Bennett Jones
Produced by Darrel Pearson, Valerie Hughes and John Weekes
Listen to how Canada's relationships with its key trading partners are shaping the landscape of Canadian international trade. Darrel Pearson hosts a discussion with Valerie Hughes and John Weekes on Canada's trading relationship with the United States, how the CUSMA will affect Canadian businesses, trade and investment relations with China, Canada's unique position with its CPTPP and CETA partners, and the importance of the WTO to Canada.
Transcript
Speaker 1:This is Business Law Talks. The Bennett Jones podcast series that sits at the intersection of law and policy. Join our lawyers and advisors as they examine today's most complex issues to help guide companies doing business in Canada.
Darrel Pearson:Welcome to Business Law Talks. I'm Darrel Pearson, and I lead the international trade and investment practice at Bennett Jones. I will be serving as the moderator for today's podcast, which examines Canada's present and future international trade policies. We will look in particular at Canada's relationships with its key trading partners. I'm joined today by two members of Bennett Jones exceptional public policy team in our Ottawa office. John Weekes, a senior business advisor at the firm, and Valerie Hughes, a senior counsel, and a leading global expert on WTO Law and Practice.
Darrel Pearson:For almost 30 years, John worked in the Canadian government on the development of trade policy. He served as Canada's ambassador to the WTO, was chair of the WTO General Council, and led Canada as our chief negotiator of the NAFTA. Valerie has served as counsel for the government of Canada before WTO panels, and the Appellate Body as an adjudicator in WTO disputes, and as the only person to serve both as director of the WTO's Legal Affairs Division, and as director of its Appellate Body secretariat.
Darrel Pearson:The United States remains Canada's most important trading partner with 70 to 75% of our outbound trade going to the US. While we maintain a strong relationship with the United States, the last four years I've seen it deteriorate despite the signing of the new Canada-United States-Mexico Agreement. The coming US election could result in a change in the presidency and a change of control in either, or both houses of Congress. So let's begin our discussion. John, we have an important election going on south of the border, what do you see when you look at the current and future political and economic landscapes as backdrops to Canada-US trade policy?
John Weekes:Of course, the United States remains by far our most important foreign market, and that is not going to change. Under the Trump administration, US trade policy has been erratic and passionately America first. To begin to understand what happens next year, we need to know the outcome of the American election in November. If Trump wins, expect more of the same, but probably worse as the president will no longer need to worry about his reelected prospect. If Biden win, American trade policy will still be focused on what is there for the United States. But it will be tempered by a recognition that the rule of law in international trade relations also benefits Americans. It will also be tempered by an interest in working with allies to try to bring China more effectively into the rule state system.
John Weekes:We should bear in mind, however, that Biden has promised to cancel the permit for the Keystone XL Pipeline Project, and has promised to institute a vigorous Buy America policy. Canadians need to be preparing now for how to deal with either Trump or a Biden victory.
Darrel Pearson:Okay. Over to Valerie, do you think the US election will have a significant impact on Canada's trade and investment with the US? Can we expect the US administration to continue to resort to trade laws in order to implement their policies? If that's to be the case, how do you think that's going to impact Canada?
Valerie Hughes:If president Trump is reelected, he will continue to use his favorite weapon, tariffs, to try to reign in China, and perhaps also Europe. Canadian exports have also been subject to tariffs in the steel and aluminum sectors, which President Trump claimed were necessary for national security reasons. Now, we probably wouldn't see Biden relying on tariffs in the same way. For example, he's unlikely to claim they're required for national security interests. But we should not assume smooth trade sailing with a Biden administration. Biden plans a $400 billion increase in government spending, but only for US made products. He calls this his Buy America plan that John mentioned.
Valerie Hughes:Biden is also outspoken on climate change. So we could see discriminatory measures being imposed on foreign products, if they're perceived to have been produced in a way that is environmentally unfriendly. We're also likely to see continuing problems for Canada softwood lumber exports, regardless of whether Trump or Biden is elected. The softwood lumber agreement provided some really welcome relief against high US duties in this sector. But the agreement expired in 2015, and we haven't been able to negotiate a new one since. So it's unlikely that softwood lumber is going to be near the top of the president's priority list, regardless of which one wins.
Darrel Pearson:Well, it sounds like we're going to experience a high degree of uncertainty in our trade relationship with the United States. Now, Canada, Mexico, and the US just expended a great deal of effort over the last two years seeking to update and improve the NAFTA. I have to admit that my impressions are that there have been only a few select changes with the new NAFTA. Have we made any real progress, John?
John Weekes:I think we have, Darrel, to see areas with significant changes or the automotive rules of origin and the labor provisions of the agreement. The new automotive rules are designed to ensure significantly increased production in North America, and could require significant increases in the wages paid to automobile workers in Mexico. These new regulations of complex and provisional trilateral regulations have been put in place, but they may need to be adjusted in the light of practical experience. How they are adjusted will be critical for the automobile industry. Making sure it works for the Canadian industry will be a big task for the government and the private sector.
John Weekes:The labor provisions of the US MTA are unprecedented. Ensuring respect for key international labor standards and providing dispute settlement with was key. Ensuring Proper implementation of these rules will require careful attention in the early years of the agreement. There may well be divergent interests in Canada on how this is done, and that will require careful political manner.
Darrel Pearson:Now, were there improvements in the charisma that will impact, perhaps benefit Canadians?
Valerie Hughes:Well, one important improvement in the new NAFTA relates to the state to state dispute settlement system or procedural loophole under the old NAFTA. So it was possible to block the establishment of a dispute settlement panel, and then avoid a negative ruling. So as a result, the system was rarely used after the first few years. The new dispute settlement system has fixed that loophole. So we could see more regularly used by Canada of the NAFTA dispute settlement mechanism to resolve trade problems.
Valerie Hughes:Now, this is more important than we might've thought it would be. We have had the WTO dispute settlement mechanism to back on. Canada has been an active user of that system, including bringing cases against the United States. However, the WTO system has been crippled by US action to destroy it. So it's helpful to have the new NAFTA system as a reliable alternative.
John Weekes:I'd like to pick up on that concept of trade disputes, and the lack of potential WTO dispute settlement going forward. It occurs to me that the economic impacts of the pandemic have been disrupting traditional relationships amongst suppliers and purchasers. It certainly hasn't been business as usual. It also seems to me that we might expect to see increased use of trade remedies within the North American market. Businesses will face competition, both domestically and from imports as they navigate the COVID and its aftermath.
John Weekes:These businesses will react to perceive an actual threats from imports, which will arise from a lack of balance between supply and demand within those countries exporting to Canada from around the world. I think we should anticipate that foreign companies will seek export markets, like Canada, for their surplus production. We Should anticipate they will do so at competitive prices, which are meant to recover at most their variable costs and perhaps the contribution to fixed costs.
Darrel Pearson:Let's turn next to China. Canada's relationship with China has been impacted both directly by Canada-China trade irritants, and indirectly by the trade war between the US and Canada. What's the current state of play in our trade and investment relations with China? Where do you see it going next? Let's start with John.
John Weekes:Thanks, Darrel. This is not going to be an easy process. Under president [inaudible 00:10:57], the role of the state in the Chinese economy has increased. This has resulted in a less market oriented economy, and one that is consequently less disciplined by the WTO rule. It is in the interest of all the major market oriented economies to work towards the objective of more effectively bringing some of these economic behavior under WTO discipline. Among other things, this will require negotiation of more effective WTO rules on subsidy.
John Weekes:Canadian exports to China have become collateral damage in the deterioration of the Canada-China political relationship, including notably the tension over the main one through arrest and extradition hearing. Of course, in recent days, the relationship has further deteriorated. Of course, the Chinese market remains very interesting for Canadian exporters of commodity products, but once Canadian exporters get a significant foothold in the Chinese market. The Chinese have shown how they can turn that into leverage against those exporters and against Canada.
John Weekes:We believe that the government could let Canadian exporters know that the effectiveness of any practical help they might expect to receive from the government will be limited by the superiate in the political relationship. Perhaps the most useful thing that Canada can do at this stage is to try to increase this leverage by engaging in discussions with other countries exporting agricultural products to China to discuss possible common approaches for dealing with that market.
Darrel Pearson:I think what you're saying is, it's not easy if you choose to go it alone against China. Finally, let's turn to Canada's trading with an investment in country partners in the CPTPP and in Europe and the United Kingdom. Canada has a plethora of free or enhance trade treaties with countries all over the world. The two most recently accomplished are with the EU known as the CETA, and with CPTPP countries, essentially being those countries bordering the Pacific with the most notable exception being the United States. The seat will be somewhat transformed with the advent of Brexit and a separate treaty with the United Kingdom. John, how should Canada take advantage of its unique position in these broader trading relationships?
John Weekes:Canadians should continued to work to take full advantage of these relatively new great agreements with the EU, Pacific nations, and of course, Japan. Reinforcing Canadian participation in these markets would be enormously beneficial to Canadian businesses. Indeed, in these market oriented economies, the scope for long-term beneficial trade is significantly greater than it is with China. The government should continue to focus on the remaining restrictions that frustrate Canadian export to these markets, such as arbitrary sanitary restrictions on Canadian meat exports to the EU.
John Weekes:On December 31, the United Kingdom will complete its transition out of the European Union. The government should work to ensure an arrangement with the UK to continue to be the light treatment to our trade as of January 1. The next step will then be to negotiate an improved free trade agreement with the UK that would further strengthen the prospects for closer business ties. At the moment, Canada has a competitive advantage over the United States in many of these markets because the US does not have a free trade agreement with Europe, and is not partying to the CPTPP.
John Weekes:The United States is trying to negotiate a free trade agreement with the United Kingdom, but negotiations have not progressed as quickly as the parties had hoped. Some have argued that the US will try to rejoin the CPTPP if Biden wins the election in November. This is not likely going to be in the top of Biden's mind if he does win the presidency. However, over several years, it is likely that US businesses will push them in that direction. It's worth reflecting that if the United States does join the CPTPP, they could also encourage China to consider accepting new market oriented trade discipline.
Darrel Pearson:I don't think we realize how fortunate Canada is as a result of being placed in this position as a result of government negotiations with countries all over the world. What I hear you saying is we should strike while the iron is hot and build on these trading relationships while Canada has a competitive edge over the US.
John Weekes:Exactly.
Darrel Pearson:John and Valerie, there's been significant criticism of the WTO by the Trump administration, and in contrast, considerable support by Canada for this institution. What are your thoughts about the importance of the WTO to Canada in the years to come? Let's start with Val.
Valerie Hughes:Canada has been a frequent user of the WTO dispute settlement system, but the US has managed to cripple that system by blocking appointments of judges to the WTO Appellate Body. As a result, the Appellate Body no longer has enough members to function. However, earlier this year, Canada joined 24 other WTO members to establish an interim appeal arbitration mechanism. It's called the MPIA. Now hopefully Appellate Body will be restored in the near future, but in the meantime, the MPIA ensures that at least some WTO members, including Canada, will have access to an Appellate level for their trade disputes.
Valerie Hughes:Unfortunately, the US and some other important players, such as Japan, Korea, Russia, South Africa, they've not yet signed up to the MPIA, and they may never do so. Certainly the United States is not going to do so under a second Trump administration. Now under Biden, I suspect the US may prefer to focus on restoring a new and improved Appellate Body rather than participating in the MPIA.
John Weekes:Val, I agree with all of that. Now turning it to the WTO rule, there are some issues that can only be tackled on a multilateral basis. Although the WTO is undergoing significant balances, it is the only forum for negotiating new rules on subsidies and digital trade, which will apply across the world, including to China. Canada has always been a strong supporter of the WTO, and it must continue its leadership in the WTO reform effort so that the WTO will be better able to promote and protect the multilateral trading system on which Canada rely.
John Weekes:This is critical because many WTO rules are broader than those found in existing FDA. For example, the new NAFTA does not include discipline on government procurement between Canada and the US. But both countries and several others are bound by the non-discriminatory procurement discipline in the WTO Government Procurement Agreement. The WTO also includes international disciplines on safeguard, dumping, illegal subsidies, and countervailing duty. Canada can challenge the US compliance with these rules before WTO panel, and has done so successfully many times, including in relation to softwood lumber. Whereas under the old and new NEFTA, Canada is limited. Its challenging whether the US have properly applied its domestic trade remedy laws.
Darrel Pearson:Thank you, John, and thank you, Valerie, for those thoughtful reflections on Canada's current relationships with key trading partners. Thank you to our listeners. We hope you join Bennett Jones Business Law Talk series again. For more information on our podcasts, the international trade and investment practice at the firm, or to access our COVID-19 resource center, please visit bennettjones.com.