Author Archives: Lawrence Herman

About Lawrence Herman

Counsel on International trade and investment, global business transactions & public policy

Sanctions Against Iran – A Short Update

The July 2015 agreement between Iran and the so-called P5+1 group (the 5 permanent members of the UN Security Council plus Germany) is a complex deal that provides that once Iran ends its nuclear-weapons program, western sanctions against that country- though not all – will be lifted.

Clients have asked about the effect of this on Canada-Iran business. The bottom line is that nothing in the deal will mean an immediate end to Canada’s sanctions against that country.

  • First, under the deal, sanctions mandated by the UN won’t be terminated until International Atomic Energy Agency (IAEA) verifies that Iran has complied with all its obligations. Once the IAEA confirms this, the sanctions are lifted, Iran will recover approximately $100 billion of its assets frozen in overseas banks and will be allowed to resume international oil exports.
  • Second, the agreement is between Iran, on the on hand, and the US and other Security Council members and Germany, on the other. Canada is not party to the deal and not legally bound by it. Canada could continue to apply its Iran sanctions – although it’s likely for the reasons explained below that Canada will eventually follow its allies in this regard.
  • Third, the agreement doesn’t end all sanctions against Iran but only UN-mandated sanctions – and only when the IAEA verifies that Iran has complied with all its obligations. The IAEA report is expected sometime in 2016. Once that is issues, the P-5 will approve a UN Security Council resolution to repeal or amend those sanctions.

There is a proviso that if future IAEA verifications reveal Iran has broken its commitments, these UN-ordered sanctions will snap-back into place.

Canada applies part of its Iranian sanctions under the United Nations Act, to implement binding Security Council decisions. So when the Security Council repeals its Iran sanctions resolution, Canada will follow through and revoke sanctions under that act by repealing or amending the United Nations (Iran) Regulations.

However, the July agreement with Iran only covers the ending of nuclear-related UN sanctions imposed by the US and the others. Sanctions on Iran for its conventional arms and ballistic missile programs will remain in place for several more years.

And significantly, other non-nuclear-related sanctions against Iran for its human rights abuses and support for international terrorism are not affected at all by the agreement.

This means that, even if Canada’s UN-mandated Iran sanctions are terminated, Canadian sanctions countering Iran’s human rights violations and its support for international terrorism under the Special Economic Measures Act (SEMA) will not be affected. These are not tied to UN Security Council resolutions or the requirements of Canada’s United Nations Act.

The Canadian government has provided little information so far on its position on these sanctions following the July agreement. What is pretty certain, however, is that even if Canada ends its UN-imposed sanctions and un-freezes Iranian assets in Canadian banks, it will continue to apply a wide range of sanctions against commercial and financial dealings with Iran to counter that countries terrorism activities and human rights violations.

Developments respecting Canada’s sanctions against Iran should be monitored carefully by Canadian business, keeping an eye on news releases and the web-site of the Department of Foreign Affairs, Trade and Development at: http://www.international.gc.ca/sanctions/countries-pays/iran.aspx?lang=eng

COOL Frustrations

The trade dispute between Canada and the US over American country of origin labelling requirements (referred to everywhere as “COOL”) is entering its eighth year. It presents a history of delay, frustration and prevarication that, sad to say, tarnishes the utility of the WTO dispute settlement system.

Canada took the matter to the WTO back in 2008. After over five years of Canadian legal victories, the US still hasn’t repealed the COOL measure.

It’s a US law that requires separate labelling of beef and pork products based on country of origin. That measure discriminated against Canadian products, because it requires American processors to segregate Canadian imports from US products. Given the complexities and costs in doing this, it resulted in US processors taking less beef and pork from Canadian sources.

In November 2011, a WTO panel said the law was contrary to US treaty obligations and had to be replaced with a compliant measure. The US appealed. In June 2012, the WTO Appellate Body turned down the appeal, siding with Canada.

The US brought in a new COOL regulation in 2012. Canada argued that this new measure was even more restrictive than the original one and took the case back to the WTO. In October 2014, a WTO panel agreed with Canada and said the US was still non-compliant with its treaty obligations. The US appealed this decision as well. They lost.

In June 2015, Canada advised the WTO of the retaliatory measures it proposed to take against the US in the form of tariff surcharges. The US objected to the amount of tariff hikes Canada was seeking. It appealed that to a WTO arbitration panel. This new panel will hear arguments this September and will issue its decision before the end of the year.

The COOL dispute is now over seven years old and still not at an end. There are machinations underway to find some sort of solution. The Canadian agriculture minister, Mr. Ritz, in the middle of an election, said he expects the US to comply in full with the panel ruling. He can’t afford to be seen as caving in. Retaliation may be in the offing.

If the US continues to refuse to comply with the 2011 panel decision and Canada finally does retaliate, by the time it does the dispute will have been around for eight years. And, of course, retaliation doesn’t end the dispute. It simply puts it into another chapter.

This is clearly one of the most frustrating of WTO cases and, regrettably, illustrates the weaknesses in the WTO dispute settlement system. It shows that if members want to prevaricate, delay or dissemble in meeting their WTO obligations, there are endless routes available.

While solutions are not easy, serious thought is needed on ways to improve the process and make it more efficient – without opening up the WTO Agreement, which is a non-starter anyway. Kicking around a trade dispute for the better part of a decade, is out of step with the real world of trade and commerce. It weakens public confidence in the value of multilateral dispute settlement.

 

TPP and Supply Management – Western Interests

Supply managed industries – such as the dairy producers – are largely centred in Eastern Canada and concern a very specific market segment. There are other parts of Canada’s agricultural industry, such as the beef, pork, grains and oilseeds, that are negatively impacted by Canada’s steadfast refusal to reduce supply-managed protectionism in international negotiations, notably the Trans-Pacific Trade negotiations.

The interests of these other – and very economically important – parts of the ag sector are often forgotten in public discussion of the TPP exercise. These producers have much to gain from a successful conclusion of the TPP.

See my comments in a recent edition of the Western Producer here.

Investment Disputes – Hot-Button Topic

I confess I’m not a fan of the Canadian Centre for Policy Alternatives. I find much of their stuff to be ideologically-driven and one-sided. I’m put off by their anti-free trade rhetoric and their congenital hostility toward the WTO and liberalized trade generally.

As a believer in the progressive development of international law, I don’t agree with those that dismiss the efforts of the global community to conclude legally-binding codes of conduct, whether in trade or other economic matters.

But I must say, the CCPA’s August 2015 report on Investor-State Dispute Settlement – “A Losing Proposition – The Failure of Canadian ISDS Policy at Home and Abroad” – is an interesting document.

Whether one agrees with its overall conclusion, and while some of its analysis can be questioned, it makes a useful contribution to the growing debate over ISDS. It’s definitely worth reading.

After reviewing the recent history of investment disputes involving Canadian investors around the world, the report says that Canadians have lost a high percentage of those cases. It concludes that ISDS hasn’t been particularly helpful in that regard and dismisses its utility as an instrument of Canadian policy.

In the reverse situation, it notes that Canada has been targeted in more investor-driven arbitrations under the NAFTA than the US and Mexico combined – a valid point. Because arbitrators found against Canadian environmental regulations, notably the recent Clayton/Bilcon decision, the report says Canadian policy in signing investment protection treaties is wrong-headed.

Typical of opponents of investor arbitration, there is questionable use of some of the data and the historical record in the document.

It throws in the Abitibi-Bowater settlement of $130 million in the list of NAFTA cases Canada has lost, when in fact that was a negotiated settlement and Newfoundland had made it clear at the very outset, when it expropriated Abitibi’s assets, that it would pay compensation.

Apart from the recent NAFTA panel award in the Clayton-Bilcon case where the damages haven’t yet been assessed, the amount paid out by Canada under NAFTA awards is less than $20 million, in comparison to the hundreds of millions of dollars claimed by disputing investors.

In typical CCPA fashion, the report raises the spectre of Canada being threatened in future investor claims under the NAFTA and other bilateral investment treaties, predicting that Canada will come under assault in a range of public policy areas, including environmental and public health and safety measures.

In its selective use of the record, the report doesn’t mention important NAFTA cases Canada has won such as Chemtura Corporation v. Canada, where the arbitrators dismissed the claim involving Canadian pesticide regulations, saying nothing in the NAFTA prevented governments from legislating or regulating for the public good. Or Dow Agrosciences v. Canada, where the case was withdrawn, the company conceding the right of Quebec to regulate the use of 2,4-D.

That being said, and whether one agrees entirely with its overall thesis, the report raises legitimate questions about the value of ISDS for Canadian investments abroad, given the record of Canadian losses over the last decade or so. Whether or not the scorecard is 100% accurate, it’s a valid question.

The irony is that, by pointing to the number and scope of unsuccessful Canadian investor arbitrations against foreign governments, the report implicitly recognizes that arbitrators have tended to side with governments as opposed to foreign corporations.

With those reservations, I find the report to be a useful document. It addresses growing interest – and concern – in the legal and trade policy community about the dramatically increased use of investment litigation and the enlargement of the scope of measures that are being challenged, not only in Canada but around the world.

Parenthetically, I guess when an investment treaty is concluded where governments say to corporations “You can sue me”, it’s not hard to understand why that option is taken advantage of.

The real shortcoming in the report is that it doesn’t come to grips with the central challenge governments are facing. With over 2,500 or so of these investment protection treaties around the world, it’s impossible to roll them back, cancel and re-negotiate them. Governments could choose to abrogate these treaties en masse but that just isn’t going to happen.

So what’s the solution? What can be done to re-calibrate ISDS going forward, to improve the process, enhance procedural transparency and, importantly, to allow appeals from arbitration decisions on matters of law?

The debate in legal and policy circles has taken us to the point where there is a fair degree of consensus over need re-balance ISDS, between the interests of foreign investors to be safeguarded against arbitrary governmental measures and the legitimate right of governments to legislate for the public good.

That’s really what we need to be talking about.

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There was an article about the CCPA reports in the August 5 edition of Embassy where I offered some comments. Click here

Supply Management – Begining of the End or End of the Beginning?

This blog was re-printed with some additions in the Toronto Globe & Mail’s Report on Business, 5 August, 2015. To read that op-ed commentary, click here.

The TPP talks in Hawaii last week – with much hoped-for anticipation – unfortunately didn’t reach agreement. The 12 countries were getting pretty close but some tricky issues remained unresolved – autos, patent rights, agriculture, among others.

Ministers will meet again to try to break the logjam, probably in Kuala Lumpur around the time of the APEC meeting near the end of August. It’s getting pretty close.

All eyes are on the Americans. Governments recognize that a deal has to be done by September-October to allow Obama to present it to Congress before the US election period starts in earnest.

In the Hawaii meetings, Canada came under repeated fire from the US, Australia and New Zealand because of the government’s refusal to make offers to reduce Canada’s prohibitive dairy tariffs. Canada prevents all but a very small volume of dairy imports to protect its regressive supply management system.

But at the 11th hour, Ed Fast, Canada’s trade minister, did something important. He put an offer out to those three countries to reduce Canada’s dairy tariffs and open up import quotas (called tariff-rate quotas or TRQs). This would apply to fluid milk and fluid milk equivalents with a phase-in period so that allowable duty-free dairy imports would expand over time.

Those three countries didn’t think Canada’s offer went far enough. But they didn’t reject it either. Negotiations will be continuing between now and the next ministerial meeting and Canada will be pressured to do better. So we’re now talking about numbers, not concepts.

Once an offer like this is made, the principle is established, the die is cast, and there’s no turning back. The concept of supply management (at least for dairy) is now on the table in a real sense. In the ongoing talks in TPP, Canada will be negotiating over volumes, tariff levels and timing.

The idea of Canada refusing to negotiate with trading partners over supply management has now been jettisoned. It’s just a matter of time – maybe longer or shorter – but the system’s days are numbered.

Trans Pacific Trade – Hold Your Horses

Many of us are hopeful that the Trans-Pacific Partnership (TPP) negotiations will wrap up sometime soon and that the deal will require Canada to open up its highly-protected dairy, poultry and eggs sectors – dairy being the most egregiously protected, outmoded Soviet-style regime.

Trade negotiations aren’t a zero-sum game, and if Canada has to compromise and possibly phase out supply-management over time, it will be in return for a forward-looking, comprehensive deal that gives Canadian exporters of goods and services major benefits of preferential access to markets in other TPP countries.

There’s been a lot of hype recently about the pressures on Canada to make concessions on supply-management because the TPP negotiations are moving to their final phase, now that Obama finally has trade negotiating authority from the US Congress.

Some of these comments haven’t looked closely at what that Congressional authority entails and how it will work. Timing in all of this is crucial and the timing is far from cut and dried. It certainly isn’t “fast track”.

If a deal on TPP is achieved at the Ministerial in Hawaii later this month, it will be a political agreement. If achieved, it will be an endorsement by trade ministers of all the key elements and, while not the final treaty text, we’ll know what Canada will have to give up on supply management in return for – we expect – major gains in other areas that make it a good deal for us overall.

That being said, it will be many more weeks before the text is finalized and put in legal form ready for formal signature by all TPP participants. I predict that won’t be until sometime next fall, maybe even late fall.

This raises critical timing issues.

Under fast-track, Obama has to give Congress 90 days’ notice of his intention to sign a TPP agreement. That means that even if the treaty text was fully scrubbed and finalized by September, the 90-day period would take us to December at the earliest.

But that’s only for Obama’s signature. Signature and implementation – followed by ratification – are very different things. A signed treaty like this one will need domestic legislation before it can be ratified and enter into force among all parties.

In Canada, ratification is fairly straightforward. Even when implementing legislation is needed, a majority government can table a bill in the House, get it passed and follow through with formal ratification in fairly short order.

It’s just not that simple in the United States. Once Obama signs the treaty – after the 90 day advance notice period – the US International Trade Commission has to complete an economic assessment of the deal and submit its report to the Congress. It has 105 calendar days to that. Only when that ITC assessment is done can an implementing bill be tabled by the president.

Both houses of Congress then have to consider and pass the TPP bill. That could take months. USTR Michael Froman has indicated previously that Congressional consideration of trade agreements typically take up to five months and even more.

All of this could bring us well into 2016, a period when the US will be fully engaged presidential election politicking — where nothing is predictable.

And there are eleven other TPP participants that will have their own internal treaty implementation processes to go through once the treaty is complete and the final text is available.

None of this doesn’t mean things couldn’t move quicker. But, even with a final TTP agreement, I think it will be many months go by before we get a clear sense of where matters stand in terms of timing.

The regrettable aspect  of this is that, if a TPP trade agreement is held hostage to political fortune for many months, it will give nay-sayers such as the Canadian dairy lobby time to use their deep-pocketed bank account to lobby against the deal.

Trans-Pacific Trade – Canada Under Pressure

With the passage by the US Senate of Obama’s long-sought-after trade negotiating authority this week, the Trans-Pacific Partnership (TPP) effort will start to move to its final wrap-up. Other countries were holding back until the necessary bill (called Trade Promotion Authority or “fast-track”) was enacted.

This will put tremendous pressure on Canada to open up its Soviet-style, protected supply-managed sector for dairy products, poultry and eggs, making it extremely tricky for the Harper government in an election year.

See my comments on all of this in the June 25 Globe & Mail Report on Business here.

More Criticism About Supply Management

There is no end to the thoughtful critics of Canada’s Soviet style supply management system for the dairy, poultry and eggs producing sectors.

Not only have leading Canadian think-tanks like the C.D. Howe Institute, the Conference Board and the School of Public Policy at U. Calgary produced reports highly critical of this antiquated system, here is what the WTO has to say, in a nutshell, about the serious defects of the system in its most recent Trade Policy Review – Canada (April 2015):

One of the weaknesses described regarding the supply managed system is the priority it gives to farmers over consumers. Supply management results in limited competition, both domestic and international. The target price to producers is largely based on average production costs and the system has not created incentives for producers to lower their production costs over the years. It therefore guarantees stable revenue for producers while transferring the cost onto consumers. In a context of growing global demand for dairy products, the system also hinders the competitiveness of the industry and may be preventing it from taking advantage of international markets. Finally, the system is maintained at the cost of trade barriers (quotas, and very high out of quota tariff rates).

It couldn’t have been better stated in such a succinct way – not only do Canadian consumers suffer from the system, Canada is losing out on major opportunities in global dairy markets. The question is this – why doesn’t the dairy industry wake up?