At Long Last, a Canada-EU Trade Agreement
On October 18, Canadian Prime Minister Stephen Harper traveled to Brussels to announce the closing of a free trade deal between Canada and the European Union after four years of arduous negotiations. The photo op with European Commission President José Manuel Barroso was a moment of relief for a G-7 leader who has staked much of his political legacy on concluding bilateral trade deals. The agreement should bring a welcome boost to Canada’s economy, estimated by the government at 20 percent of bilateral trade, or 0.6 percentage points of additional annual GDP growth (CA$12 billion).
While the deal is not expected to be ratified and come into force until 2016, the announcement was made at a crucial time—the beginning of free trade negotiations between the EU and United States. The full text of the Comprehensive Economic and Trade Agreement (CETA), which has been called a template for a U.S.-EU FTA, has yet to be made public.In October, the Canadian government circulated a political summary that lacks details on various aspects of the agreement, such as rules of origin. Recently, a technical summary of the agreement-in-principle was released. An overview of what is known follows.
Greater Competition From Europe for Goods Imported in Canada
Perhaps the most obvious effect of CETA will be to improve Canadian market access for European goods. More than 98 percent of tariff lines will be suppressed between the two jurisdictions as soon as the agreement comes into force. While nearly all non-agricultural Canadian tariffs will disappear from day one, important exceptions exist for passenger vehicles and ships, with those tariffs gradually eliminated over seven years.
Better Access to European Markets for Canadian Goods
CETA’s rules of originFor the most part, rules of origin have not been made public, but a preview concerning the auto sector was included in the technical summary. are characterized as being both clear and consistent with today’s globally integrated value-added chains. Combined with the elimination of most tariffs as well as provisions to integrate standards and regulations, CETA should bring about easier access to European markets.
Seven-year exceptions are also granted in this direction, including for passenger vehicles and certain seafood and agricultural products (for which there will be duty-free quotas, in many cases much larger than current quotas). In terms of value, raw materials still account for a large share of Canadian merchandise exports to the EU (Table 1).
Greater Competition From Europe in Tenders for Canadian Public Procurement
European companies and providers will enjoy broader access to Canadian government procurement, since provinces, municipalities, and utilities—all excluded from existing WTO agreements—will be covered by CETA. The reverse is also true: Canadian businesses will have access to all European public procurement, and the EU is 14 times more populous than Canada (500 million vs. 35 million people).
The agreement covers only high-value procurement contracts. CETA’s thresholds range from CA$205,000 to CA$7.8 million for 2012-13, varying by level of government and contract type.The thresholds are set in special drawing rights, the International Monetary Fund’s “currency” for which the value is a weighted basket of four major currencies. These provisions contain important exceptions.Notably for cultural industries, aboriginal businesses, defense, R&D, financial services, recreation services, sport and education, and social and healthcare services, as noted in the technical summary.
Improved Access to European Services
Overall services liberalization is perhaps one of the most significant aspects of CETA given the importance of services in Canada-EU trade (Table 2). Financial, telecommunication, logistics, and transportation services, for example, are also crucial to manufacturing productivity and competitiveness.See, e.g., Hildegunn Kyvik Nordås and Yunhee Kim, “The Role of Services for Competitiveness in Manufacturing,” OECD Trade Policy Papers, No. 148, OECD Publishing. Some experts have suggested that the economic impact of CETA through service trade liberalization could be more beneficial than the abolition of tariffs on goods.This suggestion was made by experts participating in an October 2012 seminar on CETA held at the Center for Interuniversity Research and Analysis of Organizations (CIRANO) in Montréal.
Greater Competition From Europe to Invest in Canada
The EU is Canada’s second-largest source and second-largest destination of FDI (Table 2). CETA will implement a state-to-state dispute settlement mechanism, along the lines of NAFTA’s but touted as more expedited and streamlined—including in its recourse to mediation and its anti-abuse clauses. Investor-to-state mechanisms are also projected, similar to NAFTA’s Chapter 11.From the technical summary: “Canada plans to become a party to the ICSID Convention, which allows for locally established, foreign-owned companies to bring a claim.”
A highly visible concession by Canada relates to its Investment Canada Act. The country has agreed to increase the financial threshold that triggers a government review of foreign takeovers and acquisitions under the act. The threshold, currently CA$344 million, will increase to CA$1.5 billion for all countries with which Canada has a free trade agreement (including the U.S.) as a result of “most-favored nation” clauses in those other agreements.As per legislation adopted earlier in 2013, independent of CETA, the CA$344 million general threshold is already set to increase to CA$1 billion over four years.
Key Changes to Rules and Regulations
Along with some duty-free quotas (for cheese exports to Canada, cars, meat, etc.), CETA will introduce important regulatory modifications—including in the way that rules and regulations are crafted.
On copyright, CETA is consistent with the recent Copyright Modernization Act and it aligns Canada with the World Intellectual Property Organization Internet Treaties. As described in the political summary, “Geographical indications provide exclusive rights for a product based on its geographical origin in cases where origin is considered to confer a particular quality or character to the product.” CETA widens Canadian recognition of EU GIs for certain foodstuffs (both countries already recognize each other’s GIs for wines and spirits). The agreement extends pharmaceutical IP protection in Canada by providing the equivalent of two additional years of patent coverage on the domestic market. This will bring Canada in line with most industrialized countries while allowing exports of Canadian-made generics during that period.
Harmonization of Standards and Connected Regulations
CETA contains provisions that favor harmonization of existing standards and regulations and future joint development. The agreement specifies how a party may request the recognition of a technical regulation as equivalent to its foreign counterpart, potentially reducing manufacturing costs for exporters. According to the political summary, a protocol on conformity assessment allows “recognized bodies in Canada and the EU to accept each other’s test results and product certifications,” reducing marketing delays for manufacturers.As mentioned in the technical summary, “While the text of protocol is stable, the issue of scope and coverage continues to be discussed. Canada has sought from the beginning of negotiations an ambitious scope that would, at a minimum, include coverage of construction products, medical devices, machinery (including equipment for use in explosive atmospheres and noise emissions of outdoor equipment), measuring instruments, and those sectors covered under the 1998 Canada-EU mutual recognition agreement (electrical and electronic equipment, radio and telecommunications equipment, and boats). Canada is also seeking coverage of gas appliances, personal protective devices, toys, pressure equipment, boilers, marine equipment and other sectors.” The agreement sets up several consultation mechanisms, both domestically and binationally, for developing future regulations.
Special dispute settlement rules will apply to the financial sector, with governments still being able to regulate on “prudential” grounds. CETA’s temporary entry provisions will ease the procedures for highly skilled individuals to work in the EU; planned processes will address mutual recognition of qualifications for certain professions.
The EU is the largest consumer market in the world and thus holds great opportunity for Canadian businesses, particularly regarding trade in services. The U.S., however, remains Canada’s #1 trading partner by a wide margin (Figures 1-2), prompting one columnist to state that “CETA’s nice. But NAFTA is essential,”Konrad Yakabuski, “CETA’s nice. But NAFTA is essential,” The Globe and Mail, October 28, 2013, www.theglobeandmail.com/commentary/cetas-nice-but-nafta-is-essential/art... a call for a revision and deepening of NAFTA. This may run counter to the U.S. attitude since 9/11 as well as Canada’s resulting pursuance of other bilateral trade deals.Canada’s other trade negotiations are also a response to the demise of the WTO’s Doha Round. The slow but tangible progress made under the Beyond the Border initiativeSee MAPI’s February 2012 and September 2013 reports on Beyond the Border. may be reason for prudent optimism, but in the meantime, North American manufacturers would be well advised to take advantage of the benefits of CETA and a future EU-U.S. trade agreement.For more on the promises and pitfalls of a U.S.-EU FTA, see MAPI’s April 2013 report and a 2013 note by the OECD.