International trade law is booming in Canada

Trade lawyers in the area are increasingly interacting with the wider legal team

B
eer is coming to Ontario’s supermarkets. Wine is not quite there yet. But who’s to blame for that?

Believe it or not, nothing less than complications arising from international trade agreements are among the primary reasons that former TD Bank CEO Ed Clark, Premier Kathleen Wynne’s privatization czar, is taking a second look at the issue.

No wonder, then, that some lawyers are calling this the “golden age of international trade law.” They’re likely right, even if measured by somewhat more compelling standards than those set by the thirsty of this world, numerous though they might be. Both public and private-sector lawyers are comparing trade law’s growth to burgeoning practice areas like Aboriginal and constitutional law, which are admittedly somewhat further along the curve.

Still, it makes sense: the spread of globalization means increased engagement with other countries’ laws, including trade laws. As other countries’ laws become more important to business, they become more important to law firms. “Trade laws are sliding their way up the ladder when conglomerates try to figure out what’s best for the whole entity,” says Darrel Pearson of Bennett Jones LLP in Toronto. “They’re right up there with other important issues like the environment, government intervention and the cost of transportation.”

All this doesn’t even take into account the growing ubiquity of sanctions and export controls, which, as Lexpert pointed out in its March 2015 issue, have become an increasing concern to companies doing international business. And trade lawyers say that’s not going to change any time soon. “When it comes to sanctions and export controls, the web of compliance is just going to get more complicated as we go along,” says Richard Wagner of Norton Rose Fulbright Canada LLP in Ottawa.

 

International trade law, which public-sector lawyers call international economic law, embracing both international trade law and international investment law, has traditionally been a public-sector practice concern. It’s different from domestic trade practice, which extends to trade remedies, subsidies, anti-dumping, customs and export-import controls, and related matters under the jurisdiction of the Canadian International Trade Tribunal.

Most of the country’s trade-law boutiques, like Ottawa-based Cassidy Levy Kent LLP, Conlin Bedard LLP and Greg Somers International Trade Law; Gottlieb & Associates in Montréal; and Millar Kreklewetz LLP in Toronto, focus on the domestic end of the trade practice. The major firms, by contrast, have changed their trade practice orientation somewhat in what has become a price-sensitive market into which non-legal consultants have made major inroads.

“Historically, customs practice has been an engine of private trade-law practice and a very stable and important part of our revenue despite the proliferation of free trade,” Pearson says. “But the focus has changed so that ‘country of origin’ and tariff issues are not as prominent as they used to be, with the emphasis shifting to things like valuation and transfer pricing from a customs and tax point of view.”

Indeed, the first three months of 2015 witnessed major customs valuation law developments. They include changes to the treatment of downward price adjustments in value for duty calculations and changes to the treatment of research and development fees.

“The first three months of 2015 complicated customs appraisal for multinational enterprise importers in Canada, and made most prudent the review of their customs valuation practices,” Pearson notes.

Otherwise, the WTO Trade Facilitation Agreement, reached in late 2013 and now undergoing domestic ratification by the organization’s members, will undoubtedly boost customs practices because it contains provisions for expediting the movement, release and clearance of goods, an objective that is very important to facilitating global supply chains.

“Trade facilitation is an important modern customs issue, but it’s not just the multinationals that are driving this,” says Greg Tereposky, who pratises in the Ottawa offce of Borden Ladner Gervais LLP. “So are the eBays of the world, who want to make things work for the little guys.”

As it turns out, however, international economic law and domestic trade law are converging. “The depth and breadth of trade agreements has expanded so much that there’s an overlap between them and traditional areas like tariffs and preferences that may prove advantageous or perhaps create risks for clients,” says Pearson’s colleague in Toronto, Matthew Kronby. “For example, if Canada and the US were both to conclude agreements with the EU, goods manufactured both in the US and in Canada might jointly qualify for tariff preferences regardless of where a particular lot has actually been manufactured.”

On-the-ball companies that recognize how trade law works can benefit by making choices about such things as whom they trade with or where they source their goods. But WTO studies note that tariff preferences are underused, particularly by small and medium enterprises but also by large sophisticated businesses, partly because trade agreements and their inter-relationships have become so complicated.

“All this puts a premium on lawyers who have the expertise to navigate these instruments and assist clients in making the right choices,” Kronby says.

Indeed, trade law is making a growing dent in M&A strategies.

“Because free-trade agreements now get into investment and services, they can become relevant in how M&As are organized,” Pearson says. “Companies who don’t have the tolerance to deal with these issues will see that their valuations are affected because the sensitivity to trade issues is quite real and growing. Trade lawyers now require much more interaction with partners in other practice areas than they did in the past.”

 

Driving the convergence is the sheer proliferation of trade agreements and bilateral investment treaties, whose scope has become ever more comprehensive in the 68 years since the General Agreement on Tariffs and Trade was signed by 153 countries in 1947. GATT’s main objective was to facilitate international trade by reducing tariffs, quotas and subsidies. The treaty focused, then, on the way goods were treated at the border.

In the next 50 years, a series of trade negotiations were held under GATT. The first rounds dealt primarily with tariff reduction but spread to include anti-dumping and non-tariff measures.

GATT’s last round led to the creation in 1995 of its successor, the World Trade Organization, whose 161 members account for about 95 per cent of world trade. About 25 other nations are currently negotiating membership. Members of the WTO must agree to abide by some 15 agreements negotiated under the organization’s auspices. Essentially, however, GATT and the WTO were creatures of state-to-state public law, although private lawyers had to have some familiarity with these arrangements if their clients ran into problems getting services across the border, and to pursue or defend complaints at CITT.

NAFTA, born in 1994, was the seed for a steady expansion of the private Bar’s role in international trade law that is still continuing. Although the treaty’s philosophical origins and guiding principles can be traced back to GATT, NAFTA was a much more comprehensive treaty. In particular, the agreement’s controversial-to-this-day Chapter 11, allowed private parties to sue foreign governments directly without first pursuing domestic remedies where they felt they had not been treated fairly with regard to procurement and investment opportunities and other matters. Suddenly, international trade lawyers became relevant in a way they had never been before.

Over the years, Chapter 11 challenges have become more common. Statistics compiled from the Canadian Centre for Policy Alternatives show 77 cases brought under the treaty. Of the three parties to the treaty, Canada is the most-oft sued with 35 challenges, significantly more than the 22 brought against Mexico and the 20 brought against the US. Over time, Canada has paid more than $170 million in damages compared to the US$204 million paid by Mexico. The US has never lost a case.

“It’s not surprising that Canada has been sued under NAFTA more than any other country,” says John Terry of Torys LLP in Toronto. “We’re a resource-rich country that attracts a lot of foreign investment.”

But Barry Appleton of Appleton & Associates, an international law firm with offices in Toronto and Washington, DC, maintains that the Chapter 11 emphasis on Canada springs from differences in the regulatory processes.

“The processes in the US are much more detailed and precise than they are in Canada, especially at the provincial level, so Canadian governments tend to make more unfair decisions,” he says.

There are currently eight cases against Canada seeking some $6 billion in damages. In each case, the complainant is a US company. Many challenges involve domestic environmental matters, including moratoriums imposed on renewable energy projects and offshore wind projects.

In March, a NAFTA tribunal ruled that Canada violated its obligations in a federal provincial assessment of a proposed quarry expansion in the province of Nova Scotia. The complainant, represented by Appleton, was Bilcon, a US-based construction materials company. Damages are still to be determined, but observers say they could well exceed US$300 million.

On reserve as well is a $653-million NAFTA challenge against Canada brought by Appleton on behalf of Mesa Power, a Texas-based developer owned by US financier T. Boone Pickens. Mesa is alleging unfair treatment in the award of wind power projects under Ontario’s FIT renewable energy program.

Bilateral investment treaties, which have also proliferated ‒ 2,600 are in force worldwide, with Canada party to 28 of them and negotiating more – contain provisions that mirror NAFTA’s Chapter 11 rights.

“When you narrow down the number of countries that are negotiating a treaty, you’re more likely to get agreement in sensitive areas, like agriculture, that are more prone to disputes after the treaty has gone into force,” Tereposky says.

As Tereposky sees it, international trade practice will continue to expand partly because it’s now open to all manner of companies. “You no longer have to be the big guy to play the international game,” he says. “You can be the little guy who feeds into the big product, and that’s happening even on the micro-level where the Internet and companies like e-Bay are empowering small businesses all over the world.”

 

Still, for Canadian trade lawyers, the best looks like it’s yet to come. The Comprehensive Economic and Trade Agreement (CETA) with the European Union, which received agreement in principle in 2014, and which many observers believe will have come into force by 2017, is Canada’s most ambitious trade initiative ever, broader in scope and more ambitious than NAFTA. Indeed, the mere anticipation of CETA coming into force has already done wonders for law firms’ trade practices.

“The announcement that agreement in principle had been reached caused a huge uptick in legal services,” Tereposky says. “Clients have become much more sophisticated and are looking very closely at how CETA might affect them. We’re getting busier and busier and I suspect that’s going to continue during the implementation phase over the next two years.”

Also under negotiation is the Trans-Pacific Partnership (TPP), currently involving Canada, the US, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The TPP would supplant NAFTA, and unlike CETA, will include both developing and developed nations.

“These new-generation agreements will still be based on historic principles, but the obligations will be modernized, and the arrangements will be a blend that goes beyond the NAFTA model,” says a government lawyer involved in the negotiations, who spoke on condition of anonymity.

For example, the new treaties will seek to prevent states from circumventing the rules by acting through third parties; to that end, the treaties will likely allow challenges not only to government measures but to state-owned or controlled enterprises to which the measures have been “downloaded,” as is frequently the case in China.

“These are game-changing agreements that will create the most wide-ranging obligations ever,” says Lexpert’s government source. “Companies will require a great deal more advice from trade law lawyers, who in turn will have to understand all the new rules and how they work in the context of the growing number of trade agreements generally.”

From all appearances, CETA and TPP will add to the complexity by pushing international trade law even further behind international borders into the provincial and municipal sphere. Indeed, as economies have advanced beyond merely trading goods to areas like cross-border services, investment issues and procurement issues, international trade is increasingly entangled with matters within provincial and municipal jurisdiction.

“Trade law used to be focused on getting things and people into the country,” Pearson says. “Now it is becoming increasingly concerned with what happens to them after they’ve made their way across the border.”

It’s not an entirely new development: NAFTA and many bilateral treaties certainly recognized that provincial and government policy, legislation and regulation are as subject to scrutiny as the actions of the federal government. The difference now is that the growing ambit of international trade agreements will increase that scrutiny and the knowledge that trade lawyers must now have of the impact of sub-federal conduct.

“One of the biggest issues for trade lawyers, governments and business is that Canada has for the first time committed the provinces, provincial Crown corporations, municipalities, school boards, academic institutions such as universities, and provincial and municipal utilities to CETA’s procurement obligations,” says Brenda Swick of McCarthy Tétrault LLP in Toronto. “These sub-federal procuring entities will be subject to international disciplines based on the WTO Government Procurement Agreement and the requirement to have a binding bid dispute mechanism for disappointed European Suppliers.”

Why is this so significant? It’s simple. “Sub-federal procurement is where the bulk of government spending occurs,” Swick says.

Also on the expanded horizon are provisions dealing with regulatory barriers and technical standards.

“Now that tariff barriers have come down or been eliminated entirely, we’re eventually going to see mechanisms that deal with behind-the-border regulatory barriers to trade,” Kronby says. “That could involve such measures as the harmonization of testing standards or provisions surrounding regulatory equivalence where the regulation in a particular country” will be deemed equivalent to those in the importing country.

It all sounds very complicated. To the delight of guess whom?