The burden of protectionism: outlook for Canadian trade

Two overarching trends in trade law have been building throughout 2024 and are likely to pose significant challenges for businesses in the coming year and beyond.

First, an expansion of protectionist trade policies worldwide has provoked retaliatory responses and signalled a further regression away from rules-based trade regimes. Second, increasing regulatory compliance regimes have been adopted in many countries. Many of these regimes have legitimate purposes, such as compliance with international treaties, mitigating the risk of sanctions evasion, and combatting forced labour in supply chains. Others, however, reflect a trend toward protectionism. Regardless of their motivations, these regimes can significantly increase the regulatory burdens for business.

Businesses that trade across borders must be increasingly aware of and proactive in their responses to these challenges if they are going to manage compliance risk in the future, navigate increasing and novel burdens, and capitalize on opportunities.

Rising protectionism and the decline of rules-based trade

The shift in recent years away from trade liberalization and rules-based trade shows no signs of abating. As international political and economic tensions continue to rise, more countries, including Canada, are adopting protectionist or mercantilist trade policies. This trend will pose increasing risks for businesses into 2025. In 2024, examples of such protectionism included import surtaxes, an increasing use of tariffs, and retaliatory measures.

Canadian surtaxes on Chinese imports

To respond to Chinese industrial policy and overcapacity affecting politically and economically important sectors, Canada is aligning its policy response to Chinese imports with that of the United States by unilaterally imposing “surtaxes” — effectively, tariffs — on Chinese-origin goods.

In October 2024, after a short public consultation, Canada began imposing 100% surtaxes on Chinese electric vehicles (EVs) and 25% surtaxes on Chinese steel and aluminum products. Further surtaxes are due to come into effect in 2025, including proposed surtaxes on Chinese imports that may negatively affect the growth and security of what the Canadian government calls “critical manufacturing sectors” for the transition to net zero carbon emissions. These include lithium-ion batteries and parts, semiconductors, solar panels, and critical minerals. The Canadian surtaxes are part of industrial and trade policies adopted in concert with allied countries, particularly the U.S.

Similar to the initial surtaxes, the proposed surtaxes have been the subject of brief public consultations and are likely to track the section 301 tariffs finalized by the Biden administration in September 2024. These surtaxes will pose administrative, supply chain, and commercial challenges for businesses. Among other concerns, it is unclear whether the rules defining when goods are of Chinese origin can be applied consistently with the origin rules in Canada’s free trade agreements. In addition, there may be challenges accommodating pre-existing commercial contracts. The federal government has indicated that some of these consequences will be addressed largely through remission orders. Finally, there are important questions as to whether there are sufficient alternative sources of supply for certain of the targeted goods.

Blanket U.S. tariffs

President-elect Trump has promised he will impose tariffs of 20% or more on all goods imported into the U.S. Canada is not the intended target of these tariffs, and it is possible that Canada might be exempted from some or all  the tariffs. However, if Canada is not exempt, these tariffs will have profound, disruptive consequences for Canadian trade and manufacturing, given Canada’s export dependence on the U.S. market, the integration of North American supply chains, and the lack of adequate alternate markets for Canadian goods.

Unilateral measures

The Chinese government has commenced a World Trade Organization challenge against Canada’s surtaxes on Chinese EVs and steel and aluminum. China has also retaliated against those surtaxes by initiating an anti-dumping investigation into Canadian canola imported into their country. Canola represents a multi-billion-dollar export market for Canadian farmers and agricultural commodity traders. If Canada proceeds with additional surtaxes on “critical manufacturing” goods, further Chinese retaliation against Canadian exports is highly likely. Agricultural and other products for which there are substitutes or alternate country sources of supply will be particularly vulnerable to potential retaliation.

The shift in recent years away from trade liberalization and rules-based trade shows no signs of abating.

In the absence of progress at the Organization of Economic Cooperation and Development toward a multilateral solution to the taxation of cross-border digital services, Canada adopted a unilateral digital services tax in June 2024. The tax focuses on large, multinational service providers. The U.S. has started the process of challenging the tax under the Canada-U.S.-Mexico Agreement. However, a unilateral U.S. retaliatory response, in the form of section 301 tariffs, remains a possibility. Additional information regarding the digital services tax is included in our international taxation article.

Increased regulatory compliance risk and burden

Expansion of economic sanctions

Economic sanctions remain a preferred foreign policy tool of various governments, including the Canadian government. In 2024, Canada expanded existing sanctions, notably those relating to Russia, and imposed new ones.

Canada’s businesses and the legal community have sought more meaningful guidance with respect to sanctions compliance. Unfortunately, most guidance to date has been anodyne and has conspicuously avoided addressing the many thorny interpretive issues posed by the wording used in the key legal instruments. However, in April 2024, the government attempted to heed these calls by updating its “Frequently Asked Questions” (FAQs) page to provide new guidance on Canada’s autonomous economic sanctions. While these FAQs do address some questions, they also include interpretations of certain legal concepts (including “ownership” and “control”) that introduce new ambiguities rather than providing the desired certainty.

Businesses may need to focus more on compliance in the face of increased penalties. Amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act, among other things, authorize the Minister of Public Safety and Emergency Preparedness to create an administrative monetary penalty scheme to promote compliance with the reporting requirements applicable to imported and exported goods. Details on these amendments are included in our Legal Outlook article on anti-money laundering developments.

As geopolitical tensions grow, governments around the world are also tightening export restrictions on strategically important items. For example, Canada, in alignment with the U.S., the U.K. and members of the EU, has strengthened export controls on quantum computers and advanced semiconductors. We can expect further restrictions in 2025, with a particular focus on exports to China.

Forced labour and supply chain diligence

As we discuss in our Legal Outlook article on supply chains, Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act came into force in 2024. This legislation introduced a reporting requirement for certain in-scope entities and Canada’s existing import ban with respect to goods made with forced labour. 

On October 16, 2024, the government announced that it is continuing these efforts and that it intends to strengthen enforcement of the existing import ban. Consultations are ongoing and the government has proposed several new measures, including the creation of a supply chain “minimum traceability” process, the publication of a list of high-risk goods, and the imposition of reverse onus provisions that would require importers to furnish information about the supply chain of certain imports. The consultation also proposes that, where goods are determined to be made using forced labour, the importer should be responsible for the payment of all costs associated with the detention, removal, abandonment, and forfeiture of the goods.

New value for duty changes

Significant changes to Canada’s Value for Duty Regulations, first proposed in 2023, remain outstanding. The proposals continue to cause uncertainty for importers in Canada. The proposed changes would result in the imposition of a new “last sale” rule for customs valuation. The rule would require the valuation of imported goods for duty purposes to be based on the last sale in the series of transactions that results in the importation of goods. The result will be an increase in the value used to calculate duty for imported goods and, accordingly, the total amount of customs duty and tax imposed on goods.

A stated purpose of these amendments is to “level the playing field” between Canadian and non-resident importers. The Canada Border Services Agency (CBSA) has asserted that non-resident importers unfairly benefit by being able to declare a lower acquisition cost from an earlier transaction outside Canada. The proposed amendments would also apply to importations by resident importers.

The CBSA engaged in consultations regarding these amendments in early 2023, but took until May 2024 to publish feedback. Industry participants noted  the amendments will increase the cost of imported goods for consumers and may be inconsistent with Canada’s international obligations. The CBSA indicated that it is working with regulatory drafters to address issues raised in the consultations. We expect this will be an important issue to monitor in 2025 after the CBSA completes the implementation of its new assessment and revenue management system.  

New reporting requirements for steel and aluminum

As of November 5, 2024, importers of certain steel products are required to report the steel’s country of “melt and pour”. The availability of general import permits 80 and 81, commonly used for carbon and specialty steel products, will be conditional on the importer providing this data to the CBSA. This information differs from country of origin data. As a result, the change imposes an additional regulatory burden on importers.

This new reporting requirement follows the inclusion of steel and aluminum products on Canada’s import control list in 2020. The purpose of the inclusion was to collect information on such goods, pursuant to an understanding between Canada and the U.S. on its section 232 tariffs on steel and aluminum products. The requirement to provide melt and pour data likely foreshadows new restrictions on imports using Chinese inputs to address attempts to circumvent restrictions on Chinese steel imports, including Canada’s surtaxes and U.S. section 301 tariffs.

Looking ahead

2024 was a year of international tension and domestic uncertainty. Governments looked inward, adopting protectionist policies. Businesses should prepare to navigate continued uncertainty and increasing regulatory burdens in 2025. There are various steps businesses can take to prepare to navigate these policy shifts, including diversifying supply chains, shoring up in-house compliance expertise, increasing third party diligence, and, perhaps most importantly, continuing to monitor these developments.