There are news reports that President Trump is considering imposing economic sanctions against China.  U.S. Ambassador to the United Nations Nikki Haley made comments that suggest that sanctions are on the horizon (not quite imminent, but no longer unrealistic).

If the United States imposes economic sanctions against China in response to the perceived/real lack of action curtailing the intercontinental ballistic missile testing by North Korea, Canadian companies (and in particular, Canadian corporations with U.S. ownership or U.S. affiliates who are seeking business opportunities in China) would in all likelihood be impacted.  Even though Canada is a separate country from the United States (no, Canada is not another U.S. state), U.S. economic sanctions laws have extra-territorial application.  A Canadian business that breaches U.S. law (and, in certain cases, individuals who are the officers, directors, shareholders and management) could be the subject of a prosecution in the United States.  For this reason, Canadian companies should not ignore what may happen in the United States and Canadian companies may have to quickly adjust compliance programs and business activities.

Further, Canadian companies should be asking the Government of Canada to do all that it can to ensure that any U.S. shot at China does not hit Canadian businesses and individuals.  Add this to the list of important trade issues to discuss with the United States.

Due to the significant trade Canadian businesses have with China, these new economic sanctions may be the most difficult for Canadian companies to live with.  With the exception of Cuba, most countries against which the United States has imposed unilateral sanctions are not countries with which Canada has significant business ties.  Canada has imposed unilateral sanctions against many of the same countries against which the United States has imposed unilateral economic sanctions. Again, with the exception of Cuba, this will be a case where Canada and the United States are not on the same page.

It is likely that the United States would impose targeted economic sanctions against Chinese entities identified by the United Nations, the United States and others as fronts for North Korean entities through which prohibited and restricted goods are acquired.  It is also likely that the United States would impose targeted economic sanctions against certain Chinese financial institutions who lend funds to the North Korean government and North Korean businesses.  It is possible that Canadian businesses do business with the persons to be designated.

If the United States imposes broad restrictions on financial transactions, this could have a significant impact on Canadian businesses who transact business with China in United States dollars (USD).  Most Canadian businesses buy goods from China and sell goods to China using USD as the currency for the transaction.  Most USD transactions flow through U.S. financial institutions, which will incorporate the new sanctions into their compliance programs.  Any effect of U.S. sanctions on money flows and payment flows would pose significant challenges for Canadian businesses.

If the United States targets particular Chinese business segments (e.g., defence industries), it is possible that Canadian export controls under item 5400 might be affected (slowed down due to the need to obtain U.S. permits and permissions).  The level of impact on Canadian businesses would exponentially increase.

If the United States targets any Chinese government entities or state-owned-enterprises, there could be a spin-off effect on Canadian businesses doing business with those same entities. The level of impact on Canadian businesses would exponentially increase and become more political in nature.

U.S. sanctions may be imposed at a time when Canada is discussing a free trade agreement with China.  At a time when Canadian trade is increasing, the United States may put up hurdles that Canadian companies will have to get over.

Since Canadian politicians may not be able to prevent U.S. economic sanctions against China from being implemented, it is possible that Canada will take steps that it may take under Canadian law. If Canada issues an order pursuant to the Foreign Extraterritorial Measures Act (“FEMA”) to block the US-China sanctions that extraterritorially apply to Canadian companies and nationals, this too would have an impact on Canadian businesses. FEMA was enacted to effectively block U.S. extra-territorial sanctions against Cuba.  FEMA makes it illegal in Canada to comply with specific U.S. sanctions and imposes a requirement of reporting to the Attorney general of Canada instructions to comply with specific U.S. sanctions.

For more information or to arrange an export controls diagnostic, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@LexSage.com. If you would like assistance in managing the process, Heather Innes, formerly in-house counsel at a company with export controls processes, would be happy to assist. Please call Heather at 416-350-1234.