A Step Towards the New NAFTA: Part II

On May 17, 2019, Canada and the United States agreed to remove reciprocal trade restrictions on steel and aluminum – the U.S. “national security” tariffs and Canada’s countermeasures. In Canada, the removal of the U.S. Section 232 tariffs without the maintenance of residual quotas or export restrictions (the initial U.S. condition) was considered an important “win.” While Canada did succeed in this regard, it did agree to “snap back” provisions; the tariffs can be re-introduced on a product-by-product basis in the event of a “surge” of imports of steel and aluminum beyond historic levels due to imports from third countries.

Although these “snap back” provisions are reciprocal, most observers view Canada as the party on the defensive. Given the aggressive track record of the Trump Administration and its frequent use of tariffs without reference to long-established international trade rules, Canadian trade officials have become particularly sensitive about the threat of third-country diversion of steel and aluminum and transshipment through Canada into the United States.

The steel and aluminum trade battle and subsequent “breakthrough” may be seen as an example of how the U.S. Administration’s aggressive “America First” trade policy is moving both the United States and its trade partners away from the principles and disciplines of free trade. Trade disputes are increasingly dealt with through temporary deals and the adoption of managed rather than free trade. Canada’s moves to allay U.S concerns about the diversion of offshore steel from the United States to Canada may well be largely what motivated recent amendments to the Customs Tariff that will allow Canada to re-impose provisional safeguard tariffs on steel and aluminum in a way that appears to run counter to international trade rules. 

Following the agreement to end the tariffs, Prime Minister Trudeau met with President Trump at the White House in June to discuss a number of matters including the ratification of the CUSMA. During their scrum with the media, when questioned about the tariffs, President Trump referred to continued U.S. concerns about possible future transshipment of cheap steel and aluminum and indicated, “If there’s transshipping I’ll call Justin and he’ll take care of it …” The PM quickly replied, “We’ll be fine.”

This exchange at the highest level illustrates the continued pressure on Canada and its corresponding sensitivity. In this context, it is interesting to note the recent changes to Canada’s trade remedies regime which, at least in part, reflect its determination to avoid the resumption of U.S. tariffs.

Safeguards are trade restrictions that a country can apply to address a sharp increase in imports that cause or threaten to cause serious injury to a domestic industry. Safeguards measures applied via tariffs and/or quotas or tariff-rate quotes are permitted on fairly traded goods under WTO rules. However, the WTO puts limitations on their use since they are not in response to WTO-inconsistent dumped or subsidized goods.

Canada is a signatory to the WTO Agreement on Safeguards which includes clear limitation on the ability to impose safeguard measures on a provisional basis. Provisional measures are allowed for up to 200 days, during which an independent investigating authority must determine whether the safeguard measures are justified. In addition, WTO rules prevent countries from simply quickly re-imposing other provisional safeguard measures once the initial measures have been rejected by the investigating authority. The WTO rules specifically prohibit the re-imposition of a safeguard on the same products for at least two years.

In the context of steel and aluminum, in October 2018 Canada applied provisional safeguards on seven steel categories, citing concerns that sharp increases in low-cost steel imports may harm the domestic steel industry. In Canada, the required independent administrative review is carried out by the Canadian International Trade Tribunal (“CITT”). On April 3, 2019, the CITT determined that the safeguards were not warranted on five of seven steel categories. As a result, Canada was required to remove the safeguard quotas and surtaxes that it had imposed on five steel categories.

However, following the CITT determination, the Government of Canada continued to express concern about the spectre of the threat of low-cost steel imports. On June 3, 2019, it introduced amendments to Canada’s trade remedies regime, eliminating the two-year limitation on Canada’s ability to re-impose safeguard measures. Canada’s move to amend its trade remedy regime is aimed at ensuring Canada is able to react more quickly to the threat of import, and was justified in light of an increasingly dynamic, volatile and interconnected global marketplace.

Although pressure from the domestic steel and aluminum industry and continued concerns about their vulnerability were important factors driving Canada’s approach in the broader context, the amendments to the Customs Tariff and the Special Import Measures Regulations will allow Canada to move more quickly to address U.S. concerns.

On June 5, 2019, Canada introduced legislation that has since entered into force, that amended the Customs Tariff. Previously, the Customs Tariff stated that goods that had been subject to safeguard measures in Canada could not be subject to additional safeguard measures for a period of two years after the initial measures. The amendment repealed that two-year prohibition. Therefore, now additional provincial safeguard measures may be placed on goods that had been previously subject to safeguard tariffs for a period of two years.

In a twist that passes the issue to future governments, the legislation provided a snap back to the original two-year standstill provision two years after the date the amended legislation entered into force. This not only passes the issue to the next government, it makes it a difficult target for our trade partners in the WTO context. Suspending the two-year standstill is likely to meet complaints from Canada’s trade partners that this is inconsistent with WTO obligations under the Agreement on Safeguards. However, the measure is set to expire well before a WTO challenge could be completed.

It should be noted that the amendments to the Customs Tariff that now enable Canada to re-impose provisional safeguards on the same products for the CITT have been reviewed and rejected. The Export and Import Permits Act, which prohibits the addition to the Import Control List of any goods subject to a re-imposed safeguard before the period required by the WTO rules has elapsed, were not changed. As a result, any safeguard that is re-imposed would have to take the form of a tariff rather than a quota or tariff-rate quota, as quotas are administered through the Import Control List.

Canada has stated that such measures are “needed to stabilize Canada’s steel market, and further protect Canadian steel workers and producers from global instability and the harmful effects of potential surges in imports.” This is an understandable and “real politic” approach, but the speed with which they were put in place underlines the pressure of Canadian officials to avoid a re-launch of U.S. Section 232 action. Canada responded to the U.S. “national security” action tariffs on steel and aluminum with its own unilateral tariffs in retaliation. Canada and other countries are responding to the Trump Administration’s trade actions without reference to WTO rules. Canada’s changes to its safeguard rules are but another example of the deterioration of international trading disciplines.

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