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June 15, 2018 Canada to impose retaliatory tariffs on certain US origin products starting 1 July 2018 Executive summary Effective 1 June 2018, the United States (US) followed through on its announcement to impose general tariffs on certain imports of Canadian steel and aluminum products. In response, Canada proposed retaliatory measures against CA$16.6 billion1 worth of US imports of steel, aluminum and many finished goods. Detailed discussion Background Effective 1 June 2018, the US followed through on its announcement to remove the Canadian exemption from the global "national security" interest tariffs imposed on US imports of steel and aluminum products at the rates of 25% and 10%, respectively. These tariffs were based on a previous finding by the US Department of Commerce under section 232 of the Trade Expansion Act of 1962, which concluded that the import of Canadian steel and aluminum products threatened US "national security" interests. In response, Canada proposed a dollar-for-dollar retaliatory measure, in the form of surtaxes or similar trade-restrictive countermeasures, against $16.6 billion worth of US imports of steel, aluminum and many finished goods. These retaliatory measures were announced in Canada's Department of Finance's Notice of Intent to Impose Countermeasures Action Against the United States in Response to Tariffs on Canadian Steel and Aluminum Products (the Notice). They are scheduled to take effect on 1 July 2018, unless the US exempts Canada from the tariffs. The Department of Finance has launched a consultation process for interested parties to comment on the proposed countermeasures. In addition to these countermeasures, Canada requested World Trade Organization (WTO) dispute consultations on 6 June and also announced it intends to launch dispute-settlement proceedings under the North America Free Trade Agreement (NAFTA) Chapter 20. Proposed countermeasures Canada's Notice proposes to target two categories of US origin goods as identified according to their Harmonized System tariff classification at the heading, subheading or tariff item level. The Notice proposes a 25% surtax on certain iron and steel products classified in chapters 72 and 73 of the Customs Tariff Schedule (see Table 1 below2). The Department of Finance also proposes a 10% surtax on aluminum products, as well as a range of finished goods, including foods, hygiene products, household appliances and articles, recreational goods and certain plywood, paper and paperboard products (see Table 2 below2). The surtaxes will apply to US origin goods based on the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations (essentially US Tariff NAFTA origin goods). Non-US origin goods transiting through the US to Canada and non-US origin goods distributed from the US to Canada will not be subject to the surtaxes or any other countermeasures. It is noted that "surtaxes" are a customs "duty" under the Customs Act (Canada) based on the value for duty of the goods in question. Importantly, they can be subject to drawback (refund) if not consumed in Canada (e.g., exported or destroyed before consumption or use in Canada) or, in other situations, subject to interpretation under section 89 of the Customs Tariff (Canada). The applicability of any particular duties relief program will depend on the definition of "duty" under that program. Relationship to NAFTA negotiations The US tariffs and Canadian countermeasures were preceded by a tense NAFTA negotiating round that failed to resolve the current impasse. Canada was initially exempted from the US steel and aluminum tariffs by the US in an attempt to reach a deal on NAFTA by the end of May. However, Canada has stated that it would rather see NAFTA collapse than accept US demands such as the proposed five-year sunset clause, the high-US Regional Value Content automotive requirement scheme proposed by the US, or the abolition of the state-to-state dispute resolution process.3 Implications for businesses Canada's proposed countermeasures are not final and may be subject to change as part of the Canadian consultation process, and importers, particularly manufacturers, can submit requests for exclusion to the Department of Finance. The number of goods targeted may increase or decrease, the form and severity of the countermeasures may change from the proposed surtaxes, and there is a possibility that the US will rein back its escalating trade action before Canadian countermeasures take effect on 1 July. It is clear that since the decision to open NAFTA renegotiations, tensions in US–Canada trade relations have grown considerably and will likely remain significant for the near future. On 23 May 2018, the US Department of Commerce initiated a section 232 investigation on whether imports of automobiles, including SUVs, vans and light trucks, and automotive parts into the US threaten to impair US national security.4 The fate of Canada's supply management system remains in the NAFTA crosshairs as well.5 The Trump administration has been consistently vocal about its protectionist trade policy, and it seems that it considers trade an essential element of US national security strategy and national security interests.6 It appears now that Canada's close economic and cultural ties to the US do not discourage US trade restrictive measures in any meaningful way. Given the current instability and uncertainty, importers and exporters across all industries engaged in US–Canada cross-border activity would benefit from reviewing their supply chains and sourcing patterns. Several other countries are subject to US tariffs and are potential candidates for additional trade actions, which will only further complicate matters for businesses with multinational supply and sourcing structures. In today's uncertain and volatile international trade environment, importers and exporters will require the ability to accurately map their supply chains and use data to make the critical decisions that will enable them to survive today's unstable trade environment while lesser-prepared competitors go by the wayside. ——————————————— 1 Currency references in this Alert are to CA$. 2 Download the pdf to see the referenced tables. 6 https://www.whitehouse.gov/wp-content/uploads/2017/12/NSS-Final-12-18-2017-0905.pdf. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Canadian Leader – Global Trade, Toronto
Ernst & Young LLP (Canada), Vancouver
Ernst & Young LLP (Canada), Quebec and Atlantic Canada
——————————————— PDF version of this Tax Alert
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