Article by Cliff Sosnow, Prakash Narayanan and Andrew Thompson, © 2007, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on International Trade, June 2007
Canada and the United States continue to enjoy one of the most enduring trade relationships in existence today. However, even this close relationship is not bereft of its share of trade-related concerns. This article discusses issues that are likely to dominate trade litigation between Canada and the U.S. in the coming years.
The trade relationship between Canada and the U.S. is one of the most robust in existence. Over $1.9 billion worth of goods and services cross the Canada/U.S. border every day – the most between any two countries in the world. This strong relationship has been bolstered by the World Trade Organization (WTO) agreements, as well as the Canada-United States Free Trade Agreement (CUSFTA) and its successor, the North American Free Trade Agreement (NAFTA). Growth in bilateral trade between Canada and the U.S. has reportedly averaged almost 6% annually over the last decade. However, the relationship between Canada and the U.S. is not void of conflict. In recent years, issues such as the softwood lumber dispute and the ban on beef trade have repeatedly occupied headlines. These, and other issues, have sometimes lead to cross-border litigation in multiple fora – domestic, bilateral and international.
Disputes between Canada and the U.S. relating to the export of softwood lumber from Canada have taken place for over 20 years and, as a result, have been a major focus of trade litigation. The most recent conflict commenced in May 2002, when the U.S. imposed duties of 27% on Canadian softwood lumber, arguing that Canada unfairly subsidized producers of spruce, pine and fir lumber. This was followed by multiple rounds of litigation under both NAFTA and the WTO, with both Canada and the U.S. claiming victories on some of the issues.
The Softwood Lumber Agreement (SLA) entered into between U.S. and Canada on September 12, 2006, was meant to terminate the most recent disputes. However, it is clear that the SLA does not guarantee a long-lasting solution. Some of the root causes of the dispute have yet to be resolved – for instance, the fundamental differences in approach between the U.S. and Canada in relation to timber harvesting and export. Just months after the signing of the SLA, there are indications that the U.S. may launch arbitration proceedings against Canada before the London Court of International Arbitration (LCIA), which is the dispute resolution forum provided under the SLA. The U.S. concerns appear to arise from the alleged failure of some Canadian provinces to abide by the requirements of the SLA, and the grant of additional allegedly illegal support payments by the Canadian government to the lumber industry.
Softwood lumber is therefore likely to continue to be a theme that dominates Canada-U.S. trade litigation, only now with another dispute resolution forum – the LCIA – added by the SLA to the equation.
Trade in agriculture and agri-food products between Canada and the U.S. has nearly doubled in the past decade, reaching more than USD 19 billion in 2002. However, over the past few years agricultural subsidies, and other issues such as the U.S. ban on Canadian beef imports, have become areas of significant dispute.
In relation to U.S. agricultural subsidies, the Canadian Grain Growers (CGG) have actively disputed U.S. farm programs by challenging them before Canada’s domestic trade tribunal, the Canadian International Trade Tribunal (CITT), and before the WTO. On April 18, 2006, the CITT found that U.S. grain corn imports were not causing any injury to domestic Canadian growers. This was the third case concerning grain corn from the U.S. to be heard by the CITT – including a positive injury finding by the CITT in 1986 which expired on March 5, 1992, and a terminated proceeding concerning a regional industry in 2000.
Canada has also challenged U.S. farm programs at the WTO. On January 8, 2007, Canada initiated a complaint challenging certain aspects of the U.S. farm programs in general, and the U.S. corn program in particular. The challenge alleged that these programs are illegal subsidies that adversely affect Canadian farmers and are contrary to the WTO Subsidies and Countervailing Measures Agreement. This challenge is important because it focuses on an issue (agricultural subsidies) that has given rise to significant discussion and disagreement between countries at WTO negotiation rounds. The significance of this complaint is highlighted by the fact that a number of countries have requested to join the proceedings as third parties, including the European Communities (EC), Brazil, Australia, Argentina and Thailand. This challenge, as well as previous challenges – for instance, the successful challenge by Brazil against U.S. subsidies for cotton – indicate that if the WTO negotiations continue to fail to resolve agricultural subsidy related issues, trade litigation on this front is likely to become more frequent.
The U.S. ban on imports of Canadian beef also continues to be an issue of contention. The dispute dates back to 2003, when the U.S. government closed its border to all imports of live cattle and beef from Canada after an Alberta cow was diagnosed with "mad cow" disease (other cases have since been discovered). On July 18, 2005, the U.S. partially lifted the ban on Canadian beef, accepting cuts from cattle less than 30 months in age. Importation of older cattle and certain beef products remains banned. Canadian beef producers, under the group "Canadian Cattlemen for Fair Trade" (CCFT) have launched a NAFTA Chapter 11 arbitration against the U.S., alleging that their investments have received "less favourable treatment" than that given by the U.S. to its own investors. As a result of the recent discovery in British Columbia of another cow affected with "mad cow" disease, the complete lifting of the ban on imports of cattle and beef-products from Canada into the U.S. is likely to be thrown into limbo. This will also result in the NAFTA challenge attaining greater significance.
State Trading Enterprises In Canada
According to a report on the WTO Trade Policy Review of Canada released in March 2007, state trading enterprises (STEs) in agriculture still constitute significant trade barriers that protect certain agricultural activities in Canada. The U.S. government has often articulated its concern relating to the use of entities such as the Canadian Wheat Board (CWB), which the U.S. claims are STEs that prevent market forces from operating in the relevant market.
The current federal government in Canada is examining the position and activities of the CWB, and recently held a farmers’ plebiscite whereby Canadian growers of barley chose to remove barley from the CWB’s monopoly marketing platform. However, the existence of STEs in agriculture continues to be an issue of concern.
The concerns over STEs is not limited to agriculture alone. United Parcel Service of America (UPS) has launched a claim against the Canadian government under NAFTA Chapter 11, alleging that Canada gives its state-owned postal monopoly, Canada Post, favourable treatment over other postal service companies. The final award in this arbitration is expected soon, and could have a significant impact on the provision of services by the state.
Thus, the continued prevalence of STEs, both in agriculture and in industry, is likely to continue to be a cause of dispute.
Intellectual Property Protection
Canada has not been involved in any new IP-related dispute settlement cases in the WTO as complainant or respondent since 2000, when the U.S. successfully contested two provisions of Canada’s Patent Act for not conforming with the requirements of the Agreement on Trade-Related Intellectual Property Rights (TRIPS).
However, Canada has consistently been placed on the Office of the U.S. Trade Representative’s (USTR) "Special 301" watch list. The "Special 301" watch list is a list of countries which the U.S. identifies as lacking adequate IP protection. In particular, the U.S. has identified Canada’s failure to ratify and implement the WIPO Internet treaties and its failure to prohibit the unauthorized camcording of films in movie theatres as major areas of concern. The U.S. has also alleged that Canada has a weak IP enforcement system and weak border measures to combat cross-border movement of counterfeit and pirated products. It was expected that Canada would be moved to the "Priority Watch List" under Special 301 in 2007 and, indeed, some organisations such as the International Intellectual Property Alliance recommended that this be done. While this did not occur, the U.S. is nonetheless likely to take a closer look at Canada’s IP protection efforts.
What makes Canada’s presence on the Special 301 watch list more significant is that the U.S. appears to be taking concrete measures to pressure countries to be more vigilant with IP protection. For instance, in April this year, the U.S. launched two complaints before the WTO alleging that China was violating its obligations under the WTO (in particular under TRIPS) due to China’s failure to adopt appropriate measures for the enforcement and protection of IP rights. If the U.S. considers that Canada is not doing enough on this front, it would not be surprising to see a complaint against Canada under NAFTA or the WTO.
Grants To The Aerospace Industry
The U.S. and the EC recently launched proceedings against each other before the WTO, alleging that the other was providing illegal subsidies to its domestic aerospace industry involved in the production of large civilian aircraft. Canada has joined as a third party to these proceedings because of the potential impact of these proceedings on its own programs – in particular, the Strategic Aerospace and Defense Initiative (SADI), which was launched in April 2007. SADI replaced the Technology Partnerships Canada (TPC) program, which had been successfully challenged by Brazil before the WTO, and in respect of which the U.S. had expressed concerns. Through SADI, support is provided through repayable financial contributions to Canadian companies as they undertake research and development projects in the aerospace, defence, space and security sectors. The outcome of the ongoing WTO proceedings against aerospace funding programs in the U.S. and the EC are likely to influence the SADI program and any potential challenge to the program.
The discussion above suggests that softwood lumber, agriculture, state trading enterprises, intellectual property, and aerospace-related issues are likely to dominate cross-border trade litigation between Canada and the U.S in the coming years. In some cases, such as softwood lumber, the litigation fora provided by a rules-based system have failed to provide solutions that address the root causes of the issues.
In contrast, in some areas, such as intellectual property, greater protection and stronger enforcement is a result of parties using the dispute resolution mechanisms provided for in bilateral and multilateral agreements.
While it is evident that the closeness of the trade relationship between Canada and the U.S. has not made it void of issues of conflict, these issues must be viewed in their broader context. Although these issues are of considerable importance for the participants in the relevant industries, for the volume and value of trade that occurs between Canada and the U.S., contentious trade issues are only a small aspect of overall trade flows. In addition, the continued reliance of Canada and the U.S. on a rules-based system, provided for domestically, bilaterally, and internationally, is an encouraging indication that the system is generally in good shape.
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