Getting out from under Canada's retaliatory tariffs can be a 'heavy lift'

The federal government has yet to make public any instances of Finance Minister Bill Morneau relieving a business of the burden of paying the retaliatory tariffs Canada levied against American products on July 1. Meanwhile, a U.S. Senate committee wants to investigate the 'screwed-up' American exemption process.

U.S. grants exemptions, but American process raises conflict of interest concerns

U.S. President Donald Trump exempted Canada and Mexico from steel and aluminum tariffs at first. Now they've become leverage in the NAFTA negotiations. (Joshua Roberts/Reuters)

The federal government has yet to make public any instances of Finance Minister Bill Morneau relieving a business of the burden of paying the retaliatory tariffs Canada levied against American products on July 1.

Meanwhile, Americans are exempting some businesses from paying their original steel and aluminum tariffs — through a process a U.S. Senate committee now wants to investigate due to claims that it is insufficiently transparent.

On May 31, the U.S. hit certain imports of Canadian steel and aluminum products with tariffs of 25 and 10 per cent, respectively, following an investigation by the U.S. Commerce Department conducted under the guise of a "national security" probe.

On July 1, Canada retaliated with a tariff list of its own, targeting $16.6 billion worth of U.S. imports of steel, aluminum and other products.

"The industries that aren't in steel and aluminum are getting sideswiped," said Brenda Swick, a Toronto-based international trade lawyer with Cassels Brock.

"Naturally, the steel companies love it."

There's a lot of things the government can do to make its retaliation strategy more fair and transparent if Canada's tit-for-tat trade battle drags on, Swick said. It could rotate its list of targeted products over time to spread the pain around, or add more products at a lower tariff rate to lessen the impact on specific items, she said. The government also could use a more narrow definition of what constitutes 'U.S. goods'.

Canadian businesses had a chance to argue their way off the list during a consultation process in June. Those that failed can try again to be excluded from the surtaxes through a remission process now underway.

"You've got to advocate," Swick said. "You've got to be in there ... Your competitors are going to be doing that.

"It's not like you're trying to say, 'Oh, the government shouldn't react.' That's kind of like treason. But it's not fair that you bear the entire burden ... That burden should be shared."

Morneau 'has to be careful'

Finance Canada is considering remission requests on a case-by-case basis. Eligible businesses must meet one or more of the following criteria:

  • their domestic market supply is short, either nationally or regionally.
  • they have contracts dated before May 31 that require them to use U.S. steel or aluminum (such as the strict requirements defence contractors face).
  • they face other exceptional circumstances that risk "severe adverse impacts" on Canada's economy.

Department of Finance spokesperson Jack Aubry told CBC News this week that the department has received "a number of requests" since July 11, "mainly in respect of various steel and aluminum products." The submissions were from a range of businesses, including firms in the "manufacturing, oil and gas and construction sectors."

But the department has yet to publish any notices of successful remission requests, suggesting either that decisions are still being processed or requests were denied.

The department will not release information about who makes the requests or whether anyone's been turned down.

An inter-departmental committee makes recommendations to Morneau for approval or rejection.

"We are hearing about the impacts on tariffs," Morneau said this week, in response to a question from CBC News about what exemptions had been granted to date. "We are making sure that we take those comments into account as we consider safeguards, making sure that the tariff approach that we've taken is actually working."

Finance Minister Bill Morneau has the power to decide which businesses don't have to pay Canada's new tariffs on U.S. steel, aluminum and other consumer goods. But his decisions could be taken to court. (Chris Wattie/Reuters)

"He has to be careful," Swick said, because the decisions are at the minister's discretion and could be litigated in court. Any exemptions could be scrutinized for inappropriate preferential treatment.

"You can imagine how many people are going to be arguing (severe adverse impacts)."

U.S. Senate push for transparency

On the other side of the border, exemptions granted by the U.S. Commerce Department to the original steel and aluminum tariffs are coming under more scrutiny.

A report in last Sunday's New York Times said that two of America's biggest steel companies, Nucor and United States Steel — both of which have ties to Commerce Secretary Wilbur Ross, U.S. Trade Representative Robert Lighthizer or President Donald Trump's trade adviser Peter Navarro — had so far objected to 1,600 exemption requests filed by other businesses with Ross's department over the past several months. These businesses want Washington's permission to use foreign steel without paying the tariffs.

On Thursday, Ron Johnson, the chair of the U.S. Senate's Homeland Security and Governmental Affairs committee, wrote to Ross seeking answers to specific questions and a briefing; his letter was obtained by Politico. A steel distributor quoted in his letter said the exemptions issued so far were the result of "the most screwed-up process."

Business leaders, Johnson wrote, have concerns about the "arbitrary nature" of the exemption process. One example cited in the letter suggested an exemption was denied based on false information, resulting in an extra $2.6 million tariff cost.

The same allegations have not been made against Canada's process.

United States Trade Representative Robert Lighthizer (left) and Peter Navarro, President Trump's trade adviser, both have ties to the U.S. steel industry. (Leah Millis/Reuters)

"From a Canadian producer perspective, we've taken the position that as far as exemptions go, in instances where the Canadian companies don't make [an equivalent steel product], we're prepared to be quite reasonable," said Joseph Galimberti, president of the Canadian Steel Producers Association.

"It's not in our interest to interrupt industrial production in Canada."

Steel producers are working with Finance Canada to help identify situations where they believe exemptions are appropriate or inappropriate, he said.

"It is in our interest to transition that business to Canadian mills in the most efficient, friendliest way possible, because ultimately what we're talking about here is a customer relationship," Galimberti said.

Jean Simard is president of the Canadian Aluminum Association, which represents Alcoa, RioTinto and Alouette. He said that although his group is "closely monitoring the situation, we are not tracking exemption requests."

'Don't expect a sympathetic ear'

Dan Ujczo, an Ohio-based lawyer with Dickinson Wright who specializes in Canada–U.S. trade and customs, said he filed some exemption applications with Ottawa on behalf of U.S. manufacturers of consumer goods that have Canadian operations. He hasn't heard back on any of them.

"We don't expect it to be favourable," he said, because too many exemptions "really defeats the purpose of retaliation."

"We've told our clients that we think this is a heavy lift, unless that you can demonstrate that there's really a negative impact to Canada.

"The purpose of retaliation is to generate political action in the U.S., so they aren't always the most rational tariffs. There is a job creation element to it, but we just don't expect a sympathetic ear, given that there are many Canadian companies with U.S. operations making the same argument on steel and aluminum."

Ujczo said the cost of tariffs worries his clients, but a bigger emerging issue is supply: when American companies run out of U.S. steel or key shipments are delayed, they'll start cancelling contracts, possibly within the next month.

It's adding pressure to the ongoing NAFTA talks. The steel and aluminum tariffs have been portrayed as an attempt by the U.S. to gain leverage over Canada and Mexico in those talks.

Morneau said the Canadian government continues to negotiate with the Americans to resolve the tariff dispute. In the meantime, it's analyzing how business trading patterns are changing in response.

"We're working hard to make sure that that trading relationship remains strong," the minister said.