Dodging The Trade Minefield Along Our Friendly U.S.-Canada Border

Editor's Note: The United States and Canada have long been friendly neighbors. But even good neighbors sometimes have to settle disputes over turf. With almost half a trillion dollars in merchandise traded between the two countries each year, differences of opinion sometime pop up. The following interview with Paul Lalonde, an international trade lawyer with Heenan Blaikie LLP, is meant to provide an overview of the big U.S.-Canada trade issues on the table today.

Editor: Mr. Lalonde, would you tell us about your practice?

Lalonde: I am a partner with Heenan Blaikie in Toronto. My practice is focused on international trade and government contracting law. I am also engaged in helping foreign companies meet the challenges of doing business in Canada. I have had the good fortune to be involved in some of Canada's high-profile trade disputes, including those on softwood lumber, steel and agricultural products.

Editor: What big cross-border trade issues do companies face now?

Lalonde: There are a number of issues between Canada and the U.S. First, it's important to recall that more than half a billion dollars in trade flows across the borders every day. The vast bulk of it is problem-free. The relationship between Canada and the U.S. is very close, and the investment climate for investors remains extremely good and welcoming.

All that being said, problems can come up that cause serious disruptions to a company's operations. A few things come on my desk regularly - issues surrounding export controls, changing attitudes in both countries about foreign investments, and continued friction between the two countries relating to agricultural subsidies and softwood lumber.

Editor: How do export controls factor in?

Lalonde There are two main cross-border issues coming from the U.S. First, the U.S. imposes complex controls on sensitive military technology and goods under the International Traffic and Arms Regulations or ITARS. Second, the U.S. imposes economic sanctions and trade bans on countries such as Cuba and Iran. Canada's economic relationship with those countries is very different - we don't impose the same kind of sanctions.

The complication arises when a Canadian company purchases goods of U.S. origin - sometimes without even realizing it - and exports those goods to a questionable country. It also occurs when Canadian manufacturers incorporate U.S. components into their finished products. When filling orders from countries that might be the subject of sanctions, Canadian exporters have to be careful not to run afoul of U.S. law. A company may be in complete compliance with Canadian law, but face severe sanctions for exporting U.S. goods from Canada to certain countries. The U.S. State Department can make life miserable if it considers a company to be in breach of U.S. export control statutes.

Editor: What does "miserable" mean?

Lalonde: The sanctions can be extremely painful. For example, a company can be put on an interdicted list, meaning that its goods will no longer be allowed through U.S. customs. Not being able to fulfil orders from U.S. customers can be a severe sanction against a Canadian company. If the company has U.S. subsidiaries or affiliates, sanctions can be taken against them. Also, travel to the U.S. for senior officials and directors of the company can be curtailed or prohibited outright.

Companies shipping to countries where there is any question of sanctions or embargos need to do their due diligence to make sure they stay well clear of any difficulties. If you're in any grey area, it's always wise to protect yourself by getting legal advice.

Editor: Are there also legal issues on the Canadian side to contend with?

Lalonde: The situation becomes tricky when U.S. ITAR requirements run afoul of Canadian labour and employment laws. There have been a few rather spectacular and well publicised problems with Canadian military contractors. U.S. law restricts access to controlled goods and technology sent to Canada by the U.S. Department of Defence or by U.S. defence contractors. For example, some - but not all - dual citizens will be excluded from access to this information. So a defence contractor may be entitled to give access to controlled goods to a Canada-UK dual citizen, but not to a Canada-China dual citizen. This creates real problems in terms of the equitable treatment of employees under Canadian employment and human rights law. You essentially have to segregate some employees and exclude them physically from some parts of your operations and from work that they may otherwise be qualified to do.

Editor: How do you help employers sort this out?

Lalonde: We help companies comply with Canadian law while still allowing them to complete their U.S. contracts. We don't have any magic wands. We implement strategies to make sure companies avoid risks and, where that's not possible, limit risk as much as possible. We help them carry out a strategy that is well planned and deliberate and that keeps them out of the newspapers and out of hot water with regulatory authorities.

Editor: How are attitudes about trade and investment changing on both sides of the border?

Lalonde : The U.S. recently passed new rules dealing with foreign acquisition of assets deemed to have a national security dimension. The goal was to broaden the capacity of the President to block some foreign acquisitions.

In Canada, there is much debate about the so-called "hollowing out" of corporate headquarters with well-known Canadian companies being acquired by foreign investors. Concern has also arisen in the context of acquisitions by foreign state-owned enterprises of Canadian natural resource jewels. For example, there was great outcry about proposed Chinese investments in the Alberta oil patch and mining sector. No changes have been implemented in Canada yet, but many parliamentarians continue to debate the issue and a review of the Investment Canada Act may result in more stringent controls on foreign investments. We are monitoring these developments closely on behalf of our clients.

Editor: How does NAFTA Chapter 11 factor into this discussion?

Lalonde: This is quite interesting. Chapter 11 of NAFTA [North American Free Trade Agreement] provides protection for cross-border investors and facilitates the settlement of investment disputes. It allows investors whose investments have been harmed by government measures to seek compensation by way of an investor-state arbitration mechanism.

Those who have not looked closely at certain provisions of NAFTA Chapter 11 might consider that the investment provisions simply attached a bilateral investment treaty to a free trade agreement. In that context, Chapter 11 might be considered as only protecting investors when they make investments outside of their home country in one of the other NAFTA parties. For example, protecting U.S. investors in Canada.

Investor claimants are now making compelling arguments that these protections under Chapter 11 also cover investments made in their home country. In other words, the investors argue that at least some of the Chapter 11 protections extend to investments made anywhere in the NAFTA free trade area. For example, if a U.S. measure is adopted in a way that discriminates against a Canadian investor whose investment is in Canada, could those enterprises claim compensation under Chapter 11?

We are currently representing the Canadian Cattlemen for Fair Trade before a NAFTA arbitration panel on this kind of issue.

Editor: You also noted that softwood lumber and agricultural products are still troublesome areas. Why?

Lalonde: Unfortunately, we still haven't resolved all our issues on subsidies and trade remedies such as anti-dumping and countervailing duties. There remain some serious irritants on agriculture and, sadly, on softwood lumber.

On agriculture, Canada is going to go to a panel of the WTO to contest the consistency of the U.S. Farm Bill and the various subsidies that it provides - according to Canada - to American farmers. Conventional wisdom in Canada is that the subsidies represent a significant advantage to U.S. farmers and have disrupting effects on the market. I think the story is a lot more complex. For example, the U.S. Farm Bill also has measures designed to constrict the supply of certain products through a program of taking agricultural lands out of production. We'll see to what extent the WTO deems the U.S. measures to be inconsistent and whether Canada can take any action in response.

Editor: What's happening with softwood lumber?

Lalonde: When we concluded the Softwood Lumber Agreement of 2006, we hoped it would bring a number of years of peace. The deal itself provides for an arbitration mechanism to resolve disputes as to whether the parties are living up to their commitments. The U.S. has now initiated that process against Canada, claiming that we're reneging on the deal.

Our firm was very closely involved in the negotiation of the softwood lumber agreement, particularly on behalf of the Government of Quebec. We are observing closely and are interested to see how the dispute settlement mechanism will work out and whether it's a template that will function efficiently and at reasonable cost.

Editor: Speaking of highly politicized issues, why has the Security Prosperity Partnership [SPP] become such a hot button issue?

Lalonde: Frankly there is quite a lot of hysteria and misinformation surrounding it. Initially, this initiative had very modest objectives designed to resolve some of the unnecessary and unhelpful differences in regulations between the three NAFTA parties. These differences might relate to packaging or the types of forms governments require to be filed or whatever makes life unnecessarily complicated for cross-border businesses. Again, the objective was to deal with industry-specific issues that needlessly interfered with the smooth functioning of trade.

It has since degenerated into a public discourse that really has nothing to do with what the governments are trying to achieve. In the U.S. there is hysteria in some quarters about the building of a Canada to Mexico super highway. No one is sure where that idea has come from. In Canada, the SPP is portrayed by anti-trade groups as a stealthy abandonment of our sovereignty to the U.S. As someone who practices international trade and assists clients in dealing with the border on a daily basis, I wish I could reassure my compatriots that these fears are completely unfounded.

A number of committees have been struck under the SPP initiative to deal with industry-specific issues. I hope they achieve some useful results for cross-border businesses in all three countries without causing hysteria and creating a political storm. We encourage our clients to continue to participate in the consultative processes set up and to provide governments with their input on how things can be improved to reduce red tape and simplify border crossings.

Editor: Any final advice for readers who are considering getting involved with a cross-border business opportunity?

Lalonde: NAFTA offers superb export opportunities that are worth pursuing. But don't forget the border. The U.S., Canada and Mexico have different ways of dealing with the import and export of certain goods. It's important that you do careful due diligence in terms of how the border is going to impact your operations and the flow of goods between your facilities and customers. Go in with eyes wide open, expect complications and get good advice.

Published October 1, 2007.