Shall I start from the beginning? Okay.
Good morning, Madam Chair. Thank you.
Members of the committee, thank you for inviting me to appear today.
I am an international law professor in the law faculty at Université de Sherbrooke, and I specialize in international trade law.
I am delighted to be here today. I commend the committee for studying the issue, because the U.S.'s Inflation Reduction Act of 2022 has significant repercussions but hasn't received much attention in recent months.
Having followed the committee's proceedings over the past few days, I felt it relevant to focus my remarks on the legality of the act under the international trade rule system. My understanding was that many of you wanted clarification on that.
Let's say it right away: The Inflation Reduction Act is clearly illegal under international trade rules.
First, it violates the national treatment principle, which aims to avoid protectionist measures. It also violates the principle of most favoured nation treatment, which requires states not to discriminate among trading parties.
The act also violates the Agreement on Subsidies and Countervailing Measures of the World Trade Organization, or WTO, because, in order for a taxpayer to qualify for the tax credit, the vehicle battery must contain 50% North American content by 2024, and 100% by 2028. As everyone knows, any subsidy contingent upon the use of local content is strictly prohibited under the agreement.
There is no doubt that the American act violates the basic rules of international trade, so the question is whether the U.S. can invoke an exception.
Some have cited protection of natural resources, which is an exception under international trade law. Too much information is missing to say whether the act would meet the threshold for that exception. We will have to watch how the U.S. implements the act. Nevertheless, we can start asking questions about certain aspects, including Canada's favourable treatment under the act and the fact that the act's protectionist restrictions could ultimately disadvantage electric vehicle production, which would be harmful to environmental protection.
One might ask whether the CUSMA allows the U.S. to favour Canada and Mexico. FTAs allow states to give each other tariff advantages and to work together to harmonize their practices and measures. Under no circumstances do FTAs allow a state to provide subsidies to companies to use domestic goods or goods from a state with which it has a free trade area.
Finally, the U.S. will probably try to justify this law in the name of energy security. They will therefore most likely want to invoke the national security exception, at least for the “foreign entity of concern” portion of the law. Analyzed quickly, this exception hardly applies to the law.
All the experts agree that the act contravenes the rules of international trade. Obviously, this isn't the first time the U.S. or another country has adopted legislation that violates the rules, but this legislation is unique for a number of reasons.
First, the act has a considerable scope. The stated purpose of the act is to restructure supply chains in the world's most powerful country trade-wise.
Second, the accepted aim of the act is protectionism, and the act's illegal nature is just as accepted. Everyone in the U.S. involved in drafting and passing the act knew—and knows—that it is unlawful under international trade rules.
Lastly, the unfriendly tone of the act sets it apart. That's how French President Emmanuel Macron described the act, calling on the European Union to wake up and pointing out that Europe's two major partners—powerful countries—provide government support to their industries. He said that Europe needed to respond.
Where are we headed? President Trump called out China for its illegal subsidies, starting a trade war that came under fire from all countries. Now we have President Biden passing a protectionist act that provides illegal support. It's highly likely that the world will react differently this time around. We could see escalating protectionism. What will international trade look like?
Above all, how will Canada, a country that has always advocated respect for the rule of law, position itself in this new landscape? That's a fundamental question because this act could have a major systemic impact on the multilateral trading system we value.
Thank you.