Written By Darrel H. Pearson, John M. Weekes, Valerie Hughes, Sabrina A. Bandali, George W. H. Reid, Jessica B. Horwitz and Ethan Gordon
The COVID-19 pandemic has already had, and will continue to have, far-reaching effects on international trade, and given its heavy reliance on trade, on the Canadian economy. In the three months that have followed the initial outbreak in China, a variety of legal, administrative and regulatory issues have emerged as the novel coronavirus has spread and public health efforts have been initiated to "flatten the curve". These issues will impact international trade, and create uncertainty for businesses.
Cross-Border Trade in Goods and Services
Supply Chain Disruption and Building Resiliency
The disruption to supply chains caused by COVID-19 is readily apparent. From raw materials to finished goods, the operational effectiveness of distribution chains has been impacted by the need to introduce social distancing measures and "lockdowns" of various kinds. Slowdowns in manufacturing due to the unavailability of labour or material inputs are an inevitable result as the virus spreads. Export and import activity has been curtailed by precautionary measures introduced by transportation authorities, such as mandatory ship quarantines, and by delays in the return of vessels. To date, the impact on Chinese shipping has left a shortfall of hundreds of thousands of shipping containers, which risks a reduction of millions of tons of shipping capacity.1 Businesses should review their supply chains carefully to ensure that they have identified, if necessary, pre-qualified alternative suppliers where possible. When the dust settles from the pandemic's disruption, not all existing business partners may survive and so companies need to be ready to move forward with new partners and alternative sources of supply as needed.
Businesses should also review their supply chain contracts to determine the application of force majeure or related clauses, with a view to determining whether or not they contemplate variation of terms or waiver of performance.
The Government of Canada has expressed a commitment to keeping commercial borders open, even as it becomes necessary to limit or eliminate non-essential travel (especially tourism and leisure). Additionally, the government has indicated that supply chains, without condition of the nature of cargo, will not be affected by limits on travel. However, restrictions at the border may become of lesser consequence than the inability to distribute imported goods in Canada, particularly non-essential consumer goods normally sold at retail and hospitality brick and mortar locations that are either closed or operating in a more limited manner.
Customs Compliance and Ongoing Trade-Related Investigations and Litigation
Interruptions in global supply chains may affect the availability of required documentation and otherwise disrupt customs compliance activities such as the oversight of service providers and maintenance of required records. These issues may manifest themselves in the future in the course of trade verification audits. For the present, the disruptions caused by COVID-19 have affected the Canada Border Services Agency (CBSA) investigation process and subsequent appeal processes have been temporarily suspended until April 20, 2020. This means that no reports, requests, or penalties will be issued until that time. The CBSA has indicated that its email system is unable to handle the volume of new customs filings that normally are sent by mail, but appreciates that many clients do not have access to mail or courier services while working at home.
Additionally, any current plans to appeal decisions of the CBSA to the Canadian International Trade Tribunal (CITT) will be delayed as the CITT has suspended its in-person hearings until at least April 14, 2020; appeals of decisions of the CITT could also be impacted as the federal court has suspended all timelines until April 17. Neither the CITT nor the federal courts have as yet advised of their intentions to conduct video hearings as a replacement.
On a positive note, customs authorities around the world have been introducing a variety of measures to assist importers and exporters navigating these challenges. Here in Canada, the CBSA has introduced several policies, communicated in Customs Notices, which vary existing CBSA policies in order to assist companies to maintain their customs compliance during this time:
- Customs Notice 20-11: The timeframe for the payment of all amounts due (for customs duties and GST on regular imports, re-assessments, penalties, etc.) has been extended to June 30, 2020. Interest on those amounts will continue to apply at the lower prescribed rate (1.6440 percent for Q1 2020), instead of the higher specified rate (7.6440 percent for Q1 2020) which would normally apply to late payments. There is no change to the deadlines to account for imported goods.
- Customs Notice 20-10: The CBSA has introduced a 45-day grace period for late accounting penalties, which applies to transactions released from March 11, 2020, to May 14, 2020, inclusively.
- Customs Notice 20-09: The 90-day period to submit corrections of errors found following a CBSA trade compliance verification has been extended by 30 days.
- Customs Notice 20-08: This Notice provides guidance on the availability of, and how to access, relief of duties and taxes otherwise payable on goods that are imported for use by government (federal, provincial and municipal entities) and first responders (police, fire and local civil defence groups, including medical response teams).
- Customs Notice 20-07: Customs brokers can obtain the release of non-commercial goods using the Single Window Initiative Integrated Import Declaration.
With many industries currently facing large-scale slow-downs or shut-downs, government measures intended to decelerate the spread of COVID-19 create challenges for domestic producers seeking to bring trade remedy actions, and foreign exporters and importers seeking to defend against them.
For domestic producers, the economic impact of COVID-19 may undermine their ability to prove causation in an injury analysis, i.e., that the dumping or subsidization of foreign goods (rather than the impact of a trade disruptive global pandemic) is a cause of injury or future injury. Companies that are considering filing complaints must diligently track their financial results during this period, and consider how to best document the changes experienced that result from market conditions related to the impact of alleged dumping/subsidization versus those that result from COVID-19. A weakened economy serves to make domestic industries more vulnerable to unfairly priced imports.
For foreign exporters and importers, COVID-19 may provide a temporary reprieve from investigations and measures levied against them. Postponements and delays have begun on this front with the CBSA announcement of a revised schedule for an administrative review relating to certain imports of Oil Country Tubular Goods and Certain Seamless Casing. Similar types of delays may cause uncertainty for foreign exporters under re-investigation, and their importers if a retroactive (up to two years) assessment is in the works.
Other trade remedies, such as safeguards or actions taken on national security grounds, may become vogue in these turbulent times, as vulnerable domestic industries seek protection from imports that either are un-dumped/unsubsidized, but cannot readily be proven as such, or simply as more expedient and effective remedies.
Export Controls, Standards and other Trade Issues
International Export Controls
The COVID-19 pandemic has prompted serious debate about whether individual countries have the supplies of essential goods required to respond to the pandemic. There has been greater interest in the introduction of export controls on medical equipment and food or agricultural products to safeguard supplies. Conversely, Canada and other countries issued a joint ministerial statement affirming the importance of keeping trade lines open, especially "refraining from the imposition of export controls or tariffs and non-tariff barriers and of removing any existing trade restrictive measures on essential goods, especially medical supplies, at this time."
On March 15, the European Commission introduced an EU-wide ban on unlicensed exports of certain personal protective equipment listed to destinations outside the EU. The personal protective equipment listed in the Implementing Regulation includes mouth and nose protection, gloves, and other protective clothing against infectious material. This regulation entered into force immediately, and will apply for six weeks.
Will these measures hamper the global medical supply chain by slowing delivery times, holding up production, and generally frustrating supply at a time where global medical professionals are in dire need? These international export controls may impact both Canadian importers and the Canadian health industry, with greater business or compliance risks to be experienced by importers, and reduced availability of critical supplies for the industry.
On March 24, World Trade Organization Director-General Azevedo called on all countries to provide information on all COVID-19 related trade measures for transparency reasons, which should help better track affected supply sources. On March 26, G20 leaders issued a statement on COVID-19 after a virtual summit in which they agreed “to work to ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders, and work to resolve disruptions to the global supply chains, to support the health and well-being of all people.” The leaders pledged “to commit to facilitate international trade and coordinate responses in ways that avoid unnecessary interference with international traffic and trade. Emergency measures aimed at protecting health will be targeted, proportionate, transparent, and temporary.” In other words, some restrictions are envisaged, including further WTO developments discussed below.
Possibility of Canadian Export Controls
Canada has firmly stated that it will not be imposing similar measures. Canada relies heavily on imported medical supplies. On March 25, Canada, Australia, Brunei Darussalam, Chile, Myanmar, New Zealand and Singapore issued a joint ministerial statement affirming their commitment to ensuring supply chain connectivity amidst the COVID-19 situation. For Canadian importers of medical supplies, the CBSA has released a listing of applicable tariff classifications, the potential for duty relief (including for imports required for an emergency), and other helpful import compliance information.
The U.S. decision to remove Section 301 tariffs (Trade Act of 1974 (U.S.)) on over 100 medical items manufactured in China could also impact Canadian businesses to the extent they export competing goods to the U.S. (though the impact should be attenuated by the short-supply situation), or would otherwise obtain better access to these goods imported from China.
Impacts on Other Trade Compliance Issues
The prevailing global trade uncertainty raises questions on whether inspection standards for agricultural goods and other controlled products will continue to the same degree and at the same pace, and whether the permit process for controlled goods for export from Canada will be affected. Global Affairs Canada has yet to address any procedural changes for export or import controls. The Canadian Food Inspection Agency (CFIA) stated on March 30 that it would be open by appointment only, which raises questions as to whether the CFIA will continue to inspect shipments of food at the same rate or with the same level of staffing.
Companies must remain vigilant and ensure that their compliance organizations are sufficiently robust to weather the current storm. Remote working and mental health effects on staff risk less attention being paid to, and oversight invested in, trade activities, financial flows, and compliance reporting than during normal conditions.
There has been no indication that Canadian government agencies will be less diligent in enforcement of Canada's international trade laws. Compliance management should be mindful that non-compliance during this difficult time may do lasting damage to a company’s compliance culture and expose it to risk of assessments and penalties. Notwithstanding injury from reduced sales, companies must remain vigilant and detail-oriented in all of their trade processes.
WTO and Trade Negotiations
COVID-19 and CUSMA
Given the immediate concerns to both the health and financial well-being of local populations, it is unlikely that the focus of governments will be on the negotiation of new trade deals. However, the Government of Canada recognized the imperative of safeguarding trade with the United States, particularly for goods and services deemed essential. Accordingly, the government has worked hard to ensure that changes at the Canada-U.S. border would not cause a discontinuance of trade.
The Canadian Government also accelerated its efforts to ratify the Canada-United States-Mexico Agreement (CUSMA, also known as the USMCA outside Canada) and secured passage by both Houses of Parliament on the day Parliament was adjourned. Despite passage of the implementing legislation, work is still underway on various regulatory measures necessary for the implementation of CUSMA, including its dispute resolution system and the uniform regulations on automotive rules of origin. United States Trade Representative Robert Lighthizer has stated that he (and the president) want CUSMA to come into effect on June 1, 2020, but it is not yet clear whether that will happen, in which case the CUSMA will likely come into effect on July 1. There is strong bipartisan support in Congress for an implementation date later than June 1. Under the terms of the CUSMA, “Each Party shall notify the other Parties, in writing, once it has completed the internal procedures required for the entry into force of this Protocol. This Protocol and its Annex shall enter into force on the first day of the third month following the last notification.” This means the notifications regarding the completion of internal procedures would have required to have been sent by the end of March in order to hit this target date. Though this did not happen, it is still possible the CUSMA itself might be amended to permit an earlier implementation date, but that prospect is becoming increasingly unlikely.
Impacts on Other Free Trade Agreement Negotiations
COVID-19 also raises serious questions about the future of negotiations between the UK and Canada on a new trade deal, as well as with the UK and the rest of the world. The British Government has given itself a hard deadline of December 31, 2020, as the date by which its Brexit transition period is to end, at which point Britain will no longer have preferred access to EU markets as an EU member. In addition, it will no longer benefit from the provisions of the trade agreements to which it was a party by virtue of being an EU member, e.g., CETA, the agreement between Canada and the EU.
Similarly, in the absence of a new Canada-UK agreement, Canadian suppliers will have access to the UK only under World Trade Organization (WTO) most favoured nation (MFN) provisions, including MFN tariff rates, rather than under the provisions of CETA. Given these exceptional circumstances, it may be that the UK Government will request an extension of the transition period as it is entitled to do under the separation agreement negotiated with the EU. However, Canadian businesses shipping goods to the UK should at least be prepared for the possibility that their exports will face WTO treatment at UK ports beginning on January 1, 2021.
Impacts on the WTO
At the WTO, the 12th Ministerial Conference scheduled for June has been postponed because of the COVID-19 pandemic, probably to a date in 2021. Ministerial Conferences provide key opportunities for discussions among trade ministers from the WTO’s 164 Members. Members were hoping to reach agreement at the June meeting on disciplining harmful fisheries subsidies and on deepening discussions on trade-related aspects of electronic commerce. The WTO was already facing a major challenge when its Appellate Body (AB) suspended operations due to American refusal to consider the appointment of new AB members.
In addition to issues created by the pandemic, the system of international cooperation has been further weakened by the action noted above to restrict exports of medical equipment needed to defend against COVID-19. Despite these difficulties, many Members of the WTO have shown a willingness to consider measures to modernize and strengthen the organization. The current challenges will test the resolve of WTO member governments to rise to the challenge. At a March 26 meeting in Washington organized by the Washington International Trade Association, concern was expressed about restrictive trade measures that have been taken during the crisis and support was voiced for the idea of negotiating sectoral agreements to liberalize trade in medical products once the pandemic subsides.
At their virtual meeting on March 30, G20 Ministers issued a Ministerial Statement echoing the leader's statement last week. The Statement noted that the commitments being made would be “consistent with national requirements”. The Statement does contain certain useful guidance on the positions the G20 ministers would like to take, as seen from the following excerpts:
- “We are actively working to ensure the continued flow of vital medical supplies and equipment, critical agricultural products, and other essential goods and services across borders, for supporting the health of our citizens. Consistent with national requirements, we will take immediate necessary measures to facilitate trade in those essential goods.”
- “We will ensure smooth and continued operation of the logistics networks that serve as the backbone of global supply chains. We will explore ways for logistics networks via air, sea and land freight to remain open, as well as ways to facilitate essential movement of health personnel and businesspeople across borders, without undermining the efforts to prevent the spread of the virus.”
Minsters also tasked the G20 Trade and Investment Working Group to carry out additional work, including identification of “longer-term actions that should be taken to support the multilateral trading system and expedite economic recovery.”
It may just be that the enormity of the current crisis will actually help Members find creative solutions to these issues. On March 27, Canada, along with 15 other members of the WTO, put in place a Multi-party Interim Arrangement (MPIA) which will allow appeals of panel reports in trade disputes on an interim basis, until the AB once again becomes fully operational. The establishment of the MPIA allows the WTO to attempt to aid businesses around the world to navigate the current pandemic. In these circumstances, the Canadian Government should continue its leadership efforts to work with other WTO countries to find a way forward.
The Bennett Jones International Trade and Investment group stands ready to assist businesses and organizations understand how these developments and measures might affect their operations, and to assist in developing strategies for managing these challenges. In addition, please visit our COVID-19 Resource Centre for other COVID-19-related materials.
1Toronto Star, "Containers Shortage Threatens World Trade; Shippers Waiting for Hundreds of Thousands of Containers to Move" (March 20, 2020) at p. B4.