Cross-border complications just got more complicated for Canadian companies
Expanded U.S. extraterritorial trade regulations threaten to derail Canadian exports, imports
It is now home to the world’s largest train manufacturer, the world’s largest shipping and logistics company and the world’s largest shipbuilder; it is also the world’s largest producer of polysilicon, cotton and tomatoes, and it is out to eat your lunch.
China’s 21st century appetite for global dominance in targeted business sectors is voracious.
As a recent Canada West Foundation (CWF) panel discussion underscored, that appetite and the intellectual property security concerns it raises for North America, are complicating export and business dealings for Canadian companies caught between the country’s two biggest trading partners.
Carlo Dade, director of the CWF’s trade and investment centre, told BIV that one of the key takeaways from the discussion was how much security issues connected with trade have increased because of North America’s growing confrontation with China and how that increase is affecting Canada’s dealings not only with China but also with the United States.
Those issues, he pointed out during the panel discussion, will have an enormous impact on Canada’s ability to sell products south of the border and import good for manufacturing “given that 77 per cent of Canadian exports in 2022 went to the United States.”
The Chinese Communist Party (CCP) is focused not just on unshackling China from dependence on other countries for technology and market share. It wants other countries to be dependent on China.
As Enterprise China authors Allen Morrison and J. Stewart Black point out, it and the country’s 150,000 state-owned enterprises constitute far more than a collection of Chinese enterprises.
“It is,” they write in their recently released book, “the combination of the state and commercial business in ways and to a degree never witnessed in modern history.”
And that, for trade-dependent economies like Canada’s, is a problem.
That problem has been amplified by escalating China-U.S. geopolitical tensions, because, as noted during the CWF panel discussion, when elephants fight the grass gets trampled.
The fight here has been illustrated recently by Canada’s order to remove the social media app TikTok from all federal government devices because of privacy and security concerns. TikTok is owned by China’s ByteDance multinational company.
But TikTok is only the tip of the iceberg when it comes to security concerns for Canadian companies doing business in the United States or in China.
And that, as the CWF speaker series illustrated, has huge trade ramifications for Canadian companies – especially when it comes to technology, biotechnology, communications, aerospace and digital data.
Kevin Wolf, senior partner in Washington D.C.-based Akin Gump Strauss Hauer & Feld law firm, outlined to the CWF panel some of the increasingly complex trade and export regulations that now make up the rest of the iceberg submerged beneath the waterline.
They started back in the 1950s with the Direct Product Rule, which designates a product that is not manufactured in the United States but is made from U.S. technology as being subject to U.S. export controls.
Those controls instituted by Canada, the United States and other allies during the Cold War primarily regulated military equipment and weapons of mass destruction.
But today products ranging from semi-conductors and artificial intelligence to biotechnology, computer chips and super computers have complicated the trade and manufacture of products all over the world.
That, in turn, has dramatically complicated export control measures.
And that, as the webinar’s panel discussion underscored, has complicated the business of exporting and importing for Canadian companies.
Add in China’s ambitions of becoming a dominant global leader in such areas as 5G mobile network technology, industrial robotics, semi-conductor manufacturing and biotechnology and supply chain integrity challenges multiply enormously.
The concern for China’s competitors is that realizing its ambitions of reversing the market dependency equation from being dependent on other countries to other countries being dependent on it has accelerated under current leader Xi Jinping.
Consider for example that, according to Enterprise China, the United States relies on China for a wide range of goods, including 98 per cent of its laptops, 66 per cent of its shipping containers and 73 per cent of its mobile phones.
The book’s authors map out the key strategies in China’s game plan to eliminate dependency, dominate the market domestically and win globally.
They include leveraging regulatory mechanisms in the Chinese market, extracting market technology and limiting foreign ownership through joint ventures and artificially subsidizing its economy and its state-owned enterprises.
That has triggered data and tech security alarm bells in North America.
It has also expanded the reach and scope of extraterritorial compliance rules dealing with U.S., China and Russian trade.
Additional complications relate to goods produced in northwest China’s Xinjiang region, where suspected exploitation of the Uyghur people has blacklisted goods produced there.
Starting in October 2020, the expanded Foreign Direct Product Rule increased the scope of products that fall under U.S. Export Administration Regulations.
For example, Wolf said anything that is not made in the United States but that is produced from U.S. software technology or that has been produced with U.S. equipment and is destined to China’s Huawei or one of its affiliates is going to be subject to U.S. licensing authority, “even if it’s from Canada, even from Korea, even if non-U.S. made with no U.S. content and no U.S. persons..… So, from a practitioner compliance perspective, particularly if you're doing anything involving China, the rules become quite complex.”
And that is creating a challenge for exporters and importers everywhere.
Because their largest market is the United States, aerospace companies in B.C. and elsewhere in Canada must tread especially carefully.
Nelson Dong, the head of Dorsey & Whitney LLP’s national security law practice, added that in March 2021, the U.S. Department of Commerce adopted information communication technology rules that bar transactions of hardware, software and cloud computing services that have anything to do with data from China, Hong Kong, Iran, North Korea, Russia and Venezuela.
Canada has previously been subject to few export limitation controls from the U.S., but the rules are changing quickly because of the strategic security threats now facing North America from China and Russia.
And violations of those fast-changing rules, which cover critical and network infrastructure, sensitive personal data, cellphones, machine learning, robotics and quantum computing, carry significant penalties.
Dong noted that the maximum civil penalty for violating these rules is more than US$300,000 or double the amount of the transaction’s value; criminal penalties are more than US$1 million and 20 years in prison or both.
The rules also affect foreign direct investment.
As noted in Enterprise China, mergers and acquisitions and joint ventures are fundamental to China’s strategy of acquiring technology and other market intelligence.
And as Dong pointed out, “Chinese-owned and controlled companies will still be considered Chinese companies, not Canadian companies within the parlance of the [cross-border trade] rules.”
He added that Canada’s ambitious immigration inflow plan also raises trade complication issues, because until foreign workers receive permanent resident status, U.S. trade laws will consider them citizens of the countries whose passports they hold. That exposes them and the companies that employ them to the export and other control rules discussed above.
Wolf and Dong suggested several precautions that all Canadian companies should be taking to avoid stepping on regulatory landmines in the new trade landscape.
•establishing a clear code of conduct for a company’s suppliers;
•establishing clear terms and conditions of purchase for suppliers; and
•establishing at least a minimal level of due diligence regarding buyers and sellers.
Dade pointed out to BIV that one of the dangers in the U.S. expanding trade compliance rules beyond its borders is that once that Pandora’s box is open it can be used by the American political establishment for other issues in other regions.
That gets complicated for Canada, he said, if the U.S. goes after a country where Canada doesn’t agree with U.S. trade sanctions.
Dade said governments therefore need to do their part in mitigating the potential for more damage to Canada’s trade relationships.
The starting point there would be initiating serious conversations at provincial and federal trade association levels.
“What is the potential threat or problem that we face?” Dade said. “What are the ramifications? How should we respond? What resources do we have? And that is not what has happened yet.... So, Step 1 is understand the problem, [have a] clear discussion, not necessarily research, but just a basic investigation, and, [Step 2], start developing countermeasures.”
Finding resources for companies so that they can effectively navigate the increasingly complex trade landscape is another challenge for Canadian businesses.
“The question is,” said Dade, “how do we enable Canadian businesses to not just compete, but more to survive in a world where these security requirements pose a two-pronged threat? One is the things you think about – spying and IP and other things – but the other [is] getting caught up in the U.S.-China trade war.”