Originally published December 2005
Trade with China is a hot topic these days for good reason. China’s accession to the WTO, as well as the expiry on January 1, 2005 of the WTO Agreement on Textiles and Clothing, provides its manufacturers with unprecedented access to the Canadian market. In response to these developments, domestic producers have launched a flurry of safeguard cases as they struggle to compete against Chinese imports. Safeguard cases impact everybody: domestic and foreign producers, importers, retailers, and Canadian consumers.
What Is A Safeguard?
A safeguard is a surtax or quota imposed by the government to limit the level of imported goods in order to prevent or remedy injury to domestic producers of similar goods. Unlike the more common trade remedies of anti-dumping and countervailing duties, in a safeguard case the domestic industry does not have to prove that the imports are being sold in Canada below their cost of production or with the benefit of foreign government subsidies. In a traditional "global" safeguard inquiry, domestic producers merely need to demonstrate that an increased quantity of imported goods is a principal cause of, or is threatening to cause, serious injury to the domestic production of directly competitive goods.
The Rise Of Safeguards
Safeguards are legal remedies that have existed for many years but have been rarely used. Until 2003, there were only two global safeguard inquiries in Canada.1 However, as a condition of China's accession to the WTO, special safeguard processes were developed specifically to provide a safety valve to domestic producers by giving them time to adapt to the potential for rapid expansion of Chinese imports. These remedies will expire in December 2013.
The two additional China-specific safeguard actions are "market disruption inquiries" and "trade diversion inquiries".A trade diversion inquiry determines whether any action affecting the imports of goods from China into the market of another country causes or threatens to cause a significant diversion of trade into the Canadian market. A market disruption inquiry is like a global safeguard inquiry in that it looks at whether a sudden increase in imported goods into Canada is causing injury to domestic producers. However, a market disruption inquiry differs from a global safeguard inquiry in three key ways:
- Lower injury threshold - The domestic industry need only demonstrate that imports from China are "a significant cause of material injury" (as opposed to the "principal cause of serious injury" in a global safeguard inquiry).
- No "unforeseen development" requirement - While it is normally required that the increase of imports be as a result of unforeseen developments,2 the CITT ruled in the Barbecues inquiry that this requirement is not pertinent to a market disruption inquiry.3
- Expedited timing - The CITT must report to the Minister of Finance within 90 days of commencing a market disruption inquiry (as opposed to 180 days, or 270 days in a complex case, in a global safeguard inquiry).
Since 2004, the following market disruption and global safeguard inquiries regarding Chinese imports have been completed:
- Barbeques - This was a market disruption inquiry into the importation of barbecues from China. The CITT found that an annual import increase of 143% followed an increase of 89% the next year constituted a rapid increase in imports. These imports were also found to be a significant cause of material injury to the domestic industry. The CITT recommended a 15% surtax be imposed for a three-year period.4
- Bicycles - This was a global safeguard inquiry against bicycles and painted bicycle frames, most of which were imported from China. The CITT found that annualized increases of between 12% and 33% over the period of inquiry constituted a rapid increase in imports. Despite the higher global safeguard injury threshold, the CITT still found that these imports caused injury. The remedy proposed by the CITT was a surtax set at 30% in the first year of application, 25% in the second year and 20% in the third year.5
There are several other safeguard complaints for which the CITT has not yet initiated formal inquiries:
- Unite Here’s market disruption complaint against Apparel from China;6
- Ontario Flue-Cured Tobacco Growers Marketing Board’s global safeguard complaint against Unmanufactured Bright Virginia Flue-cured Tobacco;7 and
- Canadian Council of Furniture Manufacturers’ market disruption complaint against Residential Furniture from China.8
Success at the inquiry stage does not guarantee that a safeguard will be imposed. In the Barbeques and Bicycles inquiries, the government has taken neither positive nor negative action with respect to the CITT’s recommendations.
Ultimately, Cabinet with input from the Minister of Finance decides whether or not to follow the CITT's recommendations and impose a safeguard remedy on the imports in question. This means that there is significant opportunity for the safeguard process to become politicized. As a result of the uncertainty created by the Government’s discretion, an integrated legal/lobbyist team is required to achieve the desired outcome in a safeguard case.
While there is no time limit for Cabinet to act on the CITT’s recommendation, the Government’s sluggishness in responding to them is troubling. A prompt decision to accept, modify or reject the recommendations coming out of a safeguard inquiry would reduce uncertainty for all market participants.
1 See Safeguard Inquiry into the Importation of Boneless Beef Originating in Countries other than the United States of America, (Reference No. GC-93-001, May 28, 1993) and Safeguard Inquiry into the Importation of Certain Steel Goods, (Reference No. GC-2001-001, August 2002).
2 Article XIX of GATT 1994.
3 Market Disruption Safeguard Inquiry into Barbeques Originating in the People's Republic of China, (Safeguard Inquiry No. CS-2005-001, October 2005) at para. 34.
5 Global Safeguard Inquiry into the Importation of Bicycles and Finished Painted Bicycle Frames, (Safeguard Inquiry No. GS-2004-001 AND GS-2004-002, September 2005).
6 Filed July 7, 2005.
7 Filed October 17, 2005, determined by the CITT to be properly documented on November 29, 2005.
8 Filed October 28, 2005.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2005 McMillan Binch Mendelsohn LLP