Margaret Kim, Peter Glossop, Riyaz Dattu
Feb 27, 2017
After some difficult last minute negotiations, the Canada-European Union Comprehensive Economic and Trade Agreement (“CETA” or the “Agreement”) is now awaiting final implementation. CETA presents important business opportunities for Canadian and EU businesses. CETA will confer significant tariff and non-tariff trading advantages over competitors in countries who are not entitled to the benefits of CETA. In addition, CETA can also potentially benefit EU and non-EU companies who invest in Canada and then use Canada as a “gateway” to conduct business on a free trade basis in both North America (using the North American Free Trade Agreement or “NAFTA”) and the EU (using CETA).
Overview of CETA
CETA is intended to significantly boost trade and investment ties between Canada and the EU and will cover most aspects of the Canada-EU economic relationship, including:
- trade in goods;
- trade in services;
- labour mobility;
- investment protection;
- intellectual property; and
- government procurement.
When can we expect CETA?
As of the end of February 2017, the implementation of CETA is still subject to the approval of the Parliament of Canada. The European Parliament (“EP”) approved the Agreement on February 15, 2017. In Canada, the CETA implementation legislation (Bill C-30) has received third reading before the House of Commons and second reading before the Senate.
In the EU, CETA must go through two major stages before it comes fully into force. At the first stage, the EP must give its consent for CETA to apply provisionally. This has already happened. As a result most of what affects Canadian and EU businesses – market access provisions, tariff cuts and government procurement rules – will come into force provisionally once Canada’s Parliament passes Bill C-30 and it is proclaimed in force. The second stage involves parliaments in EU member countries. Of the 28 member countries currently in the European Union, 27 are required to hold ratification votes in one or more national legislatures. Only once each of them has approved the Agreement does the CETA come fully into force. Latvia became the first member country to ratify CETA on February 23, 2017. Political events, such as elections in France, Germany and the Netherlands later this year, and the United Kingdom’s decision to exit the EU will be critical factors in deciding the ultimate fate of CETA.
Overview of main benefits for Canadian and European businesses
CETA can be expected to result in fundamental shifts in the flow of goods, services and investments between Canada and the EU.
Here is a very high level review of CETA’s impact:
Tariff Elimination for Trade in Goods: the most visible benefit of CETA is the agreement to reduce and ultimately eliminate virtually all tariffs. Currently, only 25 percent of EU tariff lines on Canadian goods are duty-free. When CETA comes into force, 98 percent of EU tariff lines will become duty-free for Canadian-origin goods, and an additional one percent will be eliminated over a three, five or seven-year phase out period. The main sectors to benefit include the following:
Agricultural Sector: EU tariffs on products like maple syrup, frozen potato products, cooking oils, processed pulses and grains, and baked goods will be eliminated immediately upon the Agreement coming into effect. Other products, like grains and starches, will become duty-free in seven years. Sensitive products such as pork and beef will be duty-free but quota-limited. Canadian tariffs will also be significantly liberalized, with 93.6% of agricultural tariff lines set at 0% immediately on entry into force of CETA, subject to notable exclusions for supply-managed products such as poultry and eggs.
Forest Products and Metal Products: Under CETA, all Canadian products will be free from tariffs currently ranging up to 10%. This will confer a significant advantage over to Canadian exports into the EU over competing exports from the U.S. and China.
Fish and Seafood: Approximately 96% of Canadian goods will be tariff free on implementation and the remainder tariff free over the next three to seven years. Tariffs currently average 11% and range up to 25%. This, again, will confer a significant advantage to Canadian exports of these products over competing exports from the U.S. and China.
Automotive Sector: EU tariffs will be immediately eliminated on all Canadian auto parts (the current EU tariff is up to 4.5%). Tariffs will also be eliminated immediately on some vehicles such as road tractors and fire-fighting vehicles. Tariffs on all remaining types of vehicles will be phased out over the following seven years. CETA will allow Canada to export up to 100,000 vehicles annually to the EU under more liberal rules of origin. However, since the EU is a major exporter of vehicles, the impact of tariff elimination is likely to be felt mostly in Canada. The phasing out of the 6.1% Canadian tariff over seven years should make vehicles produced in EU more price competitive in Canada.
Oil and Gas Sector: Canadian oil and gas products will immediately become tariff-free and quota-free (the current EU tariff is up to 8%). This will confer a significant advantage over competing exports from countries such as Russia.
Broad Services Trade Liberalization: CETA adopts a “negative list” approach to liberalization of services. All service sectors should benefit from non-discriminatory treatment and market access, except for those expressly excluded in a list of reservations. Among the key services that are excluded are health care, public education and other social services.
CETA provides for enhanced market access commitments for Canadian financial services firms in the EU, which should benefit Canada’s globally competitive financial services firms. It also provides certain protections for financial investors and a special dispute resolution framework. Investors in the financial sector will now have recourse for breach of investor treatment obligations in addition to expropriation and limits on transfers if these provisions are approved in the parliaments of the EU member countries.
Like other financial services trade agreements, CETA preserves the broad discretion of financial regulators to take measures to promote financial stability and maintain the integrity of their financial systems. However, prudential guidelines set out a process and principles clarifying application of the prudential carve-out.
Labour Mobility: CETA’s temporary entry provisions will facilitate temporary travel or relocation for selected categories of business persons, including short-term business visitors, investors, intra-company transferees, and professionals and technologists. CETA’s labour mobility provisions will not open up permanent employment opportunities in Canada or the EU.
Investment Protection: Canada and the EU are major investors in each other, with Canadian investment in the EU totalling $210 billion in 2015 and EU investment in Canada totalling $242 billion. CETA includes standard guarantees prohibiting expropriation without “prompt, adequate and effective” compensation, and requires investors from each of the parties to be treated in a fair and equitable manner. CETA will ensure investors are accorded both “national treatment” and “most-favoured-nation treatment,” meaning that investors cannot be treated in a less advantageous manner than domestic investors or investors of any other country. However, governments may act in the public interest when regulating health, safety and the environment and this will not be considered contrary to the investment provisions.
Investment Arbitration Court System: The investment provisions also include access to an investor-state dispute settlement (“ISDS”) mechanism enabling foreign investors to enforce their rights against the host state of the investment in an independent international arbitration proceeding. The ad hoc arbitration system that was part of the draft ISDS mechanism was replaced in February 2016 with a permanent and institutionalized investment arbitration court system.
Increased Investment Review Threshold: CETA preserves Canada’s ability to review large foreign investments pursuant to the Investment Canada Act (“ICA”). The net benefit review threshold under the ICA will be raised from the current $600 million to $1.5 billion in enterprise value for EU parties either acquiring control of, or disposing of control of a Canadian business. Investments by state-owned enterprises and investments in cultural businesses in Canada will not be eligible for the higher threshold. EU enterprises that are controlled by nationals from Canada’s existing Free Trade Agreement partners (such as the U.S., Mexico and South Korea) would also benefit from the higher threshold.
The coming into effect of the investment protection provisions and the ISDS will depend on approval by the parliaments of each of the EU members, unlike the other provisions of CETA which will be implemented provisionally once the EP provides its approval.
Pharmaceutical Patent Protection: CETA introduces additional protection for patented inventions, particularly in the pharmaceutical field. Unreasonable delays in approving a pharmaceutical product will lead to additional protection for up to two years following patent expiry. The resulting eight years of data protection will be the highest under any international trade agreement. The provision contains safeguards to ensure only undisclosed tests are protected for new chemical entities only.
CETA introduces a new form of “sui generis” protection in Canada. There will be one protection period per pharmaceutical product, for up to two to five years, subject to narrow exceptions for a possible extension. Eligible patents include composition of matter, application/use and process patents.
Another key provision includes an innovator right to appeal under the Patented Medicines (Notice of Compliance) Regulations (“PMNOC Regulations”) and a potential end to “dual litigation” in Canada under both the PMNOC Regulations and the Patent Act.
Geographic Indications & Trademarks: On the trademark front, the most significant change is the recognition of geographic indications (“GIs”). A GI identifies an agricultural product or foodstuff as originating in a particular territory where a given quality or reputation is essentially attributable to its origin, e.g. Parmigiano Reggiano or Brie de Meaux.
CETA expands the protection in Canada to a broad list covering 179 agricultural products and foodstuffs originating in Europe. The list includes cheeses, oils and animal fats, vinegars, spices, dry-cured meats, fresh and processed fruits and nuts, fresh, processed and frozen meats, fresh and processed vegetable products, olives and cereals.
Going forward, where a GI subsists, a new trademark will be rejected if the place of origin is outside the GI. However, an existing good faith trademark or trademark application will not prejudiced by the GI.
Government Procurement: CETA will expand significantly the ability of Canadian and EU businesses to compete in each other’s national and sub-national government procurement markets. In Canada, the procurement rules apply to federal, provincial and municipal authorities and procuring entities specified in Annexes to CETA. However, it is important to note that CETA applies only to higher value procurement contracts in order to ensure that governments can continue to use smaller procurements to support local and small businesses.
CETA includes exceptions in Canada for public transport tenders in Ontario and Quebec, cultural industries, Aboriginal businesses, defence, research and development, financial services and services in the fields of recreation, sport and education, as well as social and health care services. Canada has also agreed to make the tendering process more transparent by publishing all its public tenders on a single procurement website.
In the EU, CETA will grant opportunities at all levels of the EU government procurement market, with certain exceptions in the Annexes.
CETA as a “Gateway”
To the extent a foreign business has a meaningful operation in the territory of Canada (e.g. a Canadian-based manufacturing facility or a Canadian office where services are performed) it can also take advantage of benefits under CETA. A business does not have to be Canadian-owned or controlled in order to be entitled to the benefits of CETA.
For example, some businesses may wish to consider shifting some of their manufacturing to Canada to create Canadian-origin products entitled to duty-free entry into the EU. Similar to the impact of NAFTA in the 1990s, supply chains may need adjustment to take advantage of favourable rules of origin and other comparative advantages. Furthermore, given the low prospects for a free trade agreement between the EU and the United States under the Trump administration, EU businesses may choose to invest in Canada in order to access the U.S. market on a duty-free basis under NAFTA, as well as to obtain the benefits of CETA for Canada-EU trade.
This chapter was first published in the Guide annuel des affaires franco-canadiennes – édition 2017.