Business Interests And Canada’s Trade Agenda

It is hard to follow all of the announcements, press reports, government communiqués and the like in the area of international trade. So in light of the flurry of activity, we thought it useful to distill all of these down to a select few, and suggest where Canada’s initiatives are leading – and how business could be impacted by these efforts.

One of the ancient pillars of Canada’s trade policy is support for the WTO and for the multilateral system. Canadian influence can often be leveraged through the WTO, sometimes more effectively than dealing one-on-one with bilateral trading partners.

While the WTO is functioning well as a dispute settlement forum, however, its negotiating arm – the Doha Round – appears to be paralyzed. This stalemate is no fault of the WTO as an institution. Rather, it’s the difficulty in getting over 150 countries – large and small, rich and poor, north and south – to agree on the formulas for reducing agricultural subsidies and cutting non-agricultural tariffs. Efforts are continuing in Geneva, but the prognosis is not good.

If the Doha Round fails, the potential gains for Canadian business will not be realized, particularly increased market access for Canadian goods through lower tariffs and reductions of non-tariff barriers. Canadian farmers and our agriculture sector will continue to suffer from the subsidies in the U.S. and the E.U. that keep prices low in international markets.

However, while WTO’s Doha Round negotiations are in the doldrums, the judicial arm of the Organization functions well, and Canada is active on this front. There are four WTO cases that Canada is now pursuing, each of which (in one way or another) is significant for Canadian export interests¹.

• China’s Treatment of Auto Parts:

  Canada, together with the U.S. and the E.U., is pursuing a claim against China (started in 2006) regarding China’s tariff treatment of imported auto parts. This is Canada’s first WTO case against China. At issue are Chinese regulations that stipulate that when a car assembled in China is made up of foreign parts, those imported components are assessed at a duty rate that is more than twice the rate applied to non-OEM auto part imports. This obviously impedes Canadian automotive part imports into that country.

  The case comes before a WTO panel this year and the panel is expected to issue its report in early 2008. If it goes in Canada’s favour, it will benefit Canadian auto parts makers in their exports to the Chinese market by reducing the Chinese duties on these goods.

• American Agricultural Subsidies:

  Of Canada’s newer cases, by far the largest is its 2007 challenge of U.S. Farm Bill subsidies, which Canada says is well in excess of the limits the Americans agreed to at the WTO. Under current WTO rules, the U.S. is limited to US$19.1 billion annually in agricultural subsidies under the so-called "amber box" (permissible subsidies with capped upper limits per country)². Most of these were doled out between 1999 and 2005 to a wide range of U.S. agricultural products, including corn, wheat, soybeans, pulses and sugar. Canada says the U.S. vastly exceeded its permissible cap. Though a panel has yet to be formed and this case is a long-way from conclusion, a win by Canada could have a major impact on international agriculture trade by forcing a rollback in U.S. payments to its farm sector.

• China’s Export Subsidies:

  Canada’s second case against China concerns a complaint launched this year by the U.S in which Canada is intervening in support. The U.S. claims Chinese tax measures are contrary to the WTO agreement by providing refunds, reductions or exemptions to enterprises in China on the condition that those enterprises purchase domestic over imported goods, or on the condition that those enterprises meet certain export performance criteria. Any panel decision will not come before a date well into 2008. A win against China will assist Canadian companies that export to China and to third-country markets.

• Belgium’s Import Ban of Seal Products:

  A final case initiated by Canada in 2007 involving only modest trade interests is Canada’s WTO challenge of a ban on imports of seal products imposed by Belgium. The case was initiated in August 2007 and must proceed through a number of steps before being heard by a panel, likely late in 2008.

Remember all the talk about the Free Trade Agreement of the Americas (FTAA)? This idea percolated along for a few years as an effort to cement a free trade deal among the North, Central and South American countries. Well, forget it - it just won’t happen. And governments (including Ottawa) are quietly putting the FTAA to rest. In all likelihood, nothing will come of this exercise.

With the deadlock in the WTO and with the FTAA exercise petering out, more attention is being paid by the federal government to bilateral trade initiatives. These can be broken down into four categories:

1. Free Trade Agreements ("FTAs"):

   The NAFTA is Canada’s most important regional/bilateral trade agreement, without exception. While it officially is a trilateral agreement, it is the relationship with the U.S., and the stewardship of this relationship, that will continue to be the second pillar of Canadian trade policy.

   While the NAFTA has its own frustrations, it secures and enhances Canadian access to the U.S. market and will continue to be the vital trade agreement for Canadian business. With the Softwood Lumber Agreement concluded last year and with restrictions on beef imports into the U.S. slowly being relaxed after the "mad cow" scare, trade relations with the U.S. are relatively harmonious.

   Of substantially lesser importance, Canada also has FTAs with several of other countries, albeit a somewhat odd collection: Chile, Israel, Costa Rica and the European Free Trade Association (Switzerland, Norway and Lichtenstein).

   On the trade agenda, Canada is also pursuing FTA negotiations with Colombia, Peru, the Dominican Republic, the countries of the Caribbean Common Market (CARICOM), Singapore and, importantly, South Korea.

   Some of these FTAs are obviously more critical than others, with the South Korean FTA holding the most economic promise, while others are far down the list in terms of direct economic interests. Other possibilities – although even more remote – are free trade talks with the E.U., India, China and Brazil.

2. Foreign Investment Protection Agreements (FIPAs):

   Canada has 22 bilateral FIPAs currently in force, some of which date back to the early 1990s, including one with Russia. Other notable FIPAs include Argentina, Venezuela, Poland, Hungary and Thailand. The most recent FIPA is with Peru (2006). Canada also concluded a FIPA with India earlier this year, but it has yet to be put into force.

   FIPAs, unlike FTAs, do not deal with tariffs or border measures or any of the other usual trade matters. FIPAs are focused on guaranteeing non-discriminatory treatment for Canadian investments and ensuring recognized standards of legal protection as well as guarantees of prompt and effective compensation in the event that Canadian property is expropriated. Of importance, following the NAFTA model, Canada’s FIPAs include investor/state dispute settlement mechanisms.

3. Trade and Economic Cooperation Agreements:

   Further down the line in terms of legal content are trade and economic cooperation agreements ("TECAs") and trade and investment cooperation agreements ("TICAs"). These are aimed at providing a framework for bilateral cooperation and contain no hard legal obligations dealing with trade and investment flows. There are no dispute settlement mechanisms under these agreements, for example. Nevertheless, TECAs and TICAs can be useful in setting a political context for future full-scope trade agreements. Canada currently has seven cooperation agreements - with MERCUSOR, the Andean Community, South Africa, Norway, Australia, Switzerland and Iceland.

4. Other Bilateral Initiatives:

   Two other initiatives are worth noting. Canada started discussions with the E.U. in 2004 on something called a "Trade and Investment Enhancement Agreement" or "TIEA", which would cover a range of leading-edge issues, including trade facilitation, competition, sustainable development, and mutual recognition of professionals. Talks were put on hold because of the WTO negotiations, but there is a good possibility that, with absence of progress in the Doha Round, talks with the Europeans on the TIEA could be reactivated.

   Canada has also been discussing a possible Economic Framework Agreement with Japan for several years, and currently has an agreement with that country on a joint study aimed at pinpointing areas that could form the basis of a legal treaty. Talks are continuing intermittently but there seems to be little enthusiasm on the Japanese side for the kind of market access commitments that Canada would require.

We reported previously that the NAFTA investment dispute provisions (in Chapter 11), once criticized as opening the door to a flood of arbitration cases by American investors, had proven to be relatively benign with only a handful of successful awards of modest value having been granted. A major Chapter 11 litigation (UPS v. Canada) launched against the Canadian government over the operations of Canada Post, was dismissed earlier this year, illustrating how difficult these cases can be for the investor-litigant.

There are, however, six active NAFTA investment arbitration cases that have been filed against Canada that are slowly wending their way through the system: Crompton Corporation v. Canada (2005), GL Farms and Carl Adams v. Canada (2006), Merrill & Ring Forestry v. Canada (2006), Gallo v. Canada (2007), Mobil Investments v. Canada (2007) and Murphy Oil v. Canada (2007). The Mobil and Murphy Oil claims were each filed in August 2007 and concern the Hibernia and Terra Nova offshore oil and gas projects. The claimants argue that the funding requirements for local services and research and development imposed by the Canada-Newfoundland Offshore Petroleum Board breach the prohibition against performance requirements in the NAFTA.

These Chapter 11 cases are long and drawn-out and will take several years before they reach any conclusion. Only deep-pocketed claimants have the resources to sustain such litigation. From the recent filings, however, it appears that there may be more appetite for these Chapter 11 disputes than we had previously predicted.

1. For more detailed information on each of Canada’s WTO cases, please see Foreign Affairs and International trade Canada’s website: http://www.international.gc.ca/

2. For a more detailed information about WTO "Amber Box" and other kinds of prohibited subsidy categories, please see the WTO’s website: http://www.wto.org/

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.