Observations on Canada-U.S. Trade Relations in 2005

Article by Cliff Sosnow, ©2005 Blake, Cassels & Graydon LLP

The U.S. market is clearly Canada’s top trade priority, but there are several simmering disputes including the notorious softwood lumber dispute that may require Canadian business to reconsider purchasing strategies, cost projections for inputs and sources of supply if these disagreements aren’t solved. The mantra of the Canadian government in 2005 is that Canada and Canadian businesses need to put greater focus on China and India to prepare for the challenges and opportunities in those markets. If not, the government warns, "we will be left behind."

While it makes sense for the government to promote these markets, Canada’s business community is maintaining its emphasis on the U.S. market.

Canada’s Trade Minister, Jim Peterson, acknowledges that Canada’s relationship with the U.S. will continue to dominate trade policy. And Prime Minister Paul Martin recently joined President Bush and President Fox in launching a North American Security and Prosperity Partnership, designed in part to face the challenges by the new economic powerhouses of China and India.

While the American market is Canada’s top trade priority, there are several disputes that may require Canadian businesses to reconsider purchasing strategies, cost projections for inputs, and sources of supply if these disagreements aren’t resolved. Here’s why.

Canada, along with seven other countries, launched a successful WTO complaint against the U.S. Byrd Amendment, which requires the U.S. Treasury to forward duties collected from an anti-dumping or anti-subsidy order to U.S. firms petitioning for the duties.

The WTO gave the U.S. until December 27, 2003 to comply with the WTO ruling, a deadline it failed to meet. The WTO then authorised Canada and the seven other countries the right to raise tariffs on imports from the U.S.

Until the end of January, Canada and the other countries had made the decision to wait pending signals emerging from Congress concerning compliance with the WTO ruling against the Byrd Amendment. The signals have not been good. Congress seems firmly entrenched in its desire to maintain the Amendment.

Canada announced on March 31, 2005 that it is retaliating against the U.S. effective May 1, 2005 when it will apply a 15 per cent surtax on imports of U.S. live swine (tariff heading 01.03), cigarettes (tariff heading 2402.20.00), oysters (tariff heading 0307.10) and certain specialty fish, in particular, ornamental fish (tariff heading 0301.10.00) and frozen talapia or monkfish (tariff heading 0303.79.00).

The current retaliation of C$14 million is relatively small compared to the billions of dollars that could be levied should duties collected on Canadian softwood lumber imports be dispersed to competing U.S. firms under the Byrd Amendment. That decision is intertwined with separate litigation, negotiation and WTO retaliation proceedings that are plaguing this industry.

This is the toughest, most complicated of trade disputes affecting Canada-U.S. relations. Canada has, to date, eight victories before NAFTA and WTO panels, but has been unable to resolve the issue.

In a sign of mounting frustration, Canada in mid-February asked the WTO for authority to retaliate in the amount of C$4.25 billion, which is the amount of softwood lumber cash deposits currently held with the U.S. Treasury collected since May 22, 2002 from a U.S. "threat of injury" anti-dumping determination. Canada claims that a WTO panel found this determination violates U.S. WTO obligations. The final ruling on this issue will not occur until late 2005.

Should the U.S. Treasury between now and the retaliation ruling decide to distribute the multi-billion dollar cash deposits to the U.S. softwood lumber industry under the Byrd Amendment, Canada would be permitted to retaliate by up to 72 per cent of the amount distributed regardless of the outcome of Canada’s recently launched retaliation proceedings.

In addition to this dispute, Canada also asked the WTO in mid-January for authority to impose C$200 million in sanctions on U.S. imports. Canada claims that the U.S. has failed to comply with a ruling faulting a U.S. anti-subsidy investigation on softwood imports. In mid-February, both parties agreed to suspend the dispute to give the U.S. until early May to comply with the WTO ruling.

A possible trade dispute indirectly affecting Canada-U.S. trade involved the textile and apparel industry.

After a 10-year transition period, import quotas on textiles and apparel in the U.S. and Canada were eliminated at midnight December 31, 2004 under the WTO’s Agreement on Textiles. China is expected to be the main beneficiary of this trade liberalization. U.S. textile groups want the United States government to impose a special textile safeguard that allows WTO members, including Canada, to limit imports to 7.5 per cent above recent trade for up to one year.

Last year, several U.S. trade associations filed controversial safeguard petitions based on the threat of a surge of Chinese exports rather than an actual surge. Actual data on textile and apparel import levels in January of 2005 have been released in mid-March. Industry groups will likely re-file safeguard petitions based on this data.

Should U.S. safeguard actions cause a diversion into the Canadian market, the Canadian government likely will launch safeguards to limit imports of textiles and apparel into the market.

While the overwhelming volume of Canada-U.S. trade is trade dispute and sanctions-free, yet the disputes that exist have an enormous impact at the legal, political, policy and business level. Companies involved in these disputes are paying attention. Given their far-reaching impact, due diligence suggests that even companies and their corporate counsel not directly affected will want to understand the impact of the disputes on them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.