On July 1, the Canadian government began imposing a 25-per-cent surtax on steel produced in the United States as well as 10-per-cent surtaxes on aluminum and various miscellaneous items, including ketchup, maple syrup, household dishwashers, lawn mowers, pillows and bedding.
These surtaxes are in response to the 25-per-cent tariffs on Canadian steel and 10-per-cent tariffs on Canadian aluminum the United States imposed on May 31, says the Department of Finance Canada.
A lot of companies were surprised when the U.S. imposed these tariffs on Canada, says Andrew Lanouette, a partner in Cassidy Levy Kent LLP’s Ottawa office.
“I think everyone was caught off guard when Canada was put on the list [of countries on which the U.S. was imposing tariffs],” he says.
“Prior to the tariffs getting put into place, there’d basically been trade peace between Canada and the U.S.”
Canada has had “small, high-profile” trade disputes with the United States, he says, noting disputes about softwood lumber. But they have not been like an “all-out trade war,” he adds.
The surprise comes partly because of the United States’ rationale that the tariffs were needed to maintain national security, says Jessica Horwitz, an associate at Bennett Jones LLP in Toronto, who advises clients on international trade and customs matters.
“Canada and the U.S. have had such a close trading and also national security relationship for the past many decades so the idea that Canada would be included in a finding that trade from Canada impairs U.S. national security is something that I think is definitely surprising for a number of people in Canada and the U.S,” she says.
The trade tensions mean more companies are paying closer attention to the tariff classification of their products, says Jonathan O’Hara, co-chairman of the international trade group at McMillan LLP in Ottawa. Importers are responsible for ensuring they’ve filled out customs information properly about goods they’re importing, says O’Hara, and border officials don’t typically inspect every piece of paperwork.
“[Before these measures], companies took their best stab [at classifying products], and they weren’t too concerned about the details,” says O’Hara. “But now, because it matters — it’s no longer a revenue-neutral thing — it means you could save or have to pay a lot more of these surtax duties. People are certainly a lot more sensitive to it now.”
Businesses should get a professional to help them determine if their items are classified properly, says O’Hara.
“[A product’s classification number] may seem correct on its face, but when you actually go into a more detailed analysis of the technical specifications of the product, it can turn out that’s wrong,” says Horwitz.
Companies also need to confirm where products they purchase from suppliers in the United States are made, she says.
“Canadian surtax only applies to goods of U.S. origin. It does not apply to all goods sold by a U.S. company,” says Horwitz.
Companies can apply for duty reliefs and duty drawbacks from the government to help reduce their costs, says O’Hara. The Canadian Border Services Agency administers these programs.
Under the duty relief program, companies can apply to have duties waived on items when the items are imported into Canada, government guidelines say. This program is only for companies that import goods into Canada or receive goods that were imported into Canada. The program applies only to items that will be exported from Canada, the guidelines say.
Duty drawbacks are requests for a refund on duties already paid on items that are imported into Canada and will be exported out of the country. Government guidelines say the claims must be filed within four years of the release date of the imported goods or five years for spirits. The goods must be exported or deemed exported before the claim can be filed, the guidelines say.
Reduced duties are “a big competitive advantage,” O’Hara says, because they mean companies might not have to raise their prices as much to cover their increased expenses.
Reductions on duties are especially important to look into because some items cross the Canada-United States border several times and could be subject to the surtaxes whenever they cross the border.
“It’s like a multiplier effect,” says Horwitz.
For example, a Canadian company may extract steel in Canada and then ship that steel to the United States where it is coated.
“By default, that Canadian steel comes back into Canada as U.S. steel even though it was pulled out of the ground in Canada, melted into a slab in Canada,” says O’Hara. “That processing in the U.S. under the relevant rules makes it U.S. goods and that really gets to be a sort of kicker for some clients.”
The Canadian Goods Abroad Program means companies only have to pay the surtax on the amount of value added to the product by the processes that happened in the United States, says O’Hara. As an example, he says, a steel slab made in Canada may have a $900 value when it enters the United States. After being coated in the United States, it may re-enter Canada with a value of $1,000. Under the Canadian Goods Abroad Program, the 25-per-cent surtax would only apply to the $100 increase.
These applications require a lot of documents, says O’Hara, and getting all the documents can be “cumbersome,” especially if companies don’t already have these inventory systems in place.
“It’s important to have all your ducks in a row before you start to import or export products,” he says.
Companies can also apply to have their goods made completely exempt from the surtaxes by applying for a remittance. This means they need to argue that “the damage being caused [by the surtax] exceeds the political value of the surtax,” says Horwitz.
Guidelines posted by the Department of Finance say the government will consider giving a remittance when there is short supply of a product in Canada, either nationally or regionally; if Canadian companies signed contracts before May 31 that require them to use U.S. steel or aluminum in their products; or for “other exceptional circumstances that could have severe adverse impacts on the Canadian economy.”
An intergovernmental committee reviews each request, the guidelines say, and the committee may also consult with domestic producers. The guidelines also say applicants must include details about domestic competitors with information about how the remission could affect them and details about the exceptional circumstances.
“Because it’s political, it’s all very unpredictable,” says Lanouette, noting that the government isn’t likely going to make a decision that would disadvantage Canadian companies.
No one knows how long this trade war will last. The government’s June 29 announcement of the surtaxes says they will “remain in place until the U.S. eliminates trade-restrictive measures against Canadian steel and aluminum products.”
Lawyers are encouraging companies to look for solutions beyond the short term.
Dan Ujczo, who co-chairs Dickinson Wright PLLC’s counsel and cross-border Canada-U.S. practice group, and who is affiliated with the firm’s Columbus, Ohio office, says companies need to lock in their contract prices now, because, even when this trade war ends, it’s likely that steel and aluminum prices will remain higher than they are now.
“Right now, it’s basically the wild, wild West when it comes to steel and aluminum,” he says. “Companies will sell to basically whoever’s going to pay the highest price.”
Companies may want to consider writing into their contracts that they will only purchase goods not made in the United States, says Horwitz.
They may also want to consider splitting the surtaxes with the vendor or writing clauses that will allow for them to adjust prices based on what happens in the future.
“This area of law is changing fairly quickly and is very politically driven,” she says. “Things could change with very little notice.”