Written By Darrel H. Pearson and Jessica B. Horwitz
The election of U.S. President Donald Trump has heralded a new protectionist era of international trade. Since Trump's inauguration, the U.S. has withdrawn from the Trans-Pacific Partnership agreement, initiated discussions regarding NAFTA renegotiation, issued executive orders to ratchet up collection of customs duties and enforcement of trade remedy actions, and has begun examining strategies to ignore unfavourable WTO rulings. Far from being an outlier, this "My Country First" stance is increasingly reflected in markets around the world.
Canadian manufacturers and exporters are expected to take their cue to, respectively, protect their own interests and brace for increased use of protectionist measures by key trading partners. Canadian businesses that rely on imports should expect to experience an increase in Canadian government protectionist actions based on claims of diversion of imports otherwise destined for other protected markets such as the U.S., as well as general growing isolationism. It is important to be aware of the risks of increased trade actions and develop strategies to mitigate risk.
What Are Trade Remedies?
Trade remedies take the form of anti-dumping duties, countervailing duties, or safeguard measures, and are exceptions to the general rules limiting tariff and non-tariff trade barriers established under the various World Trade Organization (WTO) agreements. They are mechanisms by which countries may protect domestic industries against injury caused, or threatened to be caused, by unfairly traded imports. Trade remedies are therefore inherently anti-competitive in nature, and are being increasingly used both by developed and developing countries. Although the principle behind trade remedies is to level the playing field, trade remedy proceedings are statutorily designed to favour domestic interests. Trade remedies can also be used strategically by countries as a form of "tit-for-tat" in response to protectionist actions by trading partners.
Anti-dumping duties protect against "dumping", which is the export sale of goods into the Canadian market at prices that are lower than the normal value of those goods in their home market (measured as either sales prices to unrelated domestic purchasers, or constructed prices based on fully absorbed cost of production plus an amount for profit). Countervailing duties eliminate the impact of certain types of foreign government subsidies that cause prices of exports to be artificially low. Finally, safeguards, whether in the form of duties, quotas, permit requirements, a surtax or some combination thereof, are short-term measures that shield against the impact of an irregular surge in import volumes.
Under the WTO Anti-Dumping Agreement (Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994), Agreement on Subsidies and Countervailing Measures, and the Agreement on Safeguards, trade remedies may only be imposed by a member state if it conducts an investigation to determine that: (i) dumping, subsidization, or surge of imports has occurred and (ii) the unfair trade practice has caused injury to a domestic industry. In Canada, anti-dumping and countervailing are bifurcated proceedings conducted by the Canada Border Services Agency (dumping/subsidization determinations) and the Canadian International Trade Tribunal (CITT) (injury/causation determinations). Safeguard inquiries are conducted by the CITT with input from the Minister of Finance and/or Global Affairs Canada. These concepts and proceedings are esoteric and specialized and warrant retaining expert legal counsel.
"My Country First"
The anti-trade rhetoric of the Trump administration, as well as other recent nationalist developments such as "Brexit", is not unprecedented. Protectionism historically tends to rise in periods of financial downturn and therefore resort to trade remedy actions tends to be cyclical. Such was the case in the 1930s with the U.S. Smoot-Hawley Tariff Act, and the wave of government interventions in commerce the form of subsidies and "voluntary export restraints" during the oil and gold shocks of the 1970s and 80s. Slowed economies of the early 1980s and 1990s witnessed particular upticks in trade remedy cases. The 2008 financial crisis caused many states to once again look inward; based on 2016 statistics from the WTO, in 2016 the G20 economies were introducing new protectionist trade measures at the fastest pace seen in nearly a decade, rolling out the equivalent of five each week. The increase in cases coincident with the improved economies experienced today have more to do with protectionism and “my country first” than weakened economies.
U.S. Trade Representative Robert Lighthizer and Department of Commerce Secretary Wilbur Ross have both taken a hard-line stance on trade and have expressed commitments to engage in a greater number of trade enforcement actions, including self-initiation by the U.S. government of trade remedy actions. (Cases are normally brought to the attention of governments by domestic industries, but this is costly as compared to cases where the government undertakes the studies of pricing and competition required to underpin complaints of unfair trade practices.) Funding has been earmarked in the Trump administration budget to hire additional staff for this purpose and to increase enforcement of existing and future cases. The President has also issued executive orders aimed at increasing collection and enforcement of U.S. trade remedy duties, examining the impact of trade deficits on the U.S. economy, and assessing whether imports of steel and aluminum products pose a threat to U.S. national security, among others. The United States has also withdrawn from the Trans-Pacific Partnership treaty and re-opened NAFTA renegotiations. All signs point to a likely increase in unilateral actions by the U.S. that could harm Canada's interests, and which could in turn inspire a domino effect of reflexive protectionist actions by Canada and other countries to compensate.
How Can Trade Remedies Affect My Business?
Historically, trade remedies only affect about 1 to 2 percent of Canadian imports at any given time. But trade remedies have a disproportionately large and disruptive effect on the industries involved. Moreover, in recent years the complexity and financial impact of trade remedy cases has been increasing. Most free trade agreements do not eliminate trade remedies (the Canada-Chile Free Trade Agreement being an outlier), and indeed may increase their use. In the absence of tariffs, trade remedies are a last line of defence to protect domestic industries against foreign competition.
For importers, trade remedies have a significant impact on costs and sourcing of inputs and merchandise, and can violently disrupt supply chains. On the export side, if trade remedies are imposed by the government of a foreign country into which Canadian exporters sell, these exporters can find themselves suddenly cut off from customers in that market if assigned, as is more often the case than not, high duties. Finally, for domestic producers and manufacturers, trade remedies can provide a much-needed reprieve from foreign competition that is genuinely unfair, and can encourage the growth and development of domestic industries.
Strategies to Manage Risk
Importers and exporters, particularly those in high-risk sectors such as industrial and construction goods, should develop contingency plans to lessen the potential impact of unfavourable trade remedy actions. This should include diversifying procurement sources and/or export markets.
Businesses should also exercise caution to ensure that their trading practices are not causing injury that could trigger a trade remedy action. Canadian and foreign exporters should examine their pricing behaviours to ensure they are not selling below cost or at prices below those offered in the domestic market. Both importers and exporters should also carefully monitor market conditions in their industries, and be aware of their respective market shares and import volumes and the impact that those imports might be having on producers in the domestic industry. The cumulative effect of all imports should be considered. Although risk of being caught up by a trade remedy complaint is greater for market leaders, the cumulation principle means that even smaller players could be drawn into a proceeding even if their own sales/imports did not alone cause injury.
Finally, businesses should examine their contract terms with international suppliers and, where possible, negotiate terms that help insulate the company from the impact of trade remedies. Such terms are possible both for importers/resellers as well as end users. If there is an intermediate importer in the transaction, contracts should be reviewed to consider the "importer in reality" issue – duty liability accrues to the importer "in reality", and the importer in reality cannot be reimbursed by their upstream supply chain.
As an additional note, the flip side of a climate of heightened protectionist sentiment is that enforcement authorities will likely have a sympathetic ear to complaints by domestic producers. Businesses that produce goods in Canada and that are subject to foreign competition should assess whether there are any protections available under Canada's trade remedy system that could be used to their advantage.