Canada’s trade fight: The legal options are slim

By Yves Faguy June 1, 20181 June 2018

Canada’s trade fight: The legal options are slim


The world’s second largest trade relationship has hit another tough patch, and it’s hard to see how it gets repaired anytime soon.

In response to the announcement of U.S. metal tariffs, Canada has announced its intention to retaliate by imposing its own countermeasures on certain U.S.-origin goods — $16.6-billion worth of U.S. imports starting July 1.  “Canada will also challenge these illegal & counterproductive measures under NAFTA Chapter 20 and at the WTO,” the prime minister tweeted yesterday.

Clearly Trudeau, who until now has gone out of his way to keep things cordial, has lost patience.  “We have to believe at some point common sense will prevail. But we see no sign of that in the U.S. action today,” he said yesterday and even allowed himself to share details of the NAFTA negotiations. Trudeau also shared details of NAFTA negotiations – normally not discussed publicly.  He explained that a new deal was close and that he had offered to go to Washington to finalize it, but it fell apart when Vice-President Mike Pence told him over the phone that the Trump administration would on including a 5-year sunset clause. Pence has since contradicted Trudeau’s version, claiming that the trade partners were not in fact close to a deal.

Yesterday’s announcement by the Trump administration that Canada and Mexico will no longer be exempted from steel and aluminum tariffs are part of a broader trade strategy to extract unpalatable concessions from the two countries, such as a five-year sunset clause on NAFTA.

To justify the metal tariffs, Trump has had to resort to some tortuous logic. As Cyndee Todgham Cherniak explains in a recent post, the measures are presidential proclamations — “not anti-dumping and countervailing measures that result from complaints by domestic industry participants.” And they are taken under section 232 of the Trade Expansion Act of 1962, on grounds that Canada poses a national security threat to the United States.  “If Canada agrees to all of President Trump's NAFTA renegotiation demands, then and only then will Canada be viewed as not a threat to the national security of the United States," Todgham Cherniak writes.

In a phone interview today, Todgham Cherniak also pointed to the U.S. Department of Commerce decision to launch an investigation last week into automobile imports – also under section 232 and again to determine whether they pose a threat to U.S. national security.  “The problem for Canada is that there is a national security exception under GATT and WTO rules,” she says. Never mind that in an integrated economy, the notion that national security is at stake is completely absurd.  “From a legal perspective, the question is what do you hang your hat on?”

For Canada, there are no good options.  The WTO’s dispute settlement process at best would take years, and would be further hindered by a growing list of vacancies on its appellate body that the U.S. refuses to help fill. 

And challenging the U.S. tariffs under NAFTA’s Chapter 20 may not be all that effective either, because the U.S. can simply decide to pull out of the trade deal.

“We really have limited options to respond to Trump’s impermissible use of tariffs, unless we can get a U.S. court to issue an injunction to prevent the collection of tariffs,” says Todgham Cherniak. “The most likely scenario would be a state attorney-general  – from New York perhaps, or Virginia or Maryland – to try to overturn the decision.”

And that might be what the Trudeau government is hoping for, too. Unlike the EU which appears to be moving quickly on imposing its promised counter measures, Canada has set a July 1, deadline, hoping perhaps for the situation to change for the better.

There’s also a chance that the parties to NAFTA can come to an agreement, though the deadline for notifying the U.S. Congress of a deal that could be voted on in 2018 has already come and gone, according to House Speaker Paul Ryan.  Todgham Cherniak also expresses concerns that Trump is boxing himself into a corner by insisting on the NAFTA sunset clause, when he could perhaps extract a hard-fought win on issues like supply management or getting Canada and Mexico to agree to raise the de minimis threshold for retailers. Right now, the maximum value of an item that Canadians can order from a foreign country without paying duties or taxes is $20.

 “It makes no sense that this is his critical piece,” she says of teh sunset clause. “He’ll never use it even assuming he gets re-elected. He’s two-years into his current term and in year seven, he’ll be a lame-duck president. I just don’t see why Trump is making the sunset clause his red line.”

Hoping for the best and preparing for the worst is probably the more prudent course of action. 

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