China factor looms large as trade wars heat up

The imposition of tariffs on Canadian goods by the United States and Canada’s response will have a political ripple effect as trade negotiations continue between the two countries.

China factor looms large as trade wars heat up
Daniel Ujczo, cross-border practice group chair at Dickinson Wright PLLC says the fact the recommendations were made at the beginning of the year and only acted on last week show this was an “un-Trumpian,” thoughtful and deliberate move.

The imposition of tariffs on Canadian goods by the United States and Canada’s response will have a political ripple effect as trade negotiations continue between the two countries.

Last week, U.S. President Donald Trump put an end to an exemption on a 25-per-cent steel tariff and 10-per-cent aluminum tariff for Canada, Mexico and Europe. Canada retaliated with a list of duties on more than 100 products, including cucumbers, soya sauce, orange juice, dishwasher detergent and aftershave.

The move comes while the U.S., Canada and Mexico are currently embroiled in a renegotiation of the North American Free Trade Agreement.

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The U.S. administration justified the move with the Cold War-era Trade Expansion Act, which has three purposes: to stimulate American economic growth, strengthen economic relations with other countries and “prevent communist economic penetration.”

Section 232 of the act states, “No action shall be taken . . . to decrease or eliminate the duty or other import restriction on any article if the President determines that such reduction or elimination would threaten to impair the national security.”

John Boscariol, head of McCarthy Tétrault LLP’s international trade and investment group, says the impact of these tariffs have an impact beyond the economic sphere.

“That's the bottom line with these measures; the Trump administration has imposed them on the basis that Canadian product is a threat to the national security interest of the United States. I think the impact is beyond economic. I think there's a real political and international relations impact here in the relationship between Canada and the U.S. And I think Trudeau even alluded to that when he said this is a real turning point in Canada-U.S. relations.”

The U.S. Commerce Department began investigating the effects of steel imports on national security last year, delivering a report to Trump in February. The report recommended a “global tariff of at least 24 per cent” and “at least 53 per cent” on 12 countries, including China and Russia, according to the U.S. Department of Commerce.

The measures recommended are intended to up American steel production to 80 per cent of capacity from where it currently sits at 73 per cent.

Riyaz Dattu, partner at Osler Hoskin & Harcourt LLP, says the U.S. administration is taking a broad reading of s. 232 and its imposition of the tariffs is contrary to the laws governing the World Trade Organization.

“The U.S. imposition of the tariffs goes contrary to our analysis of the WTO rules and so Canada is taking the appropriate action, which is allowed under the WTO rules to retaliate,” he says.

Daniel Ujczo, an international trade and customs lawyer and cross-border practice group chairman at Dickinson Wright PLLC in Columbus, Ohio, says the fact that these recommendations were made at the beginning of the year and only acted on last week show this was an “un-Trumpian,” thoughtful and deliberate move.

Ujczo says that missing from the conversation on the trade war is that Trump had been criticized by both Democrats and Republicans for not acting on the Commerce Department’s recommendations, which were made in February.

He says at the core of these tariffs imposed on Canada by Trump is China.

“Nobody thinks Canada is a national security threat, but it is about China. And the question is where is Canada on China at the end of the day?”

Ujczo says the international community agrees that China over-produces steel and aluminum and “country hops,” but it has not done anything about it. He says China plays a role in the NAFTA negotiations as well.

Trump campaigned on the idea he would get tough on China and used the trade deficit to demonstrate the failures of past administrations on trade.

“The president has put these tariffs on, hopefully, in an effort to mobilize collective action on China, but we just haven't seen the willingness of the EU, Canada [and] Mexico to tackle this issue in any meaningful way up until very recently,” says Ujczo.

Boscariol says the idea that Canada is soft on China is misguided. McCarthy Tétrault acted in a trade remedy case concerning fabricated industrial steel components, which was brought against China last year.

“We have many trade remedy cases against China on steel products; Canada's very aggressive on China,” he says.

When the issue goes before the WTO, Ujczo says, the U.S. will argue that Canada “has been a backdoor to China” and that the U.S.’s low steel-producing capacity has had real national security consequences.

Ujczo says the commerce department’s study offered the U.S.’s failure during the Iraq war to equip Humvees with military-grade steel because they lacked the resource, as a connection between steel tariffs and national security. The fact that underproduction of steel in the U.S. arguably denies them the ability to produce material needed for war will be an argument the U.S. uses to justify the tariffs, Ujczo says.

“I think that will be the argument. It hinges on whether an entity like the WTO will say the inability of a country to produce weapons-grade materials for defence and national security qualifies for the national security exemption.”

Boscariol says that the U.S. using a “really weak” national security argument is going to give other countries licence to protect their industries on that basis.

“Once the U.S. does it, everyone else is going to be thinking we can do that, too, if we want to protect our domestic industries. And that completely undermines a lot of the structure that's been built up since the Second World War essentially in promoting free and balanced international trade,” he says.

With the steel and aluminum tariffs and Canada’s reaction, Boscariol says, it is time for Canadian businesses to look to other markets, such as Europe and those within the trans-pacific partnership. Companies need to look at their supply chains and where their product sources are and develop alternative arrangements, he says.

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