Canada Series – Liberation Day, Dirty 15, Country of Origin

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Martha Harrison 

I can’t imagine a world in which we don’t renegotiate the kusma in whatever form those negotiations take. So we will probably have a Kuzma that looks a little different than the current multilateral agreement. And that’s okay, because that’s what negotiations are all about. Before

Annik  

we get started with the show. Here’s a quick word from our sponsor, global Training Center. As trade compliance professionals, you want to make sure that your procedures and documentation are completed as correctly as possible to avoid any delays and possible fines, we provide a range of trade compliance courses that will fit your needs, from in person or web training to recorded on demand courses. We can train one or even 1000s on your team through your learning platform or on our portal. We can even customize a private session for your team. Go to globaltrainingcentre.com to find out more.

Warrington Ellacott  

Hey, good afternoon, everybody. It’s Warrington Ellicott from the Canadian Association of importers and exporters, and welcome once again to the simply trade Canadian edition. And with me today is a very distinguished guest. I’m very happy to see our good friend, Martha Harrison from McCarthy Tetro in Toronto. Martha is a partner at the firm, and she’s usually the first person I give a call to to say, Hello,

Martha Harrison 

Warrington, that is lovely, and it’s very mutual. As soon as our clients need real industry application, you’re my first call. So there you go. All

Warrington Ellacott  

right. Well, you know, I like we always want to bring experts on the pod, and we certainly are thankful for you joining us today. So first of all, a little political update, as as the listeners will recall, last time we sat here with Jill and will was February 21 and we were talking about a Canadian election. And hey, we got a Canadian election. It happened Sunday. Mark Carney, who was the prime minister at the time, went to see the Governor General, and sure enough, she accepted the call for an election, and we’re in the middle of it, and we got 34 more days to go, so stay tuned as of right now, folks on the US side, it’s a coin flip. Frankly, we don’t know. So stay tuned. And enough of that. Let’s get to the policy side. So Martha, I’m sure you’ve been vacationing and lying on the beach, and everything’s been fantastic. I know, I know there’s been a lot of discussion, a lot went down. So I am going to date stamp it. We’re going to record this on the 25th of March, late in the afternoon. And the last time we sat together was February 21 so I counted that we went through 11 things. Now people are think 11 things went well. We added copper to the 232, investigations. We also had investigations now on the US side into lumber and lumber derivatives, which is obviously very concerning to Canada, right? This is an old argument. I’m sure you’ve been involved in those arguments, right? This dates back, not centuries, but many, many years. And then we had the IEEPA tariffs, come on, come off, come on again. And then we then we got into this usmca issue, and I know probably a lot of your clients got caught on the we were trading on a zero MFN basis. Now sudden, now, suddenly we have to be on a usmca basis. And I was laughing at the folks on the national broadcasters to suggest how easy it is to get usmca qualification. Yeah,

Martha Harrison 

it’s it’s certainly a very involved process to review, and you know, might be something that we talk about over the next over the next little while, yeah,

Warrington Ellacott  

and then from there, we got into the Canadian reaction. So I think it’s important to update our US listeners, on what exactly is in play from the Canadian retaliatory side. And you recall, we had $155 billion worth of products that were originally being targeted. That original $30 billion list, which was associated with the IEEPA tariffs, is still in effect and and in play right now, and I’m sure lots of your clients are probably caught in that game. And then that 120 $5 billion was parked to the curve until April 2, which we’ll talk about in a second, but that list still exists. And then, frankly, when the United States launched its steel and aluminum tariffs. Government of Canada took portions of that list and put that in the into the steel and aluminum thing. So I think there’s still going to be some activity depending upon what the United States does. We’ll have to see what happens there. And then we had our good friend Doug Ford talk about a. Electricity tariffs that got the attention of the White House and secretary, let Nick and that seemed to all get pulled back, and we now seem to be in this state of calm, I would suggest, right? There’s been a definite change in tone, I would suggest, from the parties, which is a good thing. I mean, de escalation is a good thing. I think everyone was looking for that. And then just recently we had the steel and aluminum tariffs, which were announced, and Canada did react to that. There was another $29.8 billion package that was in effect. But I think one of the things I did want to talk about here is I know the pod, the guys on the US side have been talking about the derivatives question, but I wanted to explore it here. Maybe you can help the listeners try to understand what is a derivative in the construct of that steel and aluminum tariff ruling. So

Martha Harrison 

when it comes to the derivatives that are engaged in the tariffs, it’s effectively a list of particular steel and aluminum products that are included in the application of the tariff. And these are manufactured products. And we understand that currently, there still remains some potential, not necessarily confusion, but potential lack of clarity around how the value of the derivative is going to be considered for the purposes of the application of the tariff. But you know, these is a is it a list of steel and aluminum goods that were subject to this, to this list in the US,

Warrington Ellacott  

right, which is quite different than just a roll of coal rolled steel, right? It was an actual good itself that was defined in the list. And importers need to pay specific attention to that item. And then, of course, they need to understand the content of the article, the weight of the article, the percentage of stealing articles. So there is quite an administrative burden to get to that. And if my recollection is correct, if you don’t define the the amount of steel in the article that they assume the maximum level of of content,

Martha Harrison 

right, that’s right. That’s right. That’s my understanding as well. Yeah.

Warrington Ellacott  

Okay, so that is that is in effect today. And so importers into the United States need to pay attention to that. And then, of course, on the Canadian side, we have our own retaliatory list and a list of items that you know, exporters and their customers on the Canadian side need to pay attention to. And then, following that, we had Canada in the fall, had put out a ruling on electric vehicles from China, and we saw China respond on March 20 to those tariffs that Canada had applied, and they had applied it to a number of Canadian agricultural products and a number of seafood products. And this is a this is a very challenging time for the Canadian government, I would suggest, because now that that has effectively driven a wedge between seafood and agricultural producers in Canada and steel and aluminum producers in Canada, and so I think the government’s got a challenge in how they bring those parties together to get at China over capacity. Because, I mean, effectively, that’s what the US administration and the Canadian administration is trying to get as China the distortions that have occurred in global trade,

Martha Harrison 

right and and whether those distortions take whether they are, whether the Canadian government or the US government is arguing that this, those distortions take place in the form of currency manipulation, in the form of overproduction, excess inventory, export subsidies. There are any number of of trade actions that can be considered as a trade irritant causing the increased risk of, let’s say, dumping or subsidization of those Chinese goods in Canada or in the US,

Warrington Ellacott  

right? Okay, well, and then this yesterday, the United States did a very interesting move where they they’re going to assess a 25% tariff on all goods coming from countries where those countries have imported oil and gas from Venezuela. I have yet to is there a precedent on such a ruling? I’m it’s,

Martha Harrison 

it’s extremely unusual and and so this, this type of action would not be considered sort of within the mainstream norm of trade type actions,

Warrington Ellacott  

because the action is not directed at to the country, which is the offending party is, for lack of a better term, it’s because, well, I’m going to tariff you because of the commercial relationships with you have with another party, right? And this, this can be very interesting, because if, if this were to stay in place, April 2 is. Coming, and this could be an additional 25% on countries such as China, India, Vietnam, Spain, Italy and others. And what’s fascinating to me here also the United States, it imported Venezuelan oil, for sure. And just

Martha Harrison 

an additional comment on that. So when we’re when we’re talking about the actions that President Trump is referring to in respect of the additional tariffs relating to the purchase or procurement of Venezuelan oil. Those are called secondary tariffs, and it’s it’s an interesting way to to put additional pressure on a foreign government for political reasons, whether that is to have the foreign government change a particular policy, change development in certain sectors, encourage more development in certain sectors, encourage them to purchase more from the US, or in you know, in many instances, to put some sort of ground around the argument that that particular government is behaving in a in a way that is unsatisfactory, in this case, to the US. So these secondary tariffs are sort of attract the the imposition, or they attract the the requirement for importers and exporters to pay those duties. But they’re a way to, behind the scenes, get at additional policy making with respect to the country, sure, and in Canada’s

Warrington Ellacott  

case, Canada has a number of sanctions already imposed on Venezuela. So this is not going to be a Canadian question which is, which is good news in that respect, all right? Well, that’s kind of a review of what has transpired over the last 30 days. Not much, really not

Martha Harrison 

much. And you know, I suspect by the end of this chat, well, we will be out of date.

Warrington Ellacott  

Only about four, four or 5 trillion bucks has changed ads here over the last 30 days. So right now, though, a couple of things before we get to April 2 there was the President did put out a desire to specifically target automotive products, semiconductor products and pharmaceuticals as well as lumber. Those have not materialized, and it reports now indicate that the administration may be taking those separately away from the April 2 date in very difficult to say, but it looks like they’re going to be placed into a different bucket different times. So let’s just park that over there in one spot. But April 2 seems to be what everyone is pointing towards, and it’s been called Liberation Day. And I think it’s interesting, because I think it’s interesting to explain to the folks what you know, the global trading system is based on right and the MFN, we all talk about MSN or most favored nation. Maybe, maybe you can help the listeners try to describe how this thing is constructed.

Martha Harrison 

Yeah, absolutely. So it is the case that we’re operating in a time where the usual constructs of traditional international trade rules, traditional international trade law, are certainly not at the forefront of some of the activity that’s taking place, particularly in the US. And so where there are parties that are that are members of the World Trade Organization at WTO. These parties have agreed to, under various international treaties, these parties have agreed to grant all other parties in the WTO sort of equal status as it relates to tariffs. And that’s generally and sort of that’s generally known as the most favored nation tariff. So that means exactly what it sounds like, if I offer Australia a particular tariff on a good and it’s a lower tariff than than maybe a general tariff, then I have to offer all of the other members of the WTO that same opportunity to take advantage of the lower tariff, that’s the MFN. Now, of course, there are exceptions to that, if you enter into multilateral trade agreements with other countries, like we’ve done with kusma, which would allow for certain countries to benefit from lower rated or zero rated tariffs, whereas countries who are not part of that multilateral agreement would not benefit from that tariff, but that that’s at a very high level, sort of how tariffs are supposed to be applied,

Warrington Ellacott  

right? Because you can always go lower, but you can’t go higher than the agreed to MFN rate. That’s that’s been established, right? And then there’s global preferential tariffs. It could be based on an article itself. Right? Like an article has been deemed an essential article by the WTO, and everyone can trade with that article free. And in my world, that’s usually a certain type of washing machine, for example, has been, has been determined to be an article that that to save water. And. Energy around the planet. It’s a great idea. So anyway, so apparently there is a list, however, of the dirty 15. Now, what the dirty 15 is that hasn’t really been defined, but I guess Canada seems to be in the mix of this dirty 15, which is an A remarkable question and of itself. But anyway, when I looked at the MFN weighted average between Canada and the United States, the facts would show that 99% plus of our goods are trading within usmca Kuzma on a free basis. So on a goods basis, we have complete reciprocity here on a good spaces on ag, it differs a little bit. There is an MFN weighted difference of about 7.4% between the two countries, but still, the amount of trade between the two parties is north of 97% so what that means, folks, is that 97% of the time goods are crossing on it, agricultural goods are crossing free. So the amount of trade we’re talking about here is very small. So what we still don’t understand, though, is what will be this methodology used by the administration to determine these reciprocal tariffs, right?

Martha Harrison 

Yeah, and I’m not even sure it’s clear what President Trump is is is calling a reciprocal tariff. You know, there there’s some writing to suggest that when he’s talking about applying reciprocal tariffs on April 2, what he’s talking about is trying to match any taxation measure that is applied by another country as against imports of us, goods going into that country, not withstanding the fact that those taxation measures would be applied to domestic sales as well, like our GT tax, for example, that’s applied on the on imported goods, but that’s also applied when I go to the store and purchase any item, I pay that Goods and Services Tax as well. So one issue to be determined is whether President Trump is considering general taxes that are applied on imported goods that are not actually discriminatory because they’re applied to local sales too, as a tax that he wants to match in this reciprocal taxation process, and so that, in and of itself is, I would say, it’s unclear. And then once we hopefully, we will gain clarity of that. I’m hoping on the first because if things start are supposed to start being executed on the second, we’re going to have to have some protocols in place to to make sure that we can respond appropriately, and importers need to understand what their liability is on for these taxes. But then, when we’re looking at the application of the taxes, it’s really around is, are these taxes or tariffs going to be applied to the value of a whole Good? Are they going to be applied to a part of a good how is that assessment going to be made it and we just don’t know yet, right?

Warrington Ellacott  

And I think we saw in the case of this deal aluminum tariffs in the United States, the US, CBP was struggling to get its system, its systems up to date. And no criticism here. It’s just the fact that they were trying to, I mean, we’re talking about 1000s and, well, millions of lines of data here,

Martha Harrison 

millions of lines and and there needed to be, obviously, you know, there’s a lot of online filing now. There’s electronic filing in Canada, and in different ways in the US. And so the systems need to be updated on both sides of the border, on Canadian side if we’re going to retaliate again, and and then on the US side for the goods going in. And I can appreciate that this would be a very different difficult scenario for the Border Services on both sides of the border.

Warrington Ellacott  

Yeah, and I think our listeners should also understand it’s just not a communication between the importer and the regulator, the customs authority, there’s a there’s brokerage in the middle. There’s others, partners in the trade system that their systems have to adapt to the change as well. So it’s not just one party, it’s multiple parties, multiple systems, multiple programming that has to take place. So the further in advance we get this information, obviously, the better we all are off. The other thing that’s come up in this discussion, though, it seems to be that this is a means to an end to get to a table, right? And I think regardless how we get to a table, I guess, who really cares? But I think the other things. So I would, I would submit this on April 2. If the United States, for example, were to impose a reciprocal tariff on Canada over and above, either the one or the 7% or above or even the 8% it was something great or different. You can imagine that the Canadian. Would likely view that as escalation, not de escalation, right? So I think that the point of the listener is stay tuned for April 2, like April 2, and I’ve been talking to the folks at the simply trade the group. I think we all need a big hug and a pod on April 3 to try and digest what has actually happened. So I think if I could make one recommendation for the listeners today, you want to stay very close to your partners and your programmers up and around April 2. So don’t be booking any vacation on April 2.

Martha Harrison 

Agreed. And another practical tip for listeners as well, to the extent that you’re engaged in import and export as between Canada and the US you know, work with your customs brokers to have at the ready all of the relevant tariff classifications that you typically use. Because to the extent that there is some kind of scope reduction to certain tariff classifications, it would be important to be able to identify that quickly, I will say on the reciprocal tariff piece, President Trump, that I’m aware of, has not made any indications, or clear indications that there would be a scope reduction based on tariff application. It seems like it would be sort of a one for one, but that remains to be seen, right?

Warrington Ellacott  

And I think the other thing too is that it’s just not Canada that’s in this discussion. There are many other countries that we can take, for example, USTR had put a document out on the Federal Register, and so we have other countries like Australia, Brazil, China, the European Union, India, Japan, South Korea. I mean, the list goes on and on. So I think the other tip for listeners here is you not only have to be viewing your situation in North America, you’re going to have to be looking at your international situation, whether you’re exporting your goods and whether those countries have taken any any retaliatory action. Right? We’ve seen that. We’ve seen the European Union right. The European Union have held back. Right. Mexico has held back. But other parties are just waiting to dip their toe in this water, right, for

Martha Harrison 

sure. And one of the key considerations following up on your point, Warrington, that you know, listeners and those engaged in the trade community need to expand their review internationally. One of the pieces that’s going to keep coming up is figuring out the origin, the true origin, of products that are moving around the world. Because just because a product is exported by a certain country, by an exporter in a certain country, doesn’t necessarily mean that that product originates for the purposes of customs law from that country. And so there’s going to have to be some pretty important and deep discussions about how importers and exporters can come to a level of comfort when it comes to identifying the real origin of the goods, because that’s a key data point in determining whether retaliatory tariffs are even going to apply to those goods being exported from around the world and imported in the US and and, and same with the host country, if the host country retaliates with whatever tariff retaliation or non tariff retaliation they take when, if it’s a tariff retaliation, the origin is also going to have to be understood, because it may not a good exporter from the US, may not qualify as a US good entering into your host state, meaning that the tariffs would not apply, or the surtaxes wouldn’t apply. So origin is a word that we’re going to see a lot in these discussions, and there’s going to be a lot more ink spilled around how to figure out what origins of goods are in order to limit risk, to the extent possible, of exposure to new tariffs and new surtaxes.

Warrington Ellacott  

Yeah, and listeners may not be aware, Canada released a consultation on Sunday, with regards to transshipment of steel in Canada. If you go to find if you Google Finance Canada, and you go to their website, you’ll see that consultation. But this is a point that Martha just raised, you are going to absolutely have to understand the origin, the melting pour requirements, and where that steel is coming from with respect to Canada, and then that’s that’s going across the planet. It’s not just a Canadian thing, but

Martha Harrison 

that’s it. And I think we’re when Canada issues consultation consultation processes. It’s really an important way for the Canadian government to government to understand the implications of potential tariffs that would be applied, not only on the US side, but potential implications of surtaxes that we could impose on our side. And it’s an opportunity for those in the steel sector to provide that input to the Canadian government so that they can make informed decisions around react. Whether they’re tariff or non tariff, that would cause the least amount of pain for Canadian entities while having a more sort of gripping impact on the US side. Yeah,

Warrington Ellacott  

and I usually find these are policy signals too, right? So the Government of Canada is thinking about doing something. It just doesn’t, hasn’t made up its mind yet what it wants to do. So it’s very important for listeners to if you’re in that space, you want to contribute to those comments and input. Get your comments in, all right. Well, I mean, stay tuned. April 2 is quickly coming. I guess the only other thing I had on my mind, though, is like, in the event this doesn’t drive us to a usmca table. Worse, worst case, right? Usmca no longer is seen to be valuable, or the parties can’t agree. And that went away, and we went back to MFN basis trade within North America. My recollection is, goods of origin becomes very complicated, like what, whatever complication we discussed in this pod today is, is minor, absolutely.

Martha Harrison 

It will be an exercise in very rigorous reviews of origin of the millions of goods that go back and forth, some partially produced in Canada, some partially produced in Mexico, some partially produced in the US. I mean, the easiest example that we often talk about is the auto sector, where it is that sector is so reliant on the interchange between all three jurisdictions. It’s you know, those and those levels of analysis on origin will be complicated and and never mind the fact that if we were to eliminate the kusma, there is incredible data that indicates really challenging numbers in terms of the exposure that Canada, the US and Mexico would have for increased border taxation, and to where inflation is a concern right now, just because of A threat of tariffs and the tariffs that are currently imposed, one can only imagine what inflation would look like if we were living in a trade environment that didn’t allow the three cosmic countries to trade on A largely 99% duty free basis. It will be very, very difficult on the North American economy, and very, very difficult on some of the most important sectors in Canada and in the US. And so one theme that I’m often thinking about when we’re talking about these really important issues is that I’m hopeful that when the Trump administration is coming to terms with additional tariffs or additional policies on the trade file, that they really start to seize on the data about how their policies will negatively impact their own constituents and their own sectors that are very important to the US economy.

Warrington Ellacott  

I think the listeners, when you’re talking to your representatives in your local markets, you want to explain to them the value of usmca, and the years that we’ve all spent together discussing regulatory cooperation, harmonization of systems, technical standards, the integration of customs rules and origin rules, and all of that that has been established is extraordinarily valuable. But if you ever made a decision one night and you were not happy and you just decided to tear that agreement up. Oh my goodness, the chaos that wouldn’t

Martha Harrison 

it won’t be a good day the next day, but I will say this, I’m an eternal optimist generally, and I can’t imagine a world in which we don’t renegotiate the Kuzma in whatever form those negotiations take, so we will probably have a customer that looks a little different than the current multilateral agreement. And that’s okay, because that’s what negotiations are all about. So, you know, I’m I can’t imagine a world where we wouldn’t have a free trade agreement anymore, but the more into this dispute we get, the more interesting it is that we could actually have that worry in mind, because in my career, there’s never been a time where I have worried about whether or not there would be free trade within the North American economy. It’s not something that would ever come. Up in a worse risk profile that when I’m advising clients. Yeah,

Warrington Ellacott  

I spent my last 30 years, you know, with Laura Dawson, talking about regulatory cooperation, and I hate to see that go down the drain. So absolutely, we’re gonna leave, we’re gonna leave the folks on that very positive note. So you know, once again, Martha, thanks for joining us today. Always, always insightful, as always, and this time it was your dogs trying to get on the pod, not my apologies. That’s okay. I dash. Hands are very noisy. That’s what they do, you know. So it is what it is. Well, folks, thanks for tuning in today, and thanks to the folks at the Global Training Center for hosting us. And we bid you a great day.

Martha Harrison 

Cheers. Thank you.

Lalo  

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