Cross-Border Counselor

Draft legislation currently being debated in the UK Parliament will introduce a new regime similar to that of the Committee on Foreign Investment in the United States (“CFIUS”) while maintaining the UK’s position as an attractive forum for business and an openness to foreign investment. While the National Security and Investment Act (“NSIA”) will not come into effect until later this year, it will have retroactive effect from November 12, 2020. It is therefore important that entities contemplating any transaction which has a UK element and is likely to come within the ambit of the new law obtain advice now to assess whether that transaction may be at risk of challenge once NSIA becomes law.  The Secretary of State for the UK has implemented some procedures to assist clients and advisers in determining whether a deal completed prior to NISA coming into force may be at risk of challenge once the new law comes into effect. More information about the draft legislation is available here.

On August 16, 2020, the United States re-imposed Section 232 tariffs on Canadian-origin primary aluminum imports, adding another twist to the long-standing trade dispute with Canada over its aluminum exports to the United States.  This tariff action followed a proclamation issued by President Trump dated 6 August 2020.[1]  Citing an 87% surge in imports of primary aluminum from Canada since a tariff truce announced in May 2019, the Trump administration re-imposed a 10% tariff on these imports.  This re-imposition of tariffs is happening despite the recent entry into force of the U.S.-Mexico-Canada Agreement (“USMCA”) in July 2020.  Canada promptly retaliated in kind by announcing countermeasure tariffs on certain U.S. aluminum goods. In early 2018, after a year-long investigation under Section 232 of the Trade Expansion Act of 1962, the Trump administration determined that aluminum imports from around the world threatened to impair U.S. national security.  In March 2018, the Trump administration imposed a 10% tariff on various aluminum imports, sourced from anywhere in the world.  (At the same time, the Trump administration also imposed a 25% tariff on various steel imports from around the world under Section 232.) Canadian aluminum products then became subject to whiplash in having tariffs imposed and removed.  Initially, Canadian aluminum products, along with Mexican products, were exempt, possibly in consideration of ongoing negotiations to replace the North American Free Trade Agreement (“NAFTA”).  Then, in June 2018, Canadian and Mexican aluminum products were added back onto the tariff list, which prompted Canadian and Mexican retaliatory tariffs on U.S. products. Despite this tit-for-tat mutual imposition of tariffs, the three countries nevertheless signed the USMCA in November 2018 to replace NAFTA.  To facilitate USMCA’s ratification by their national legislatures, the three countries declared a tariff truce in May 2019.  The Trump administration once again exempted Canadian and Mexican aluminum from the Section 232 tariffs, while Canada and Mexico rescinded their retaliatory tariffs against U.S. products.  The Trump administration also agreed not to re-impose Section 232 tariffs unless there was a surge of Canadian and Mexican imports beyond historic levels, and negotiations to address that surge are unsuccessful.  This truce paved the way for the USMCA’s entry into force on July 1, 2020. The U.S. tariff action affects only imports of unwrought, unalloyed aluminum from Canada – which are primary products made from raw bauxite that are used to fabricate downstream aluminum products.  This class of goods constitutes the largest share of Canadian aluminum exports to the United States.  Assuming this 10% tariff proceeds, it could significantly impact the aluminum market, from competing U.S. producers of primary aluminum, to producers of secondary aluminum from recycled goods that could compete with imported primary aluminum, and to downstream users of aluminum across all industries. Canada promptly imposed retaliatory tariffs on a variety of U.S. aluminum goods, as expressly allowed under the May 2019 tariff truce.[2]  Canada is imposing a 10% “surtax” on items ranging from raw aluminum ore to finished household appliances that use aluminum.  The May 2019 tariff truce had reserved Canada’s right to impose such countermeasures, albeit limited only to goods in the aluminum sector. If you have any questions about the Section 232 tariffs or other trade matters, Dorsey’s international trade attorneys profiled below would be happy to assist.  Dorsey’s attorneys at its offices in Canada and the United States are also prepared to assist clients with any other legal issues that may arise in cross-border transactions.[1] https://www.govinfo.gov/content/pkg/FR-2020-08-14/pdf/2020-17977.pdf. [2] https://www.canada.ca/en/department-finance/programs/consultations/2020/notice-intent-impose-countermeasures-action-against-united-states-response-tariffs-canadian-aluminum-products.html.

On January 17, 2020, the Committee on Foreign Investment in the United States (“CFIUS”) published two new rules that will greatly expand the scope of minority investments by foreign persons in U.S. businesses that are subject to CFIUS review. The rules take effect on February 13, 2020. Importantly for certain Canadian investors, the rules include an exemption for the next two years. These new rules implement changes in U.S. law mandated by Congress in its 2018 Foreign Investment Risk Review Modernization Act (“FIRRMA”). The first rule expands coverage over minority investments by foreign persons in U.S. businesses that involve critical technologies, critical infrastructure, or sensitive personal data (as those terms are defined in the rules). Depending on the investor involved and the nature of the U.S. business, the parties to the transaction are required to either submit a “mandatory declaration” to CFIUS 30 days before closing or file a voluntary notice with CFIUS. If the investment is subject to this new rule and the parties fail to file a declaration with CFIUS, CFIUS could impose a potential civil penalty in an amount equal to the entire transaction value (and the deal could be potentially unwound if CFIUS were to determine there was a national security threat). For two years from the rule’s effective date, CFIUS will exempt certain investors from Canada, Australia, and the United Kingdom. However, not all Canadian, Australian, and U.K. investors will benefit from this exemption. The exemption expressly excludes foreign individuals with non-exempt dual nationalities; firms that exceed certain thresholds for foreign ownership, board membership, or voting interests held by persons with non-exempt nationalities; investors who fall under any of the listed national security-related exclusions; and certain investors who lose eligibility for the exemption within three years after completing the relevant transaction. The second rule addresses foreign investments in most forms of real estate. In general, a foreign real estate investment will now be subject to scrutiny if it involves properties located within, or that function as part of, major U.S. airports or seaports, or that are within one mile (about 1.6 km) of a listed military installation in urban environments. Further, outside of urban areas, this “proximity” standard under the new real estate rule extends up to 100 miles (about 160 km) from certain U.S. military facilities and, in certain instances, includes entire counties of a U.S. state. This real estate rule contains the same exemption for Canadian, Australian and U.K. investors and is subject to the same express exclusions as noted for the first new rule. Foreign investors should understand that both of these new CFIUS rules are in addition to its previous well-known jurisdiction over investments that transfer control of a U.S. business to a foreign party. Moreover, that existing jurisdiction over change-of-control transactions does not contain the above carve-out for Canadian, Australian or U.K. investors. For more information about the new CFIUS rules, please see this synopsis of the proposed texts released in late 2019 (and which remain mostly unchanged in the final rules as promulgated): dorsey.com/newsresources/publications/client-alerts/2019/10/cfius-proposed-regulations-expanding-jurisdiction.

Canadian companies with interests in Cuba should take note of our recent eUpdate, Trump Administration Allows Lawsuits Against Persons Who Have Used Assets Confiscated by the Cuban Government, Imposes More Sanctions on Venezuela and Nicaragua, regarding new potential exposure to litigation in the United States. On April 17, 2019, the Trump Administration announced that U.S. courts may begin to hear lawsuits against persons who use assets that the Cuban government expropriated in the wake of the Cuban revolution in 1959 or since that time. While the underlying U.S. law (the Helms-Burton Act) has been in effect since 1996, all prior U.S. Presidents have chosen to exercise their discretion to waive that particular provision in the law, so this is the first time that such lawsuits have been allowed to proceed. This watershed event could have major and unprecedented implications for Canadian companies or individuals who have engaged in business in Cuba since 1959 if previously confiscated assets were involved. Such companies and individuals may now find themselves targeted by lawsuits in U.S. courts by the former owners of Cuban properties (such as mines, factories, hotels, and the like). Dorsey attorneys are available to assist Canadian businesses with addressing this significantly increased risk under U.S. law from doing business in Cuba. Our team has extensive experience assisting clients with addressing U.S. economic sanctions, including the trade embargo against Cuba, as well as representing clients in complex commercial litigation across the United States.

The governments of the United States, Mexico, and Canada signed a trade agreement (“USMCA”) in November 2018, which would replace the existing North American Free Trade Agreement (“NAFTA”). The Trump administration has begun seeking support in the U.S. Congress for USMCA. The path for the agreement, however, remains uncertain, with criticisms leveled against USMCA from both Democrats and Republicans. USMCA will adjust the existing NAFTA trade framework in certain ways, such as increasing the regional content requirement for automotive goods, providing greater market access in Canada for U.S. milk producers, and requiring Mexico to implement measures that will enhance organized labor activities. In addition, the USMCA contains new provisions that were unaddressed by NAFTA, such as those relating to digital technology, state-owned enterprises, foreign exchange rates, and termination in the event that a USMCA member enters into a trade agreement with a non-market economy (e.g., China). (See our prior post here for more on this topic.) Much of the core of NAFTA remains unchanged or very similar in the USMCA, a fact illustrated by the limited list of legal changes that the Trump administration has identified as necessary to meet U.S. obligations under the USMCA. According to the Trump administration, most U.S. legal changes relate to tariffs and procedures under which tariffs are determined, imposed and reviewed by agencies and courts. Despite the continuity between USMCA and NAFTA, USMCA’s approval and the timing of its consideration in Congress is uncertain. Speaker Nancy Pelosi and the newly elected democratic majority House of Representatives will have the first say on whether to approve the USMCA. Speaker Pelosi has not endorsed USMCA, and she has identified a number of issues of concern in USMCA, including labor rights, environmental protection, and prescription drugs. In addition, key Republicans and Democrats have stated that the USMCA will not be approved without an agreement from the Trump administration to remove steel and aluminum tariffs imposed on U.S. imports for national security reasons (referred to as “Section 232” tariffs). This demand could be a sticking point to approval because the Trump administration refused to consider lifting the Section 232 tariffs in negotiations with the governments of Canada and Mexico. In addition, Republicans have raised concerns about changes to investor-state dispute resolution under the USMCA. The USMCA has, however, gained support from key business interests, such as the Advanced Medical Technology Association, Biotechnology Innovation Organization, Canadian-American Business Council, Household & Commercial Products Association, International Association of Drilling Contractors, National Association of Manufacturers, PhRMA, and the Washington Council on International Trade. The timing for consideration of USMCA by Congress is uncertain. Under the Trade Promotion Authority (“TPA”) that Congress enacted in 2015, and extended in 2018, Congress must approve or reject the USMCA within 90 days of its introduction in the House. Introduction can occur when the Trump administration submits USMCA to Congress. President Trump recently said the administration plans to submit it “very shortly” to Congress, but doing so would immediately start the clock for Congressional approval. As noted above, it remains far from certain that the USMCA has the support necessary to pass the House of Representatives, let alone that Speaker Pelosi is willing to take up USMCA. If passage is not secured within the 90-day window, the U.S. ratification process could become significantly prolonged and perhaps unattainable, because Congress likely would seek to amend the USMCA, effectively re-opening the negotiating process among the United States, Canada, and Mexico. In short, whether and when USCMA will be approved by the U.S. Congress remains uncertain at this time.

Now that Canada allows using and producing marijuana and marijuana-related products, and bordering U.S. states like Washington, Maine, and Michigan have similarly relaxed marijuana-related laws, it seems natural that industries on both sides of the border will look for cross-border business opportunities. But cross-border transactions between the Canadian and U.S. marijuana industries face a potentially insurmountable obstacle: items primarily intended for the marijuana industry are considered prohibited drug paraphernalia and are illegal to import into or export from the United States. We refer to this statute as the Paraphernalia Statute. The Paraphernalia Statute prohibits paraphernalia from being imported into, exported from, or transported across U.S. state lines. The statute also prohibits the use of the mail to transport drug paraphernalia. Even merely offering paraphernalia for sale in the United States is a federal criminal offense. U.S. Customs and Border Protection (“CBP”) takes custody of each import prior to release the goods to the importer or consignee, giving CBP a powerful means to enforce the Paraphernalia Statute. CBP has the authority to seize and forfeit any merchandise that is considered to be contraband under federal law. Likewise, CBP can halt an outward bound shipment of an item prohibited for exportation from the United States and seize and forfeit drug paraphernalia. Besides the loss of the merchandise itself, importers and exporters also could become subject to criminal penalties. Most people would not be surprised to learn that CBP may seize items intended to inhale or ingest drugs, but the breadth of what is considered “paraphernalia” under U.S. law may not be widely understood, and goes far beyond items merely designed for marijuana consumption. The Paraphernalia Statute defines paraphernalia as equipment, products, or materials primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance. The Supreme Court has interpreted the phrase designed for to mean that items principally used with illegal drugs by virtue of features designed by the manufacturer are prohibited items under the Paraphernalia Statute. In addition, the phrase primarily intended, according to the Supreme Court, focuses not only on the objective features of the item, but also what the “likely use” of the item is by users. By way of example, production and harvesting equipment likely would be considered drug paraphernalia if it had particular attributes unique to the marijuana plant. CBP has found, for example, that cannabis grinders are prohibited by the Paraphernalia Statute from being imported because they were marketed for marijuana grinding, and the importer did not submit evidence of non-drug uses for the grinders. The statute could potentially cover health- or production-related equipment primarily used with drugs or drug plants. Companies should not take comfort in the legally ambiguous test about what constitutes prohibited paraphernalia because the penalties for being wrong are severe, and CBP and third parties can raise the issue. CBP can independently assess whether an import or export is prohibited under the Paraphernalia Statute, even if no party raises the issue. In addition, carriers and importers can ask CBP to interpret the Paraphernalia Statute to determine whether the import ban applies. This happened most recently in April 2017 when a carrier received confirmation from CBP that items shipped by the not-so-cleverly-named Stashlogix were in fact prohibited from import. The penalties for violating the Paraphernalia Statute, moreover, are severe and include potential prison time, CBP seizures, and hefty fines as a result of an offense. CBP has rejected arguments that statutory exceptions permit state laws to provide a safe harbor for importing or exporting drug paraphernalia. The Paraphernalia Statute exempts persons “authorized by…state…law to manufacture, possess or distribute such items.” An importer argued to CBP that, even assuming its marijuana accessories are paraphernalia, the Paraphernalia Statute authorized its activities because they were legal under Colorado law. CBP rejected the argument holding, among other things, that the statute could not be read as proposed by the importer and, in any event, the U.S. Constitution prohibited the result, because, under the “Supremacy Clause,” federal legislation supersedes and displaces inconsistent state law. Until a federal court overrules CBP on this interpretation of the law, importers and exporters must assume that state law is not a viable defense under the Paraphernalia Statute. CBP’s interpretation also raises the question: what is the status of state-licensed or authorized distributors of marijuana-related equipment under the Paraphernalia Statute? As with federal law generally, it remains to be seen how vigorously enforcement authorities will penalize violators of the Paraphernalia Statute. CBP’s actions to date, however, suggest that it will take action against offending imports or exports. For example, CBP has indicated that it could cite a non-citizen’s investment in cannabis business as grounds to bar admission into the United States under immigration law. Entities that are focused on the marijuana industry should take action to prevent cross-border transactions unless they are certain the items involved are not considered paraphernalia. Finally, application of the Paraphernalia Statute to trade between Canada and the United States could become a flashpoint in the larger debate about the extent to which federal prohibitions related to marijuana should be enforced. At the least, companies should avoid testing the boundaries of what are prohibited items under the Paraphernalia Statute and CBP’s willingness to enforce the statute.

On Sunday, September 30, 2018, the U.S. and Canadian governments announced that they had reached agreement on a new trilateral trade agreement with Mexico, which will replace the North American Free Trade Agreement (NAFTA). This long-awaited text, released late in the day as the “United States-Mexico-Canada Agreement (USMCA),” is now available for public inspection.[1] The two governments announced this agreement just before a key deadline was set to expire at midnight. As reported in May 2017,[2] the Trump Administration commenced a process to renegotiate NAFTA, citing the need to update the cornerstone trilateral agreement that has governed trade among the three countries since 1994. At that time, U.S. Trade Representative Robert Lighthizer informed Congress that the renegotiation would include the key trade negotiation objectives that underpin the Trade Promotion Authority (TPA) that Congress granted in 2015, and extended in mid-2018.[3] Adherence to that TPA framework is key, because it would allow for a simplified legislative process that avoids proposals for significant amendments. TPA requires the Trump Administration to publish the proposed agreement 60 days before the President enters into the agreement. Because of the Trump Administration’s negotiation tactics, that deadline fell on September 30.[4] The Trump Administration reached tentative agreement with Mexico at the end of August. Because Mr. Lighthizer initially announced his intention to renegotiate NAFTA with both Canada and Mexico, it appeared that TPA required all three countries to reach agreement. The public was kept in suspense, as Canada did not indicate its intention to join until just a few days before the deadline. The USMCA text released late Sunday appears to cover the objectives announced in May 2017.[5] In addition to sections that appear in the current NAFTA, there are new provisions relating to digital trade, regulatory practices, labor, environment, and small and medium enterprises. There are also enhanced provisions relating to state-owned enterprises that contains express prohibitions, and enhanced protection of intellectual property. According to Mr. Lighthizer, these were the areas that required updating because of significant advancements since 1994. (It is interesting to note that these objectives also appeared in the Trans Pacific Partnership of Pacific Rim nations that the Obama Administration negotiated, and from which President Trump withdrew in early 2017.) A notable difference from the current NAFTA is that the USMCA, unlike NAFTA, would automatically terminate if not renewed. During the sixth year, each country must give notice of its desire for the agreement to continue for another 16 years. If such consent is given, the process would repeat 6 years later. Although the United States had indicated a desire to abolish NAFTA dispute settlement panels, it appears Canada succeeded in pressuring the Trump Administration to preserve a key aspect of the panels. Currently, NAFTA provides for a panel to review of any tariff-related measures imposed under a country’s domestic laws as “trade remedies.” In a major concession to Canada, the USMCA preserves the panels to review trade remedies. At the same time, the USMCA curtails a separate provision regarding disputes relating to private investments; that mechanism will be limited to certain disputes between Mexico and the United States. Although the text has been released, the USMCA still must overcome Congressional scrutiny (as well as any obstacles to ratification in Canada and Mexico) before it can enter into force. For instance, Congress must be satisfied that the USMCA satisfies the TPA parameters to avoid a drawn-out legislative process. Because that process may not occur until 2019, the mid-term elections in November 2018 may determine whether the Republicans retain control of Congress to push through the Trump Administration’s USMCA text. All eyes will be on Congress to see whether USMCA will replace NAFTA and become law. [1] https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico [2] https://www.crossbordercounselor.com/trump-administration-announces-nafta-renegotiation/ [3] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/june/ustr-lighthizer-welcomes-extension [4] https://www.politico.com/story/2018/09/30/nafta-trade-canada-819081 [5] https://ustr.gov/sites/default/files/files/Press/Releases/NAFTA%20Notification.pdf