Written By Darrel H. Pearson, Jessica B. Horwitz, Sabrina A. Bandali
As of midnight on May 31, the Trump administration revoked the exemptions to the U.S. ad valorem tariffs on imports of steel and aluminum previously granted to Canada, the EU, and Mexico. In a swift response following the U.S. announcement, Canada (as well as the EU and Mexico) declared its intention to impose retaliatory tariffs against U.S. exports.
President Trump imposed the tariffs through presidential proclamations under an obscure provision in U.S. domestic law, Section 232 of the U.S. Trade Expansion Act of 1962. The chosen legal mechanism is irregular and trade experts question its application given the requirement that true national security risks exist. WTO Agreements permit application of protective tariffs under other conditions, including dumping, subsidization, and import surges, but the U.S. government has chosen to take the Section 232 route which is not burdened by the rigor of as many procedural steps and satisfaction of legal conditions (other than security risk). "National security" in the U.S. usage includes the "general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements, which are critical to minimum operations of the economy and government."
The move was naturally seen by the Canadian government as an aggressive tactic by the United States to pressure its trading partners into making trade concessions, notably with respect to Canada and Mexico in the NAFTA renegotiations. Canada's Minister of Foreign Affairs Chrystia Freeland described the U.S. tariffs as a "specious and unprecedented use" of the Section 232 national security exemption.
The list of U.S. products proposed to be subject to Canadian retaliatory measures is available on the Department of Finance website. These are "dollar for dollar" countermeasures on similar categories of U.S. steel and aluminum products as the Canadian products targeted by the United States, as well as 71 categories of other industrial and consumer goods. The collective value of imports of the targeted products is C$16.6 billion (US$12.8 billion) per year, which is approximately the same value as Canadian steel and aluminum exports to the United States affected by the U.S. tariffs. Minister Freeland described it as the strongest trade action Canada has taken in the post-war era.
Canada also announced that it has filed requests for consultations at the WTO over the legality of the U.S. steel and aluminum tariffs, and has requested consultations with the United States under Chapter 20 of the NAFTA.
China and India have already filed requests for consultations through the WTO (DS544 and DS547), and other member states have asked to join these consultations. The EU, Japan, Russia, Turkey, India and China have also notified the WTO of their intent to impose countermeasures against the United States in response to the steel and aluminum tariffs.
This unequivocal response demonstrates that key U.S. trading partners will not easily capitulate to pressure from the U.S. administration. However, it also means that there will be significant economic disruption and additional costs in the short to medium term for Canadian businesses who trade in the targeted products.
In addition, on May 23, the U.S. Commerce Department initiated another national security investigation into automobiles and auto parts. Given the integration of the North American auto industry, auto tariffs would cause substantial economic disruption to manufacturing supply chains. The threat of Section 232 tariffs on auto parts could significantly increase the negotiating advantage of the United States against Canada and Mexico in the NAFTA negotiations. The default "Most Favoured Nation" U.S. tariff rate applicable to Canadian and Mexican originating auto parts in the absence of NAFTA is only 2.5 percent, which pales by comparison to a 25% Section 232 surtax.
And, if NAFTA leverage is the U.S. motivation for these Section 232 tariffs, there is no reason to believe that it will stop at steel, aluminum and autos; the U.S. could initiate investigations into other categories of goods. Looking ahead, these actions may be precursors to further protectionist trade measures undertaken by both sides.
Legal Framework—WTO Countermeasures
The WTO challenges brought to date against the U.S. actions are grounded in Article XIX of GATT 1994 and the Agreement on Safeguards. Safeguards are exceptional, emergency measures that member states are allowed to undertake for a limited period of time when imports of particular goods are causing or threaten to cause serious injury to the importing member's domestic industry (Agreement on Safeguards, Article 2). Generally, a member applying a safeguard measure must balance the effect of the safeguard by compensating trading partners through concessions or other obligations. If the trading partners cannot agree on the appropriate compensation within 30 days, then the exporting partner may retaliate by suspending “substantially equivalent” concessions or other obligations, i.e., imposing countermeasures.
Canada's countermeasures will most likely take the form of a surtax under the Customs Tariff Act on listed products, but could also involve quantitative restrictions (i.e., import quotas or tariff-rate quotas under the Export and Import Permits Act), or some combination of tariff and non-tariff measures.
The list of countermeasure products may seem random, but it is anything but. WTO countermeasures need not be imposed against the same products targeted by the measures of the offending state. Typically, a retaliating state will choose items that will exert the greatest political pressure on the offending member state and avoid those needed for use as inputs by domestic manufacturers. Canada's list appears carefully developed to target the home states of prominent members of Congress, and/or swing electoral districts in the upcoming U.S. congressional elections this fall. Some examples, with targeted, though not exclusive, States in parenthesis, include:
- household appliances, beer kegs and ketchup (e.g., Pennsylvania—American Keg Company and Heinz);
- roasted coffee (e.g., Washington state—Starbucks);
- whiskies(e.g., Kentucky—home state of Republican Senate majority leader Mitch McConnell);
- candles and soaps (e.g., Ohio);
- boats (e.g., South Carolina);
- maple syrup (e.g., Maine);
- orange juice (e.g., Florida); and
- fruit jams, soy sauce, facial tissues and felt-tipped pens (e.g., Wisconsin—home state of Republican House Speaker Paul Ryan).
The Canadian government also would have considered alternative availability of the products from domestic or non-U.S. suppliers in order to minimize the disruptive impact of the tariffs on Canadian importers.
The surtax will be assessed on an ad valorem basis, meaning calculated as a percentage of the declared value for duty of the imported goods. This reinforces the importance of accurate customs valuation accounting, and of designing commercial import transactions in a manner that minimizes the customs value.
With respect to enforcement of the countermeasures, only goods of U.S. origin will be subject to the countermeasures. Goods merely in transit through the United States, or goods that incur minor processing in the United States that does not affect the origin (such as marking, tagging or packing) and which are onward shipped to Canada will not be subject.
An important challenge will be the identification of whether goods are subject to countermeasures by virtue of their origin, particularly with respect to fungible or difficult to mark products such as food. Origin for countermeasures purposes will be determined under the rules contained in Canada's Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations.
Finance Minister Bill Morneau released a statement on March 30, 2018 that Canada will also be expanding the scope of its country of origin marking regime for steel and aluminum products. The public consultation period for proposed amendments of the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations and the Determination of Country of Origin for the Purpose of Marking Goods (Non-NAFTA Countries) Regulations closed on May 14. These changes are designed to improve the Canada Border Services Agency's access to information and ability to identify source countries, volumes and prices of subject goods, which could in turn lead to more self-initiated Special Import Measures Act (SIMA) investigations.
Note that the currently proposed Canadian countermeasures are to be proportional to the value of trade affected by the U.S. steel and aluminum tariffs. If the U.S. administration were to impose tariffs on additional categories of goods, Canada's countermeasures will expand to reflect an equivalent value of trade of the new category.
What Can Businesses Do to Protect Themselves?
It is critical that Canadian importers and exporters review their trade policies and examine their supply chains in light of the new trade law paradigm. Canadian importers and exporters exposed to risks of U.S. trade policy are advised to consult with experienced international trade counsel immediately to help gird themselves for the fight, and to explore strategies to defend themselves and minimize risk to business outcomes caused by these or future "trade war" measures.
The following are some thoughts to keep in mind when planning risk response strategy:
- Importers should immediately review the HS classifications and description of their imported goods to see whether they import goods covered by the proposed countermeasures list, and then further review to ascertain whether any covered imports are of “U.S. origin”.
- The Government of Canada has invited members of the public to comment in response to the proposed countermeasures consultation. The deadline to submit comments is June 15, 2018. Interested parties, including U.S. exporters, should seriously consider making submissions.
- The countermeasures will apply to goods that enter Canada on or after the July 1 effective date regardless of whether the goods were already purchased or pre-ordered prior to that date, although the Finance Canada notice states that goods in transit on the effective date will be exempted. Importers should therefore also review existing orders and expected ship dates, assess risk that the shipments could be subject to the surtax, and consider options to accelerate shipment, delay the acquisition, or switch to a non-U.S. goods supplier to avoid additional costs. In this connection, diversification of input sources and export markets should be examined.
- Businesses should recall that the countermeasures, as well as typical current or future trade remedy duties under the SIMA, will be implemented on an ad valorem (percentage of value) basis. Importers should account for the additional tariff when budgeting. The ad valorem nature of the tariffs also underscores the importance of taking steps to legitimately reduce value for duty through thoughtful planning of the commercial structure of the sale for export, to minimize tariffs.