Written by Darrel H. Pearson, Sabrina A. Bandali, and Jessica B. Horwitz
The Government of Canada has released its updated list of U.S. products that will be subject to a surtax when imported into Canada as of July 1, 2018. The final list targets approximately $16.6-billion worth of goods as a response to the U.S. section 232 tariffs imposed on Canadian steel and aluminum products. A 25% surtax applies to imports of listed steel products and a 10% surtax applies to listed aluminum and other goods.
Scope of the Countermeasures
Most listed goods are the same as the May 31 draft list discussed in our previous blog post on this issue. A number of items were removed from the provisional list in response to stakeholder consultations held throughout the month of June: beer kegs, prepared mustard, and nut and fruit purées. The government has also narrowed the scope of some goods, by targeting goods based on a more specific classification, as in the case of cast-iron grills, refrigerator-freezers, and pillows.
The surtax only applies to U.S.-origin goods, i.e., those marked as U.S. goods in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations. All importations, whether personal or commercial, will be subject to the surtax applied as a percentage of the value for duty of the imported good, and the surtax will apply notwithstanding any entitlement to preferential duty rates under free trade agreements.
Relief and Guidance for Importers
The government’s duty relief and duty drawback programs will continue to apply, and may offer some relief for importers in limited circumstances. These programs are trade incentives that allow importers to avoid paying or be refunded customs, anti-dumping or countervailing duties so long as the imported goods are intended for export or are eventually re-exported.
The government has also released two policy documents to guide importers and businesses affected by the tariff: Customs Notice 18-08 and Memorandum D-16-1-1. This policy guidance provides details of how the surtax will be applied and the correct manner of accounting for goods that are subject to the surtax.
Safeguards on the Horizon
Although the countermeasures will have a significant impact on Canada-U.S. trade, the Canadian government has signaled that its response is far from over, announcing a variety of funding and other mechanisms to soften the impact of U.S. measures on the Canadian steel, aluminum and manufacturing industries. While Canadian Minister of Foreign Affairs, Chrystia Freeland, was quoted as saying "We will not escalate and we will not back down," the Canadian government’s news release foreshadows strong actions on the horizon, including potential safeguard actions to protect energy tubular, steel plate and rebar products manufactured in Canada.
Safeguards are temporary restrictions on importations for specific goods. Given Canada’s commitment to the rules-based international trading system, if safeguards are imposed, they would be grounded in the GATT 1994 and WTO Agreement on Safeguards. This means that Canada would only be allowed to apply safeguards for a limited period of time, and only if it can show that imports of particular goods are causing or threaten to cause serious injury. WTO rules also require that safeguards be imposed globally, i.e., not targeted at particular countries, although there are possibilities for exemptions of partners under free trade agreements in certain circumstances. The determination of injury is made by the Canadian International Trade Tribunal (CITT), which will conduct a safeguard inquiry in accordance with the CITT Act, CITT Regulations and CITT Rules. In the normal course, a safeguard inquiry may take from 180 to 270 days from initiation in order for the CITT to report and make recommendations to government.
If the CITT inquiry concludes that serious injury is occurring or is threatened, it has the ability to recommend a variety of safeguard measures, including import surtaxes or other restrictions such as import quotas or tariff-rate quotas. Under Article 8 of the Agreement on Safeguards, however, a country imposing safeguard measures must balance their effects by compensating trading partners through concessions or other obligations. If the two trading partners are unable to agree on the appropriate compensation within 30 days, then the other country may retaliate by imposing countermeasures in turn.
Although safeguards are designed to protect domestic manufacturers from influxes of cheaply priced competitor goods, they have the collateral effect of restricting the available sources of supply for covered products. This can result in unintended impacts on consumers and companies that rely on imports for their own manufacturing, such as cost increases or difficulty securing necessary materials if domestic inventories are limited.
The Canadian government is clearly doing its best to mount a proportionate response to the U.S. tariffs that minimizes negative effects on the Canadian economy. Trade wars, like any conflict, cannot be waged without at least some damage to both sides. Companies with an interest in Canadian international trade should closely monitor developments and assess the impact on their businesses, including by reviewing the tariff classification and origin of potentially impacted goods. Alternatively, Canadian importers and exporters may pursue opportunities from Canada’s free trade agreements with non-U.S. markets. Supply chains may also shift to source from low cost countries. Business impacted by the countermeasures have various ways to participate in trade proceedings and make their voices heard, and should consult legal counsel to explore these options.