On March 28, the Minister of Finance introduced Budget 2023, aptly titled a “Made-in-Canada Plan”. A key trade-related theme resonates throughout the Budget: futureproofing the Canadian economy to respond to realignment of global trade patterns.
Budget 2023 highlights new policy based initiatives and legislative amendments to address:
- The global race to net-zero economies and “industries of tomorrow”;
- “Friendshoring” economies to limit dependence on authoritarian regimes for critical goods;
- Domestic supply chain weaknesses;
- Forced labour in Canadian supply chains; and
- Circumvention of economic sanctions.
An overview of Budget 2023’s impact on the Canadian trade landscape are outlined below.
Budget 2023 proposes amendments to the Customs Tariff, which seek to address the realignment of global trade patterns and Canadian values on responsible business conduct. The Government has proposed:
- Indefinitely withdrawing the Most-Favoured-Nation (MFN) tariff for imports of goods of Russian and Belarusian origin. As drafted, the Customs Tariff, only permits the government to withdraw the MFN tariff for a circumscribed period of time. This amendment will result in the application of the 35% General Tariff of goods of Russian and Belarusian origin for the foreseeable future.
- Renewing Canada’s General Preferential Tariff (GPT) and Least Developed Country Tariff (LDCT) until the end of 2034, which will allow developing countries to continue their preferential market access to the Canadian economy on terms more favourable than the MFN tariff. These tariffs were set to expire at the end of 2023 and have been in place since the 1970s and 1980s, respectively.
- Creating a new General Preferential Tariff Plus (GPT+) to incentivize countries to adhere to international standards on human rights, labour conditions, gender equality, and climate change to gain access to the Canadian market. This tariff was first proposed in a 2022 consultation issued by the Department of Finance. Canada is attempting to align its non-reciprocal tariff programs with trade and development policy objectives, like those pursued under Canada’s FTAs. Canada appears to seek to export Canadian values on responsible business conduct by creating GPT+ for eligible developing countries that meet international standards on labour rights and environmental protection, such as offering preferential tariff to goods that are not currently subject to the GPT (apparel, footwear and ships), which are otherwise subject to MFN duties of 25%. Eligibility for GPT+ could be withdrawn if there is evidence that an eligible country no longer meets criteria, for example, the possibility that use of forced labour is used in the production of goods.
Budget 2023 predicts that customs duties will increase by 18.8% in 2022 to 2023 due to the repeal of the Certain Goods Remission Order (COVID-19) on personal protective equipment and other medical goods. It also predicts strong growth in imports of at least 4.4%. Additionally, it proposes to amend the Customs Act to permit the Canada Border Services Agency (CBSA) to change how it processes low-risk travelers entering Canada. Travelers have faced long delays when arriving at Canadian airports as global travel has returned to pre-pandemic levels. It appears that the proposed amendments are aimed at reducing wait times for travelers to clear Canada Customs.
Prohibiting Forced Labour in Canadian Supply Chains
Budget 2023 doubles-down on eliminating forced labour from Canadian supply chains. The Government intends to “eradicate forced labour from Canadian supply chains to strengthen the import ban on goods produced using forced labour” by 2024. Although the Customs Tariff was amended in 2022, pursuant to Canada’s obligations under the USMCA, to prohibit the importation of goods mined or manufactured with forced labour, the CBSA has been slow to enforce under the tariff classification re-determination scheme available under the Customs Act. The Government has not specified any earmarked funds, increased hiring of CBSA officials, training programs, or other policy changes to enhance enforcement of the existing prohibition. The Government also made an ambiguous commitment to ensuring that existing legislation (targeting forced labour) “fits within the government’s overall framework to safeguard supply chains”. Whether this foreshadows legislative or policy changes as to how goods are scrutinized for being manufactured with forced labour has yet to be seen.
Given this commitment, the Government may continue to legislate on forced labour once Bill S-211 is passed into law. The Bill is currently in its third reading before the House of Commons and politicians have scrutinized it for failing to do enough to address forced labour in Canadian supply chains. The Bill is supply chain transparency legislation and does not create a positive due diligence obligation on corporations to root out forced labour in their supply chain. Although there does not appear to be political will for a positive due diligence law in the House of Commons at this time, the Government could introduce due diligence legislation in the future to action its commitment to “eradicate forced labour”.
A focus of Budget 2023 is prohibiting economic sanctions evasion/circumvention by amending the existing legislative framework in place to report and criminalize money laundering. The Budget announces amendments to the Criminal Code the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and has foreshadowed new regulatory obligations for the financial sector to “report sanctions-related information” to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Currently, certain reporting entities in the financial sector have a continuing duty to determine and disclose whether they have property owned or controlled by or on behalf of a designated person. Currently, disclosure is made to the Commissioner of the Royal Canadian Mounted Police, and not to FINTRAC.
The Budget also recommits to Budget 2022’s proposal to implement a public beneficial ownership registry for corporations incorporated under the Canada Business Corporations Act by the end of 2023. Unlike Budget 2022, the Government now emphasizes the importance of a beneficial ownership registry to combat sanctions circumvention: shell companies can conceal ownership of property and when enforcement agencies cannot determine true ownership shell corporations can be used to evade sanctions. Additionally, the Government has recommitted to Budget 2022’s proposal to establish a Canadian Financial Crimes Agency. The reference to “financial crime” has been scoped to target money laundering charges, prosecutions and convictions, and asset forfeiture. The Government commits to providing the proposed agency’s mandate in its 2023 fall economic and fiscal update. Whether the agency will play any role in enforcing Canada’s economic sanctions, which are currently enforced by the CBSA and the RCMP, remains to be seen.
Strengthening Trade: Canadian Supply Chains, Imports, and Exports
Budget 2023 highlights the Government’s commitments to strengthen trade by investing in Canadian infrastructure in strategic trade corridors (ports, airports, railways, and highways) and to mitigate risks and increase opportunities for Canadian exports.
Moving goods within Canada is a necessary element to increasing Canadian exports and distributing imported goods throughout the country. The Government has committed to continue to strengthen Canadian transportation by establishing a “Transportation Supply Chain Office” to respond to transportation disruptions and coordinate to increase capacity, efficiency, and reliability of transportation infrastructure. It has also earmarked $25 million to develop transportation supply chain data to inform future infrastructure planning, and it has proposed legislative amendments aimed at compelling data sharing by shippers using federally regulated transportation services and extensions to interswitching limits on rail lines in the prairie provinces.
Budget 2023 also highlights the Government’s past and ongoing efforts to mitigate risks and increase opportunities for Canadian exports. The Government outlines its efforts to lobby the U.S. government to create benefits under the Inflation Reduction Act (IRA) for Canadian auto-manufacturers and the Canadian critical minerals sector. Under the IRA, U.S. consumers purchasing “North American” electric vehicles are eligible for tax credits. The tax credits equally apply to electric vehicles undergoing Canadian production, and Canadian sourced critical minerals and batteries used to manufacture these vehicles. Coupled with the benefits under the IRA, the Government appears to seek to increase critical mineral and battery production, and perhaps exports, by supporting the extraction and processing of critical minerals through the “Clean Technology Investment Tax Credit”. The credit proposes a refundable credit equal to 30% the cost of investments in new machinery and equipment used to extract, process or recycle key critical minerals: lithium, cobalt, nickel, graphite, copper, and rare earth elements. Increased Canadian extraction of critical minerals and production of batteries will reduce Canada’s reliance on imports from other nations that are key to the green energy transition.
Additionally, the Government committed to providing $57.5 million over five years to the Canadian Food Inspection Agency to establish a foot and mouth disease (FMD) vaccine bank for Canada, and develop response plans. This initiative seeks to mitigate risks of a Canadian FMD outbreak, which would impact Canada’s exports of the infected livestock. This commitment follows Japan lifting its restrictions on imports of Canadian beef, and precedes planned tariff rate reductions on Canadian beef products that come into force on April 1 pursuant to the Comprehensive and Progressive Trans-Pacific Partnership.
Budget 2023 commits to make efforts to continue to reduce exemptions under the Canadian Free Trade Agreement, which governs trade amongst Canadian provinces. Specifically, the Government commits to facilitate meetings on mutual recognition of regulatory standards with the goal of improving the movement of goods and services within Canada.