Trump on Trade/NAFTA’s Future – Part III

Dear Friends,

On the NAFTA front, there were two further developments this past week of which we wanted to be sure you were aware.

The first was a notice from the U.S. Trade Representative’s Office published in the Federal Register on Tuesday requesting public comment and input on what the U.S. position should be in negotiations with Canada and Mexico to modernize NAFTA.  Specifically, the USTR is interested in comments addressing the following topics:

(a) General and product-specific negotiating objectives for Canada and Mexico in the context of a NAFTA modernization.
(b) Economic costs and benefits to U.S. producers and consumers of removal of any remaining tariffs and removal or reduction of non-tariff barriers on articles traded with Canada and Mexico.
(c) Treatment of specific goods (described by HTSUS numbers), including comments on (1) Product-specific import or export interests or barriers, (2) Experience with particular measures that should be addressed in negotiations, and (3) Addressing any remaining tariffs on articles traded with Canada, including ways to address export priorities and import sensitivities related to Canada and Mexico in the context of the NAFTA.
(d) Customs and trade facilitation issues that should be addressed in the negotiations.
(e) Appropriate modifications to rules of origin or origin procedures for NAFTA qualifying goods.
(f) Any unwarranted sanitary and phytosanitary measures and technical barriers to trade imposed by Canada and Mexico that should be addressed in the negotiations.
(g) Relevant barriers to trade in services between the United States and Canada and Mexico that should be addressed in the negotiations.
(h) Relevant digital trade issues that should be addressed in the negotiations.
(i) Relevant trade-related intellectual property rights issues that should be addressed in the negotiations.
(j) Relevant investment issues that should be addressed in the negotiations.
(k) Relevant competition-related matters that should be addressed in the negotiations.
(l) Relevant government procurement issues that should be addressed in the negotiations.
(m) Relevant environmental issues that should be addressed in the negotiations.
(n) Relevant labor issues that should be addressed in the negotiations.
(o) Issues of particular relevance to small and medium-sized businesses that should be addressed in the negotiations.
(p) Relevant trade remedy issues that should be addressed in the negotiations.
(q) Relevant state-owned enterprise issues that should be addressed in the negotiations.

Comments on these issues (or any others) must be submitted to USTR by June 12, 2017.  In formulating any comments, it is important to keep in mind that this Administration has a different perspective than previous ones when it comes to modernizing or liberalizing NAFTA.  We believe that this effort (at least from a US perspective) will be aimed more squarely at benefitting the United States than previous efforts (which may have looked more at benefitting the NAFTA region as a whole, or US companies with operations in Mexico or Canada).  The following quote from the summary is clear (and consistent with the Administration’s messaging on trade to date): 

“The United States intends to commence negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (NAFTA). The NAFTA was negotiated more than 25 years ago, and, while our economy and U.S. businesses have changed considerably over that period, NAFTA has not. The United States seeks to support higher-paying jobs in the United States and to grow the U.S. economy by improving U.S. opportunities under NAFTA.”

Emphasis added.  A copy of the notice is available here.

The second development relates to a study the USTR requested the U.S. International Trade Commission undertake related to NAFTA imports.  The study, entitled “Probable Economic Effect of Providing Duty-Free Treatment for Currently Dutiable Imports,” will examine the impact of providing duty-free treatment to imports of currently dutiable imports from Canada and Mexico.  Specifically, the ITC will provide a report containing its advice as to the probable economic effect of providing such treatment on (i) industries in the United States producing like or directly competitive products, and (ii) consumers.  The ITC has been asked to look at every dutiable article in the Harmonized Tariff Schedule.  The ITC has also been asked to specifically address the probable economic effects of eliminating tariffs on any dutiable agricultural imports from Canada or Mexico.   

The report is due by August 16, 2017.  A copy of the ITC notice of initiation can be found here and the USTR’s letter to the ITC can be found here.

*     *     *

These efforts to modernize NAFTA/trade with Canada and Mexico represent a ‘once in a generation’ opportunity.  Every company that produces articles in the NAFTA territory, sources articles in the NAFTA territory or competes with articles produced or sourced in the NAFTA territory has a strong incentive to participate in this process.  Given how quickly it is moving, companies need to assess their opportunities/challenges and decide how best to engage now.  Those who do not do so will likely find themselves at a competitive disadvantage once this process is over. 

We are helping numerous clients perform this assessment, as well as develop and implement strategies (offensive or defensive) to maximize the potential benefits.  If you have any questions about how to go about this, please let us know.

Best regards,
Ted

 

Customs Valuation Implications of Year End Transfer Price Adjustments

Dear Friends:

Just a quick reminder for those of you working at multinational companies which operate on a calendar year basis – do not forget to ask your tax colleagues whether any retroactive transfer pricing adjustments were made at, or before, year end.

If such adjustments were made (whether upward or downward), please be sure to consider the customs valuation implications here in the United States and elsewhere.  The failure to declare upward transfer pricing adjustments is becoming an increasingly common enforcement issue in many jurisdictions (largely because the issue is so easy to identify and often involves significant amounts/penalties); whereas downward adjustments could lead to a refund of customs duties, taxes and fees in some jurisdictions (including the US, the EU and, based on some recent developments, now Canada).  A quick note to your tax colleagues now could save a potential headache down the line.

As part of our customs compliance assessment process, we have developed a questionnaire tailored to these issues for sending to your in-house tax colleagues.  If you think the questionnaire would be helpful to you, just let me know.

Best regards,

Ted

Retaliatory Duties On US Exports to Canada and Mexico Are A Step Closer to Becoming Reality

Dear Friends,

Further to the below, the WTO arbitrator issued its report today in the COOL dispute between the US, Canada and Mexico.  In short, the report concludes that the United States’ COOL program harms Canada in the amount of $1.054 billion annually (the $1.054 billion is CAD (not USD).  At today’s exchange rate, that comes to approx. $781 million USD), and harms Mexico in the amount of $227.758 million annually.  See here for more info.

This was the last major hurdle before Canada (and possibly Mexico) imposed retaliatory duties on imports from the United States.  We expect that Canada will proceed to impose such duties soon (i.e., in days or weeks).  The list of products to be subject to such duties, as originally published in 2013, is below.  We also expect that Mexico will identify the products it intends to sanction shortly.  We expect both countries to adopt a “carousel” approach, which means that the list of products subject to these retaliatory duties will change periodically (to exert maximum political pressure on the US).

In that regard, earlier this year, the House of Representatives passed legislation repealing COOL.  That effort stalled in the Senate, however.  It will be interesting to see how the Senate reacts once the sanctions are actually put into place.

If you have any questions about this development, please let us know.

Best regards,

Ted

Retaliatory Duties On US Exports to Canada and Mexico Are A Step Closer to Becoming Reality

Dear Friends,

As you may know, the United States has been engaged for several years in defending a legal challenge brought by Canada and Mexico at the WTO to country of origin labeling (“COOL”) requirements for certain meat products.  The United States lost a substantive challenge to these provisions in 2013, and U.S. efforts to bring the COOL provisions into compliance with international legal obligations have also been challenged at the WTO.  

The WTO Appellate Body ruled yesterday that U.S. attempts to “fix” the problems created by the COOL legislation have fallen short. As a result, absent action by Congress to repeal the offending provisions, Canada and Mexico are poised to impose retaliatory duties on a variety of U.S. products (the retaliatory duties can be imposed on any products and are not limited to U.S. meat exports). 

In 2013, Canada published a list of tariff subheadings which it intends to subject to retaliatory duties (available here: http://gazette.gc.ca/rp-pr/p1/2013/2013-06-15/html/notice-avis-eng.html#d115).  Absent Congressional action on COOL, these duties are expected to take effect as soon as late summer/early fall.  

If you have any questions regarding this development, please let us know. 

Best regards,

 Ted

Canada and Mexico Question U.S. Country of Origin Labeling Requirements

Dear Friends:

You may have seen in the news over the last few weeks stories about a dispute between the United States and Canada (and to a lesser extent Mexico) over U.S. country of origin labeling requirements for meat.

The U.S. Department of Agriculture recently issued final regulations requiring the country of origin labeling for certain cuts of beef. Canada and Mexico have alleged that this final rule is not consistent with an earlier WTO decision finding that a previous version of the USDA regulations were inconsistent with the United States’ WTO obligations. Now that the USDA has issued its final regulations, Canada, in particular, is publicly raising the possibility that it will impose sanctions on imports from the United States. Sanctions in this area generally take the form of additional customs duties on unrelated imported goods; often times the duties are upwards of 100%.

While the imposition of sanctions will need to be approved by the WTO (and, as a result, is a little ways off), the negotiation process has begun. On Friday, Canada’s Ministers of International Trade and Agriculture issued a statement that included a draft list of tariff classifications Canada is considering hitting with sanctions. The list primarily covers U.S. agricultural products and foodstuffs (e.g., certain types of meat, fruits, vegetables, ketchup, etc.), it also includes certain manufactured items (e.g., furniture, jewelry, etc.). The complete list is worth a quick read and can be found here. Canada is publishing this list now, so the U.S. exporters that are impacted have time to pressure their Congressional representatives to resolve the USDA meat labeling issue.

All U.S. companies that export products to Canada should review the list. If your products are currently included, there are steps you should take now to minimize the chances that they are included on the final list of products ultimately subject to the sanctions. We, together with our colleagues in Canada, have a great deal of experience with these issues and would be happy to advise further, if helpful. If it would be, just let me know.

Best regards,

Ted