In our last international trade brief, we talked about the timing for the NAFTA renegotiations, the TPP summit in Chile and the proposed U.S. border tax. In this week’s brief, we look at President Trump’s trade enforcement budget, how Robert Lighthizer’s confirmation as U.S. Trade Representative will impact cross-border trade, and Canada’s NAFTA chapter 11 win.

President Trump to increase Department of Commerce’s trade enforcement budget

On March 16, 2017, the U.S. Office of Management and Budget released the President’s 2018 Budget Blueprint (Budget Blueprint), which provides the Trump administration’s preliminary budget outline for 2018. Among other “America First” strategies, the Budget Blueprint proposes to strengthen the International Trade Administration (ITA)’s trade enforcement and compliance functions, as a way of prioritizing “fair and secure trade.” ITA is under the purview of the U.S. Department of Commerce (DoC), and is responsible for enforcing U.S. trade laws and ensuring compliance with trade agreements negotiated on behalf of U.S. industry. Commerce Secretary Wilbur Ross is already on record as indicating that his department will vigorously enforce U.S trade laws.

The immediate manifestation of the “America First” strategies in the area of trade enforcement will likely be experienced by Canadian businesses through the following:

  • AD/CVD enforcement will likely increase — International trade law experts expect “ramped up” use of antidumping and countervailing duty laws by the Trump administration. Strengthening trade enforcement was a central theme in the Senate Finance Committee confirmation hearing of Robert Lighthizer, the U.S. Trade Representative (USTR) nominee, who stated during the confirmation hearing that he intends to bring “as many trade enforcement actions as can be justified under World Trade Organization rules, bilateral trade agreements and U.S. trade remedy laws.”
  • Softwood lumber dispute: negotiation vs. litigation — During the Senate confirmation hearing, USTR Nominee Lighthizer also noted that resolving the Canada-U.S. softwood lumber dispute is “at the top of his list” either through forging a new agreement or via litigation. While the softwood lumber dispute dates back to 1982, the most recent agreement between Canada and the U.S. expired on October 12, 2015. In January 2017, the U.S. International Trade Commission issued the preliminary ruling that Canadian lumber is harming the American industry.

David Emerson, British Columbia’s trade envoy to the U.S., has expressed that “B.C., as much of the rest of Canada, is not anxious to take a long, costly damaging (litigation) process.” Emerson previously signed the softwood lumber agreement in 2006 that brought about the fourth Canada-U.S. softwood lumber dispute to an end after costly trade litigation. Whether the U.S. will agree to resolve the dispute without protracted litigation remains unclear. Unless there is a negotiated resolution, the DoC is slated to announce its preliminary subsidy decision at the end of April and its dumping determination at the end of June. The U.S. will finalize the duties by early 2018, at which point Canada will be in a position to appeal the decisions.

In view of promises of accentuated trade remedy enforcement under the Trump administration, Canadian businesses exporting into the U.S. would be prudent to undertake a full risk analysis on their U.S.-bound exports to assess compliance with customs matters, economic sanctions and export controls, trade remedies and other market access issues.

Robert Lighthizer’s confirmation as U.S. Trade Representative: buckle up your seat belts for a bumpy ride

The nominated U.S. Trade Representative, Robert Lighthizer, is a well-known and veteran international trade lawyer and a free-trade critic who has spent much of his career filing trade remedy cases that seek to protect U.S. industries from “unfair” trade, and advocating for changes in U.S. legislation and policies that benefit domestic producers. At his Senate confirmation hearing held on March 17, Lighthizer reaffirmed commitment to President Trump’s “America First” guiding strategy for the new administration including enforcing U.S. trade laws, stating that, “Effective enforcement of these laws is an essential and indispensable element of a strong and effective trade policy for all Americans […] I will commit to use all the resources available to the U.S. Trade Representative to enforce fully existing U.S. trade agreements to ensure that our trading partners comply with their international obligations.”

As noted in the previous article, Lighthizer has indicated that ensuring U.S. softwood lumber producers can compete on a level playing field against subsidized imports from Canada will be “at the top of his list” if his nomination is confirmed.

The overall scope and breadth of the application of this “America First” strategy in the area of trade policy will become further understood with the passage of time. An early indication of how this principle will be applied in the area of economic sanctions and export controls is discussed in our recent Osler Update, which explores the implications for Canadian companies of the recent enforcement action taken against a Chinese telecom company, ZTE Corp., which has been fined $1.2 billion by the new administration. Accompanying the announcement of this record-breaking fine was a statement from Commerce Secretary Wilbur Ross that “these penalties are just the first example of the extraordinary powers Commerce will use” to punish non-U.S. companies who ignore U.S. trade laws, including U.S. export control and economic sanctions laws.

It is time to buckle up and brace for turbulence ahead.

Canada’s NAFTA Chapter 11 win and future IP negotiations

On March 17, 2017, a NAFTA tribunal unanimously ruled that Canada did not violate NAFTA Chapter 11 provisions providing for minimum standards of treatment and protection against expropriation of the property of Eli Lilly when Canadian courts ruled against Lilly in two patent cases based on the so-called “promise doctrine.” Lilly had argued that the promise doctrine, under which a patented invention must work as promised or else be held invalid, was a departure from international and pre-NAFTA Canadian patent law.

The NAFTA tribunal found no merit to Lilly’s claims. The tribunal was unwilling to shut the door to the possibility of a NAFTA violation based on a radical change in domestic law. However, the tribunal set a high threshold for liability, even while accepting that under certain circumstances, challenges to judicial decisions can ground a NAFTA challenge. However, such challenges should be successful only in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct by the judiciary. The tribunal in this case refused to question the Canadian judiciary’s own interpretation of pre-NAFTA patent law and found that changes to patent law were incremental and evolutionary.

Despite Canada’s success, trade pressure from the U.S. regarding the promise doctrine is unlikely to let up. During the March 14 Senate questioning of Robert Lighthizer — President Trump’s appointee for United States Trade Representative — Senator Orrin Hatch asked Lighthizer what he will do to ensure that Canada’s patent standards are in line with international obligations. Lighthizer indicated that he would place a high priority on strong IP enforcement for trading partners, including determining how to use all appropriate trade tools to address Senator Hatch’s concerns.

This exchange suggests that the U.S. Government may be willing to challenge Canada’s promise doctrine as a trade violation, possibly before the WTO. Alternatively, the issue may arise in NAFTA renegotiations, just as it did in early TPP negotiations. Both PhRMA and the U.S. Chamber of Commerce have criticized the tribunal decision, and both groups can be expected to push for U.S. intervention on this issue.

Criticism of Canadian law by these industry groups may be misplaced, however, especially since the Federal Court of Appeal made it more difficult to invalidate a patent for lacking utility in its 2013 decision in Sanofi v Apotex. The Supreme Court has yet to weigh in. In view of the industry’s level of alarm on this issue, clarity regarding Canada’s approach to the utility requirement in patent law would be desirable. The Supreme Court of Canada’s decision in AstraZeneca v Apotex, ruling on this very issue, will be very timely.