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"Security trumps trade has become a political mantra in the United States " since the terrorist attacks on September 11, 2001.² The most serious issue affecting Canada 's international trade performance today is unrestricted access to the U.S. marketplace. The Canadian government has restructured institutions to adjust to this new trade and security nexus.

Several of the current Canada-U.S. trade irritants are directly related to enhanced border security and antiterrorism legislation. Other long-standing disputes, such as softwood lumber, are inspiring a search for a more effective dispute settlement mechanism that cannot be hijacked by special industry interests. Indeed, the ultimate outcome of the current softwood lumber case (IV) may destroy the legitimacy of the NAFTA Chapter 19 dispute resolution system directed at antidumping and countervail actions.

The U.S., Canada and Mexico recognize that other components of the trilateral trading relationship are also due for an upgrade. Plans to move "beyond NAFTA" include further liberalization of rules of origin, the adoption of common regulatory standards and serious consideration of the potential for external tariff harmonization.³

Canada 's participation in multilateral trade talks and its use of multilateral dispute settlement under the auspices of the WTO increasingly serve as means to improve otherwise elusive disciplines on the use of trade remedies and trade distorting subsidies. Bilateral negotiations with trading partners such as the EU reflect the Canadian government's strategy for global competitiveness by focusing on Canada 's strengths in new technology sectors. Canada continues to support the negotiations toward a Free Trade Area of the Americas .

U.S.-Canada "Border Risk"

Border risk in the form of longer transit times and heightened uncertainty about timely access to the U.S. market poses an ongoing threat to Canada 's most important trade relationship. The Canadian government has restructured existing institutions and created new institutions aimed at safeguarding the relationship. Both governments seek to deepen border cooperation by building on the Canada-U.S. Smart Border Declaration, an agreement forged in the wake of 9/11 to construct a "zone of confidence against terrorist activity" by creating a border that "securely facilitates the free flow of people and commerce."⁴

Restructuring of Canadian Institutions

A new department of Public Safety and Emergency Preparedness was created in December 2003 to consolidate the security responsibilities of the RCMP, Canadian Security Intelligence Service, and Customs inspectors. This department includes the new Canadian Border Services Agency. The CBSA integrates the Customs program from the Canada Customs and Revenue Agency with intelligence functions previously undertaken by Citizenship and Immigration, and import inspection functions previously undertaken by the Canadian Food Inspection Agency.

The position of Parliamentary secretary to the Prime Minister (Canada-U.S.), a Cabinet committee on Canada-U.S. relations and a Canada-U.S. secretariat in the Privy Council Office were all created to develop and support Canada 's multi-dimensional relationship with the U.S. The Canadian government is expanding its diplomatic missions in the U.S. from 15 to 22 and has appointed 20 new honorary consuls. A new secretariat was established in Washington to facilitate a dialogue between the Canadian Parliament and the U.S. Congress.

The former Department of Foreign Affairs and International Trade (DFAIT) was functionally split into two separate departments. In December, 2004, the Government introduced legislation to officially create the Department of International Trade and to divide the departments into two separate entities (Bills C-31 and C-32). The legislation was defeated at second reading. The Trade Minister has reported that the two branches will continue to operate independently notwithstanding the defeat.

A "Next Generation" Border Accord

Canada and the U.S. are discussing a "next generation" border accord to build on the existing Smart Border Action Plan. The plan contemplates ways to speed the flow of goods across the border, including through the adoption of full pre-clearance of commercial goods at key land crossings. Plans to deepen the border relationship also include enhanced cooperation between Canada 's department of Public Safety and Emergency Preparedness and the U.S. Department of Home-land Security in the areas of national emergency response, law enforcement and the protection of shared critical infrastructure.

The "NEXUS" component of the Smart Border Action Plan is designed to simplify border crossings for pre-approved, low-risk travelers. A development in the NEXUS program is the use of iris recognition biometric technology at the Ottawa and Vancouver international airports to identify pre-approved travelers. FAST is the component of the Smart Border Action that seeks to expedite the movement of eligible pre-approved goods across the border. The Canadian and Ontario governments are jointly investing in infrastructure programs in Niagara, Sarnia and London to support FAST. Two new dedicated FAST lanes will be created at the Pacific Highway in B.C. and at the Windsor-Detroit Ambassador Bridge .

U.S.-Canada Trade Irritants

New and ongoing trade disputes with the U.S. reinforce the need for a new North American approach to dispute settlement. While the bovine spongiform encephalopathy (BSE) dispute and problems associated with the U.S. Bioterrorism Act might be addressed though increased harmonization of highly integrated North American industries, the never-ending softwood lumber dispute has taken a path that may jeopardize the legitimacy of the NAFTA Chapter 19 bilateral dispute settlement system. The International Trade Commission has attacked the findings of a Chapter 19 panel, and the Coalition for Fair Lumber Imports has taken the position that Canadian exporters are not entitled to retroactive refunds.

So serious is this flaunting of the Chapter 19 panel's decision that Canada 's International Trade Minister has stated that: "without the prospect of refunds, NAFTA itself, and its dispute settlement system, would be rendered virtually useless."⁵ In order to maintain respect and integrity for the resolution of NAFTA disputes, serious consideration must be given to the creation of a permanent trinational court to resolve all trade disputes between NAFTA parties. The usual claims of unconstitutionality and loss of sovereignty that will be advanced by those in opposition to NAFTA should not discourage such an initiative.

Bioterrorism Act

In December, 2003, the U.S. Food and Drug Administration implemented two new interim regulations under the Bioterrorism Act. The regulations require registration with the FDA of all manufacturers of food products that ship to the U.S., as well as prior notice of shipments of food into the U.S. . Canada has complained that the final regulations have the potential to cause significant confusion since they include time frames and reporting requirements that differ significantly from U.S. Customs requirements. Full enforcement of the Bioterrorism Act and regulations began in August 2004.

BSE (Mad Cow Disease)

The CFIA announced that it had quarantined an Alberta farm in an investigation into a case of BSE in May, 2003. Canada 's major trading partners immediately instituted temporary bans on live cattle, beef and beef products from Canada .

An investigation into the source of the infection conducted in June, 2003 revealed that only a single case of BSE existed. By August, 2003, the U.S. had opened the border to Canadian boneless beef products and products from cattle aged less than 30 months. Plans to reopen the U.S. border to live Canadian beef were derailed in December, 2003 with the discovery of a case of BSE in Washington State in a Canadian-born cow. The closure of the U.S. border to live cattle has had a devastating impact on Canadian cattle producers.

While the Canadian government has not initiated any claims against the U.S. concerning the border closure, numerous Canadian feedlot operators have filed notices of intent to submit multimillion-dollar damages claims against the U.S. government under the investor-state arbitration provisions of NAFTA Chapter 11. A potential obstacle to the feedlot operators' claims is whether the feedlot operators have made an "investment" in the U.S. according to NAFTA Chapter 11.

On December 29, 2004, the U.S.D.A. announced a new rule that declares Canada a "minimal risk" region and authorizes imports of live cattle under 30 months of age. On the same date, the CFIA identified a suspect Alberta cow, later confirmed to have BSE. Legal action by the Ranchers-Cattlemen Action Legal Fund has derailed the coming into force of the new U.S.D.A. rule, which was slated for March 7, 2005.

Softwood Lumber

Following the expiry of the Canada-U.S. Softwood Lumber Agreement in March 2001, the U.S. producers once again initiated countervailing (subsidy) and antidumping investigations of certain softwood lumber products from Canada . Canada responded with a two-track strategy consisting of litigation under the NAFTA and WTO agreements, and negotiations toward a durable solution.

WTO challenges were launched against the U.S. Department of Commerce's (U.S. DOC) final countervailing duty and dumping determinations and the U.S. International Trade Commission's (U.S. ITC) final determination of threat of injury. The WTO Appellate Body ruled that the U.S. practice of "zeroing" when calculating antidumping duties is inconsistent with WTO rules. A WTO panel found the U.S. ITC's threat of injury ruling inconsistent with WTO obligations. The U.S. has not yet complied with the WTO ruling.

A NAFTA panel found the U.S. ITC's ruling on threat of injury inconsistent with U.S. law on August 31, 2004.  Although the U.S. ITC has complied with the NAFTA panel's order by issuing a determination that the U.S. softwood lumber industry is not threatened with material injury, the ITC stated: "[W]e continue to view the panel's decision throughout this proceedings as overstepping its authority, violating the NAFTA, seriously departing from fundamental rules of procedure and committing legal error."⁶ Such commentary by investigative authorities negatively impacts the  legitimacy of the Chapter 19 system of bi-national panel review, undermines respect for this institution and reinforces the need for the creation of a permanent tri-national court. The U.S. will pursue an extraordinary challenge to the NAFTA panel decision on the basis that the panel "seriously misapplied the standard of review" and "other irregularities."⁷

NAFTA at Ten

In July, 2004, NAFTA parties committed to liberalizing rules of origin and to further measures to enhance the transparency of NAFTA Chapter 11 dispute settlement.

Progress on Rules of Origin Negotiations

Canada , the U.S. and Mexico have committed to further liberalizing NAFTA rules of origin for a broad range of foods, consumer and industrial products. Rules of origin provide the basis for customs officials to make determinations about which goods are entitled to preferential tariff treatment under NAFTA. The rules are necessary because the NAFTA parties retain their external tariffs on goods that originate from non-NAFTA countries while levying a preferential tariff on goods "originating" from the other NAFTA members. The tests used to evaluate "origin" are relatively strict and have been applied in support of protectionist ends. The most aggressive way to deal with the costs associated with determining origin is for the NAFTA Parties to adopt a common external tariff. While this is likely not feasible in sectors where there exist wide divergences in duty rates (i.e., agriculture and textiles), it should be possible to harmonize rates and dispense with rules of origin on a sector-by-sector basis.

Chapter 11 Investor-State Arbitrations

The NAFTA governments announced in July, 2004, that all of the Chapter 11 negotiating texts would be made available to the public, after several years of denying access to these texts to Chapter 11 litigants. This transparency-enhancing measure builds on a 2003 decision by the NAFTA Free Trade Commission to allow the participation of third parties (amici curiae) in Chapter 11 arbitrations. Two amicus submissions were filed in the Methanex case.

The Federal Court of Canada rendered a decision in January, 2004, that accorded a high degree of deference to the decisions of arbitral tribunals hearing disputes under Chapter 11, which permits private investors in one NAFTA party to bring an arbitration claim for damages against the NAFTA party in which their investment is located. Canada had sought federal court review of the NAFTA tribunal's decision in the S.D. Meyers case (2004 F.C. 38). The federal court rejected Canada 's argument that the award should be overturned on the basis of public policy, stating that this argument could only succeed if the tribunal's finding were "clearly irrational," "totally lacking in reality" or "a flagrant denial of justice."

Multilateral (WTO) and Bilateral Trade

WTO Negotiations: Doha Development Agenda

Canada 's primary objectives in the Doha Development round of WTO negotiations (scheduled to conclude January 2005) are to rein in the use of agricultural subsidies, to reduce tariffs on non-agricultural goods and to promote development.

Canada was the first country to enact domestic legislation to implement the WTO General Council Decision of August 30, 2003, on TRIPS and Public Health. The Decision addresses the fact that WTO members with little or no drug manufacturing capabilities cannot use compulsory licensing to address public health crises because they cannot manufacture their own drugs, nor can they import drugs made under compulsory licences in other countries due to limitations on the export of such drugs found in TRIPS Article 31(f). The Decision allows Article 31(f) to be waived under certain conditions.

Scepticism abounds as to whether Canada 's generic drug industry will use the domestic legislation to supply drugs to poor countries. Canada 's generic industry has gone on record that provisions in the legislation designed to ensure that it is used for non-commercial objectives "will open up a hornets' nest of potential court battles that will undermine the purpose of the legislation."⁸

Byrd Amendment Retaliation

Canada successfully challenged before the WTO the U.S. Continued Dumping and Subsidy Offset Act of 2000 (the "Byrd Amendment"). The Byrd Amendment requires U.S. Customs authorities to distribute antidumping and countervailing duties to affected domestic producers. The WTO Appellate Body confirmed that the Byrd Amendment is inconsistent with WTO rules and imposed a deadline for U.S. compliance with its decision (December 27, 2003). The deadline passed without compliance, prompting Canada and other countries to request authorization to retaliate.

The WTO arbitrator released its decision on retaliation on August 31, 2004. The decision confirmed that Canada 's authorized level of retaliation can fluctuate annually depending on the amount of countervailing and antidumping duties on Canadian goods that were disbursed to U.S. producers that year. Canada 's annual level of retaliation is permitted to equal 72% of the annual disbursement to U.S. producers.

The Canadian government published its retaliation proposals in the Canada Gazette and invited public comment. Public consultations closed December 22, 2004. Canada announced retaliatory measures on March 31, 2005. The measure take the form of a 15% surtax on imports from the United States on four categories of goods, including: live swine, cigarettes, oysters and certain specialty fish. The Canadian government has also filed a suit in the U.S. Court of International Trade (CIT), arguing that the application of the Byrd Amendment to Canada is contrary to NAFTA. The advantage of pursuing an action in the CIT is that the Court can enjoin the U.S. government from distributing the duties collected on Canadian imports of softwood lumber.

Canada Wheat Board: Appellate Body Decision

The WTO Appellate Body ruled that the practices of the Canada Wheat Board (CWB) are consistent with Canada 's international trade obligations in August 2004. The ruling affirmed a panel decision that the CWB is consistent with WTO rules applicable to state trading enterprises. Canada did not appeal the panel's decision that aspects of the CWB's operations are inconsistent with WTO national treatment obligations and is working to implement these aspects of the panel's decision.

U.S. wheat producers aim to dismantle the Canadian and Australian wheat boards through the WTO agricultural negotiations. A framework agreement on agriculture adopted by WTO members in August, 2004, states that future use of monopoly power by wheat boards is to be the subject of further negotiation.

The EU-Canada Trade and Investment Enhancement Agreement

The framework agreement for a new Canada-EU Trade and Investment Enhancement Agreement ("TIEA") adopted in March, 2004, complements the Canadian government's plan to promote new technology sectors such as biotechnology, securities, environmental, communication and health technology. The framework agreement goes beyond cross-border trade to deal with trade and investment facilitation, competition, mutual recognition of professional qualifications, financial services, e-commerce, temporary entry, small and medium-sized enterprises, and science and technology. The EU is Canada 's second most important trading partner after the U.S. .

Canada 's trade negotiations with several regions and countries, including Singapore, the four Central American countries, CARICOM (Caribbean Community and Common Market), the Andean community and the Dominican Republic are ongoing.

Customs

AMPS and "Reason to Believe"

Among the contraventions that are subject to Canada's Administrative Monetary Penalty System (AMPS) custom's penalties is the failure to comply with the self-adjustment obligation found in section 32.2 of the Customs Act, which requires importers to correct errors within 90 days of having a "reason to believe" that the importer wrongly declared the origin, tariff classification, value for duty or end use of the imported goods.

What constitutes a "reason to believe"? "Reason to believe" is not defined by the Customs Act. On October 15, 2003, Customs Memorandum D11-6-6 was issued with the objective of providing better guidance about the scope of "reason to believe." A nonexhaustive list of seven examples of "reason to believe" is provided. The notion of "reason to believe" remains inherently subjective and will be the subject of future litigation.

Value for Duty

One of the requirements that must be fulfilled by an importer to use the transaction value method of valuation is that there must be a "purchaser in Canada," defined as either a Canadian resident or a non-resident with a "permanent establishment" in Canada . Whether a "permanent establishment" in Canada exists depends on whether the company "carries on business" in Canada in a manner contemplated by the regulations.

In AAi. FosterGrant, 2004 E.S.A. 2.59, the Federal Court of Appeal overturned a Canadian International Trade Tribunal (CITT) decision that set a high threshold for the "purchaser in Canada " requirement. The CITT held that a non-resident company had to have a significant presence in Canada to be considered to be "carrying on business" in Canada . The Federal Court of Appeal lowered the threshold for "carrying on business" in a manner that is consistent with the interpretation of this phrase in income tax jurisprudence. The decision suggests that a corporation will be found to be "carrying on business in Canada " so long as it buys and sells on its own account for profit in Canada, regardless of whether management and control of the business occurs in Canada . Further litigation and an amendment to the regulations are anticipated.

The New Reporting of Exported Goods Regulations

Canada 's Reporting of Exported Goods Regulations (SOR/B6-1001) set out rules for the reporting of exported goods. The existing regulations do not clearly identify who is ultimately responsible for reporting goods that are exported and do not identify specific time frames under which export reporting must take place, or where goods that are exported must be reported.

Under the new 2004 Regulations, exporters will have to report goods destined for export within prescribed time frames and at particular locations, except in cases where they are specifically exempt. The 2004 Regulations also address the responsibilities of carriers and customs service providers with respect to the reporting of exported goods.

Conclusion

Inadequacies in the structure of North American trade relations and opportunities to deepen cooperation are the immediate focus of the Canadian government and private sector. Groups such as the Canadian Council of Chief Executives and the Council on Foreign Relations are examining strategies for future cooperation that are based on improving regulatory efficiencies, enhancing North American security and devising better institutions. Future issues for the Canadian government include whether its new "trade diplomacy strategy" (aimed at U.S. senators, congressional leaders and governors) will be successful in healing relations wounded by trade rifts, and whether the government will heed calls from within to establish a powerful new bilateral border commission.

 

1 This article was written with research assistance from Andrew Kidd of Gowlings.

2 Canadian Council of Chief Executives, "New Frontiers."

3 The Honourable Jim Peterson, Minister of International Trade, "NAFTA: Ten Years and Beyond," February 16, 2004.

4 Government of Canada , "The Smart Border Declaration," December 12, 2001.

5 Globe & Mail, October 25, 2004, p. B1.

6 "Views of the Commission in Response to the Panel Decision and Order of August 31, 2004," September 10, 2004.

7 " U.S. to Pursue Extraordinary Challenge of NAFTA Lumber Ruling," Inside U.S. Trade, October 15, 2004.

8 The Canadian Generic Pharmaceutical Association, "Government Amendments to Bill C-9 Fall Short," April 20, 2004.

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