Canada: Canada Imposes 25% Surtax On Imports Of 7 Steel Products And Announces Inquiry To Determine Whether Safeguards Are Warranted

On June 1, 2018, the United States imposed tariffs on Canadian, Mexican, and EU steel and aluminum under Section 232 of the US Trade Expansion Act of 1962.  These tariffs, said to be necessary for the protection of the national security of the United States, were an expansion of similar tariffs previously levied against other countries.  These tariffs against the United States' closest security and trade allies were roundly condemned by Canada, Mexico, and the EU.  These parties promptly responded with retaliatory duties of their own – for more information on Canada's response see Retaliatory Measures Canada Imposed in Response to U.S. Steel and Aluminum.  

However, notwithstanding the retaliatory measures, there was concern that the U.S. steel tariffs would divert steel exports from other countries into the Canadian market.  The Canadian government had to consider whether this diversion would inundate Canada with cheap steel imports from other markets and, in conjunction with Canada's own supply of steel suddenly unexportable to the U.S., cause substantial injury to the Canadian steel market and the Canadian steel industry.  There are likely also additional reasons for this action, including a strong desire by the Canadian government to be seen as addressing US concerns regarding cheap foreign steel entering the US market through Canada.

On Thursday, October 11, 2018, the Government of Canada announced a new provisional safeguard on steel imports to prevent diversion of foreign steel products into Canada. This emergency safeguard will take the form of a surtax of 25% on certain imports over a specified volume level, and will come into force on October 25, 2018.  Safeguard measures are enacted pursuant to the World Trade Organization Agreement on Safeguards and the Customs Tariff.  Canada has decided to apply a global safeguard as it deems that there is evidence that a product is or will be imported in such an increased quantity, and under such conditions, that cause or threaten to cause serious injury to domestic producers.

These measures are similar in some ways to traditional anti-dumping and countervailing duties cases.  However, there are three major exceptions.  First, the duties under a safeguard are levied immediately and prior to any investigation or inquiry as to whether injury is actually occurring to domestic industry.  Second, unlike in dumping or countervailing duties investigations there is no requirement to show the goods are being dumped or subsidized, the only relevant consideration is injury.  Third, safeguards are levied globally rather than against a specific subset of listed countries (as is the case with an anti-dumping proceeding).

The new emergency safeguard is more focused than the U.S. tariffs, and covers only 7 steel product categories

The Canadian safeguard is more finely tuned than the U.S. Section 232 measure.  It is specifically targeted at only 7 categories of steel products.  These are the products the domestic production of which the Canadian government believes, based upon its initial review, to be at threat of injury due to a diverted flood of low-priced imports.  The products include:

  1. Heavy Plate;
  2. Concrete Reinforcing Bar;
  3. Energy Tubular Products;
  4. Hot-Rolled Sheet;
  5. Painted Steel;
  6. Stainless Steel Wire; and
  7. Wire Rod.

As with an anti-dumping measure, the Canadian government has provided a description to give greater clarity as to the scope of each of these categories, including exclusions for the purposes of these surtaxes.  For example, concrete reinforcing bar is defined as:

"Hot-rolled deformed steel concrete reinforcing bar in straight lengths or coils, commonly identified as rebar, in various diameters up to 56.4 millimeters, in various finishes.

The definition excludes:

  • plain round bar;
  • fabricated rebar products; and
  • 10-mm-diameter (10M) rebar produced to meet the requirements of CSA G30 18.09 (or equivalent standards) and that is coated to meet the requirements of epoxy standard ASTM A775/A 775M 04a (or equivalent standards) in lengths from 1 foot (30.48 cm) to 8 feet (243.84 cm)."

The safeguard also provides a list of Harmonized Tariff Codes for each of these categories to assist importers in determining whether their imports are subject to the safeguard.  Also like an anti-dumping measure, though, the Harmonized Tariff Codes are provided for illustrative purposes only and are not binding.  That is, it is possible that goods may be imported under a non-listed Harmonized Tariff Code but still be subject to the safeguard measure.  It is vital that importers review and confirm whether their goods fall within the description of the categories.

To obtain more information regarding the definition of each product, please refer to Annex A of the Announcement.

Who is covered by this new emergency safeguard: 4 important exemptions

As a safeguard measure, the new surtax will apply in principle to all countries.  Indeed, safeguard measures can fail if they are not applied globally, and any exceptions must be based on a solid rationale.  That said, some countries are excluded as they do not account for a substantial part of total imports in Canada, or because trade remedies are already imposed through other avenues:

  1. The United States: The safeguard will not apply to imports from the U.S. These categories are already covered by the 25% surtax countermeasure introduced by Canada on July 1, 2018.  No additional safeguard is needed.
  2. Chile, Israel, or beneficiaries of the Canada-Israel Free Trade Agreement: The Canadian government has noted that imports from these jurisdictions account for a relatively minor share of total imports and therefore should be exempt. It should be noted that additional deference may be given to Chile as the Canada-Chile Free Trade Agreement exempts Chile from the application of all anti-dumping measures unless it has the Chilean government's consent.  The Canada-Israel Free Trade agreement lacks such a clause; however, it was only recently amended and is awaiting entry into force, and Canada may be hesitant to apply new tariffs on imports from Israel until the new agreement is fully ratified by the Israeli government.
  3. Mexico: There is a partial exclusion for heavy bar, hot-rolled sheet, pre-painted steel and stainless steel imported from Mexico. Canada has determined that these products do not account for a substantial share of total imports and can therefore be excluded.  However, energy tubular products and wire rod imported from Mexico remain subject to the duties.
  4. Countries subject to the General Preferential Tariff: Canada maintains a General Preferential Tariff for a specific list of developing countries, for example Belize, Egypt, Ukraine, and Mongolia. The list of developing countries is set out in Customs Notice 18-17.  Imports on all product categories are excluded as they do not account for a substantial share of total imports.  It is also within the general policy framework of the Canadian government to encourage development of these countries' economies. There is a caveat to the exception – rebar products imported from Vietnam are significant and are subject to the safeguard.

Just as it is vital that importers fully vet which products are covered, it is also important to vet the supply chain for those products.  For example, relocating sourcing from Russia to Mongolia or from Algeria to Egypt might avoid application of the surtax.

It is also worth noting that there may be room to argue for additional exclusions as the process continues, and there is a strong argument that all steel products currently subject to anti-dumping and countervailing measures should be exempt.  For example, there are currently anti-dumping duties on Concrete Reinforcing Bar from China, Turkey, the Republic of Korea, Japan, Hong Kong, Portugal, Spain, Belarus, and Chinese Taipei.  There are also anti-dumping duties on energy tubular products and steel plate from a number of countries. 

Because anti-dumping duties already impose what is, effectively, a price floor through the normal value process, there would be no need to levy a safeguard measure against the goods from these countries.  The new surtax may also make the goods of these countries more efficient than those sourced from newly surtaxed countries.

There is some speculation that, in the wake of the USMCA negotiation, the United States may grant to Canada a full or limited exemption to the American Section 232 tariffs.  While it is likely that Canada would respond with a full or limited repeal of its retaliatory measures against those tariffs, one imagines it would also conduct a corresponding re-examination of the need for the safeguard measure's exemption of the United States or even for the anti-diversion safeguard measure itself.

What is the tariff-rate quota? a 25% surtax on all imports of steel above a certain volume

The safeguard takes the form of a 25% surtax applied to imports over and above a set total quota volume limit applicable for four successive 5-day periods. There is also a limit on the share of the total quota that may be filled by a single country, as set out below:

7 steel product categories

Product

Quota for each 50-day Period
(tonnes)

Total
200-day Quota
(tonnes)

Maximum Share of Total Quota per Country

Heavy plate

12,918

51,672

23 %

Concrete reinforcing bar

35,332

141,328

23 %

Energy tubular products

64,348

257,392

23 %

Hot-rolled sheet

15,299

61,196

37 %

Pre-painted steel

11,635

46,540

35 %

Stainless steel wire

467

 1,868

25 %

Wire rod

11,513

46,052

47 %

Permits for quota are issued on a "first come first served" basis, and are country-specific.  It is important to move quickly.  Applicants must supply their Export and Import Permit Act ("EIPA") registration numbers when applying for a permit.  Applicants can file for permits for multiple quotas within the same fifty-day period.

All shipment-specific applications for permits may be submitted as of October 25, 2018 (when the surtax goes into effect).  These applications may be made at any time prior to five days before a shipment's arrival in Canada, and are applicable for fourteen calendar days from the date of issuance.  Global Affairs Canada (GAC) has warned that these permits will not be extended except under extraordinary circumstances.  Applicants with an EIPA number can file for a permit by completing the Import/Export Permit EXT 1466 form.  However, it is likely more advantageous to work with your customs broker, as brokers have been granted exclusive authorization to apply for a shipment-specific import permit online.

GAC will maintain a website that will track the fill rate of the various quotas for each period.  However, there has been no indication from GAC as to how often this quota system will be updated.

What's next: the CITT hearing is looming

Under paragraph 20(a) of the Canadian International Trade Tribunal Act, the Canadian International Trade Tribunal (CITT) will conduct a safeguard inquiry to determine whether this emergency safeguard is warranted. In the meantime, the emergency safeguard will remain in place for two hundred (200) days, pending the CITT's findings.

The CITT is an independent quasi-judicial body which reports to Parliament through the Ministry of Finance. The goal of the CITT is to provide fair, transparent and timely processes for the investigation of trade remedy cases, and, as in this case, advice in trade, commercial and economic matters.

The CITT will have to report to the Minister by April 3, 2019. Time is therefore of the essence, and the proposed inquiry schedule includes (GC-2018-001):

  • October 29, 2018 – Notices of participation, declarations and undertakings are due;
  • October 31, 2018 – Replies to all questionnaires are due and a case management conference will be held;
  • November 26, 2018 – The CITT will distribute the record, including staff-prepared statistical summaries;
  • December 6, 2018 (noon) – case briefs are due from all parties;
  • December 13, 2018 (noon) – reply briefs are due from all parties;
  • December 17, 2018 – The CITT will decide which witnesses will testify;
  • December 27, 2018 – Deadline for procedural and preliminary matters;
  • January 3-22, 2019 – Public Hearings in Ottawa;
  • April 3, 2019 – The CITT will publish its report, including any recommendations it has.

The CITT has posted on its website its questionnaire for: (1) domestic producers; (2) importers; and (3) foreign producers of each class of goods.

Companies will have only a short time to consider how these significant measures will affect their business. If you decide to support or to oppose this new 25% surtax on all or some of the steel imports, you will need to act expeditiously. 

The hearing itself will be divided into separate periods covering each of the different product categories.  That is, importers may choose to support or oppose the imposition of the duties on certain categories of products but not others.

Parties to the CITT proceeding should seriously consider retaining counsel. The CITT divides all material generated in response to its questionnaires into two categories: confidential and non-confidential information – and only counsel who have filed a Declaration and Undertaking may be provided with copies of the confidential material.  Parties without counsel to advise them will be unable to have anyone assess the confidential material – which includes details of the financial data on which the necessity of the safeguards, to prevent injury to the Canadian industry, will be judged. Similarly, any confidential information of producers, including their market intelligence, will not be available to other parties but only to their independent counsel.

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.

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