2020 was, to say the least, an unusually active year on the trade front. While 2021 may not be as spectacularly eventful, we nonetheless anticipate several significant developments in international trade, and specifically trade related to Canada, over the coming year. COVID-19 will continue to affect global trade flows and economic growth throughout 2021. The pandemic has highlighted the significance of e-commerce and the importance of new digital trade chapters included in mega-regional trade agreements (like the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) as well as standalone e-commerce agreements. We also anticipate further East-West decoupling to impact trade through measures focused on separate supply chains for strategic technology and defence goods, as well as ESG-related supply chain legislation, such as legislation governing modern slavery and human trafficking.

In Canada, the recently implemented free trade agreements will continue to be ramped up. In relation to the Canada-United States-Mexico Agreement (CUSMA), this has meant the re-emergence of dispute resolution between Canada and the US. This has already included long term disputes such as softwood lumber and new disputes relating to market access for dairy and duties on solar energy products. Throughout the year, further trade disputes may emerge as Canada looks to regulate and tax digital services and implement amendments to its broadcasting legislation. At the World Trade Organization (WTO), appeals continue to be hampered by the stalemate to appoint new Appellate Body members. The election of a new WTO Director-General and a potentially different approach to trade, specifically at the WTO, under a Biden Administration, may break that deadlock.

1. The continued impact of COVID-19 on trade

International merchandise trade will continue to slowly recover from the significant impacts of the COVID-19 pandemic. Forecasts for 2021 remain positive. The WTO has noted that though there are still various challenges, recovery is in sight. The WTO forecasts a 7.2% rise in trade over the course of 2021. The World Bank similarly predicts 4% global economic growth over the course of the year, with the Chinese economy predicted to expand by 7.9%. Such forecasts depend on the evolution of the pandemic throughout the year and government responses to it. However, these growth forecasts imply continued resilience in trade and notably in East-West shipping, a key global trade indicator.

Source: WTO Secretariat.

2. Continued CUSMA implementation

On July 1, 2020, the Canada-United States-Mexico Agreement (CUSMA) entered into force. Since its implementation, Canada and the United States have shown their willingness to re-engage in state to state dispute resolution under the agreement’s improved dispute resolution processes. State to state dispute resolution under the CUSMA's predecessor NAFTA had stalled due to procedural wrangling that effectively blocked the dispute resolution process. With the US's challenge of Canada's dairy quotas, the continuing softwood lumber dispute, and the imposition of US safeguard tariffs on Canadian solar products, it is safe to say that dispute resolution is back between Canada and the US.

a. Dairy tariff-rate quota dispute

On December 9, 2020, the US announced the first CUSMA dispute under Chapter 31 of the CUSMA. The dispute relates to Canada's allocation of dairy tariff-rate quotas on milk, cream, cheese, industrial cheese, milk powders, condensed milk and butter, among other goods, and targets Canada's:

• practice of setting aside certain allocations to processors and subsequently not being able to allocate requested quantities;
• administration of the tariff quotas; and
• additional criteria not contained in Canada's CUSMA schedule in the allocation process.

The dispute is currently in a consultation phase. Canada has not yet released any official public response. With the recent US election, it is unclear if the Biden Administration will pursue this dispute in the same manner. Should the parties not be able to resolve the dispute in the consultation stage, a dispute resolution panel could be formed under the CUSMA to decide the issue.

b. Softwood lumber dispute

On December 11, 2020, Canada announced that it had requested a panel review under Chapter 10 of the CUSMA regarding the US countervailing duties on imports of Canadian softwood lumber. The request is responsive to the most recent US imposition of duties on Canadian softwood lumber based on a Department of Commerce review of antidumping duty and countervailing duty investigations of imports of certain softwood lumber products from Canada. On November 24, 2020, Commerce established through the first administration process a 7.42% countervailing duty rate for most Canadian producers of softwood lumber. Under Chapter 10 of CUSMA, the parties have a right to challenge each other's antidumping and countervailing duty decisions in front of an expert panel with members from the countries involved in the dispute. The dispute will now move through the CUSMA’s dispute resolution process.

c. Canadian solar products

On December 22, 2020, Canada requested consultations with the US under Chapter 31 of CUSMA to address the continued imposition of US safeguard tariffs on Canadian solar products. Since early 2018, the US safeguard tariffs have caused Canada's exports of solar products to the US to decline by as much as 82%. On July 23, 2018, Canada requested under the North American Free Trade Agreement (NAFTA) dispute settlement consultations with the US. However, the US blocked Canada's attempts to resolve this issue under NAFTA. With the new CUSMA provisions, the US cannot unilaterally block dispute settlement proceedings. Similar to the dairy dispute, this dispute is currently in consultation and may be subject to the state to state dispute resolution process, which includes the formation of an adjudicative panel.

3. Canada and e-commerce

The COVID-19 pandemic has highlighted the importance of e-commerce and trade. Since 2019, Canada has supported the WTO's negotiations on e-commerce and held a consultation process. In 2020, the Canadian government expressed its interest in joining the Digital Economy Partnership Agreement between Chile, New Zealand, and Singapore, which promotes digital trade and interoperability between different regimes and addresses the new issues brought about by digitalization. This interest follows the inclusion of digital or e-commerce chapters in Canada's most recent mega-regional trade agreements such as CUSMA, the CPTPP and the CETA.

4. Brexit and the Canada-United Kingdom Trade Continuity Agreement

Canada and the United Kingdom agreed on a transitional trade agreement entitled the Canada-United Kingdom Trade Continuity Agreement ("Canada-UK TCA" or TCA) shortly before the end of 2020. The Canada-UK TCA replaces the Canada-EU Comprehensive Economic Trade Agreement (CETA), which governed Canada-UK trade prior to Brexit and during the 2020 transition year.

The Canada-UK TCA is currently working its way through both the Canadian and UK Parliaments. The final text of the TCA can be found here. In the TCA both parties have agreed to continue following CETA, subject to the provisions and modifications of the agreement and its applicable appendices. Canada published the UK Trade Continuity Remission Order, 2021 (Order). This Order preserves access to CETA duty rates for imports from the UK and allows importers to maintain their current trading levels without fear of higher duty rates affecting their bottom line. The Order came into effect on January 1, 2021, and will remain in place until the TCA is formally passed into law. As a result, importers must still ensure their products meet the rules of origin under CETA in order to qualify for the Order.

Throughout 2021 consultations and negotiations on the new Canada-UK Free Trade Agreement will commence, with an understanding that both parties will work towards a final agreement by 2024.

5. Modern slavery legislation potentially coming into force

Bill S-216, An Act to enact the Modern Slavery Act and to amend the Customs Tariff (Bill), was introduced in the Senate on October 29, 2020. This Bill has received two readings in the Senate and will continue to work through the legislative process in 2021. The Bill, in its current form, includes reporting requirements for certain designated entities. We have previously written about the Bill here. We believe that Canada will pass modern slavery legislation similar to its current form in the near term. Several jurisdictions around the world have recently implemented modern slavery legislation.

In addition to the Bill, Canada is actively taking measures on companies that engage in modern slavery practices. In a coordinate action with the UK and later the US, Canada imposed measures related to the human rights situation in the Xinjian Uyghur Autonomous Region. These measures include addressing the risk of forced labour from any country from entering into Canada and global supply chains by prohibiting the imports of goods produced wholly or in part by forced labour.

6. Digital and broadcasting tax and trade

On November 30, 2020, Canada set out its Fall Economic Statement which included a digital tax if one has not been agreed to under the current Organisation for Economic Co-operation and Development (OECD) digital tax consultations by January 1, 2022. Alongside recent amendments to Canada's Broadcasting Act that mandates payments to support Canadian content production, these measures may attract future trade and investment agreement scrutiny. Notably, the US and France are currently disputing a similar digital tax, with a US 25% retaliatory tariff on French goods having been thus far delayed. The US has already launched probes into the UK, Italy, Turkey, Austria, Brazil, Indonesia and the EU for similar digital service taxes.

7. WTO D-G elections, and Appellate Body still in crisis

We anticipate that in 2021 a new Director-General of the WTO will be elected. In May 2020, former Director-General Roberto Azevêdo announced his surprise resignation from the office of WTO Director-General, which took effect on August 31, 2020, a year before the expiry of his mandate. Azevêdo's resignation meant that the WTO had to find a new Director-General in a shortened process. At the end of the nomination period, eight candidates were put forward by WTO members. At the final round of consultations, Dr. Ngozi Okonjo-Iweala from Nigeria had significant support for the position. A final decision had to be taken at a General Council meeting. This meeting was meant to take place on November 9, 2020; however, it was postponed until further notice. The election of the Director-General must be by consensus. It still remains unclear as to whether that will be achieved.

Another event to look out for in 2021 is the development of the current, inoperative WTO Appellate Body. As discussed in a previous article, since December 2019, the WTO Appellate Body has been placed in a state of paralysis due to political disagreements between WTO members that have blocked new adjudicators' appointments. As a result, the Appellate Body lacks the quorum necessary to hear appeals, grinding the dispute settlement system to a halt. This paralysis created uncertainty in 2020 as the number of appeals increased, and this will continue into 2021, leaving countries to either wait it out or seek a resolution by negotiating with the other party to arbitrate the dispute outside of this forum. Nonetheless, for those countries that signed onto the Interim Appeal Arbitration Agreement, they may wish to continue such an arrangement until the Appellate Body is fully functional again.

The Dentons International Trade team keeps abreast of leading global developments and is ready to respond to the most challenging and topical trade-related questions. Please feel free to reach out to Paul Lalonde or Sean Stephenson with any inquiries.

This article was co-authored by Daniela Acevedo.

For the latest information and developments in regulatory law across Canada, see our Canada Regulatory Review blog.