uruguay was bound under the FET clause by the concept of “legitimate expectations” that tobacco regulations wouldn’t be changed when it made its original investment. The panel rejected this argument as well. It cited the 2006 ICSID arbitration award in El Paso v. Argentina, which said,
- Under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze.
In light of this and its factual analysis, this panel concluded (at para, 430) that,
- . . . in light of widely accepted articulations of international concern for the harmful effect of tobacco, the expectation could only have been of progressively more stringent regulation of the sale and use of tobacco products.
Upholding Police Powers
The other important part of the decision is that it upholds the “police power” of the State to enact legitimate regulations for the public good. The panel rejected PM’s claim that its regulations improperly expropriated the company’s patent rights. Citing the 2010 NAFTA case of Chemtura v. Canada, it concluded that the measures were a valid exercise of its “police powers” by Uruguay for the protection of public health.
Deference to Legitimate State Regulation
The award also refers in numerous places to the doctrine of deference – i.e., that it is not the role of international arbitration panels to substitute their views for those of the governments concerned where there is evidence that an impugned measure is not unreasonable or arbitrary and has been based on sound public policy underpinnings:
- 488. . . the present case concerns a legislative policy decision taken against the background of a strong scientific consensus as to the lethal effects of tobacco. Substantial deference is due in that regard to national authorities’ decisions as to the measures which should be taken to address an acknowledged and major public health problem.
- 399. . . . .The responsibility for public health measures rests with the government and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health. In such cases respect is due to the “discretionary exercise of sovereign power, not made irrationally and not exercised in bad faith … involving many complex factors.” As held by another investment tribunal, “[t]he sole inquiry for the Tribunal… is whether or not there was a manifest lack of reasons for the legislation.”
Important Precedent
These and other passages supporting the Uruguay regulations as within applicable international law standards are extraordinarily important. Added to the legal weight of the decision is the fact that one of the panel members, James Crawford, is the highly respected British judge on the International Court of Justice.
While it is true that ISDS arbitration decisions are not strictly-speaking binding as precedents on subsequent panels, it can be expected that this decision will have considerable weight in future investment arbitrations.
Canada-EU Trade – Suggestions for Moving Forward
The Globe & Mail published a commentary of mine (7 July 2016) on some suggestions for moving forward with the CETA process, without it being held hostage to the ratification by all 28 EU member States (or 27 without the UK). To read my article, click here. http://bit.ly/29AQ2mP
The South China Sea Dispute – China Offends International Law
In the 1970s, as a young diplomat, I was a member of the Canadian delegation to the UN Law of the Sea Conference. Later in private law practice, I was on the Canadian legal team in the Gulf of Maine Case before the International Court of Justice. I have advised governments and international organizations on maritime claims and legal issues concerning offshore sovereignty. As a result, I have followed the current South China Sea dispute pitting several countries against China with interest.
There is little doubt – even without the benefit of the 500 page decision of the Permanent Court of Arbitration on 12 July 2016 – that China’s outrageous claims to vast areas of maritime space in the South China Sea lack legal validity.
It’s not a matter of parsing complex provisions in the Law of the Sea Convention, to which China is a party. The words in the Convention are convincingly clear. Article 121, paragraph 3 states,
“[r]ocks which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone or continental shelf.”
Applying this to the facts in the case, the Court found that various shoals, reefs and other features surrounding the Spratly Islands – one of a group of islands claimed by China – are in fact and in law just “rocks” and not entitled to be recognized under the LOS Convention as islands themselves.
It reached this decision without deciding on the question of the sovereignly over the Spratly Islands, hotly contested by the Philippines. It didn’t have to.
Even if, for argument’s sake, China had sovereignty over the Islands, their surrounding reefs, shoals and and other features weren’t entitled to generate a vast surrounding economic zone and continental shelf under Article 121, paragraph 3 of the Convention.
This important paragraph was inserted during the LOS negotiations in the 1970s for good reason. The concept of seaward maritime jurisdiction – the exclusive economic zone and the resources of the shelf – is based on sovereignty over appurtenant land territory.
Negotiators agreed without much, if any, controversy at the LOS Conference that incidental geological or geographical features shouldn’t be allowed to generate massive, and indeed egregious, accretions of maritime jurisdiction.
As noted by the Court in several key passages,
The principal impetus for expanding such jurisdiction in the first instance is unequivocally linked with the interest of coastal States in preserving marine resources for the benefit of their people. . . .
As a counterpoint to the expanded jurisdiction of the exclusive economic zone, Article 121(3) serves to prevent such expansion from going too far. It serves to disable tiny features from unfairly and inequitably generating enormous entitlements to maritime space that would serve not to benefit the local population, but to award a windfall to the (potentially distant) State to have maintained a claim to such a feature.
After an exhaustive review of all the factors and their physical attributes, the Tribunal concluded that the shoals and reefs around the Spratlys that China claimed to be distinct islands were, in fact, no more than rocks.
The Court said that China’s aggressive activities involving land reclamation and construction of artificial islands, installations, and structures on these shoals and reefs has caused severe, irreparable harm to the coral reef ecosystem and offends various other provisions of the LOS Convention.
No-one is naïve enough to believe that the Chinese government will cave in to this decision and cease or retreat from its aggressive South China Sea activities. We’re involved in a serious game of raw power and geopolitics at its highest pitch.
The peaceful resolution of this issue, if there is one, will ultimately be based on the ability of the US to broker some kind of deal among China and the contending parties. In the final analysis, the Seventh Fleet is more critical than the Permanent Court.
That being said, the Court has done admirable service to the world community in its detailed analysis and firm conclusions about what governments can and cannot do in asserting sovereign claims and maritime jurisdiction. International law sets boundaries and serves a vital and overriding purpose in this regard.