Daniel Fombonne, Riyaz Dattu
Businesses looking to fully and effectively compete in the global marketplace need to monitor ever-changing trade rules and incorporate these rules into their strategic business plans. Few, if any, major Canadian businesses can avoid being buffeted by the rising and shifting tides of global trade.
This article summarizes the trade-liberalizing achievements of the recently concluded Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union (EU), which qualifies as the most panoptic international trade and investment agreement entered into by Canada in two decades, since the implementation of the North American Free Trade Agreement (NAFTA) in 1994 and Canada’s accession to the World Trade Organization (WTO) Agreements in 1995.1
The negotiations spanned more than four years,2 and on October 18, 2013, both Canada and the EU confirmed that an agreement had been reached and that the final legal text would be settled over the next few months, with ratification and implementation to be achieved within two years. The broad reach of CETA will require provincial government concurrence due to the wide-sweeping nature of the agreement, which extends to matters beyond Canadian federal jurisdiction. Concurrently, the European Commission will seek approval from EU member countries.
As we note toward the end of this article, along with Canada’s other free trade initiatives, the short- and long-term effects of CETA should be analyzed by Canadian businesses whether or not they export goods or services to the EU or indeed engage in any export trade. Otherwise, future business plans will fail to take into consideration all eligible benefits available under CETA and other free trade agreements entered into by Canada, and any comparative advantages now being enjoyed may be lost to business competitors that have taken the necessary strategic steps to fully benefit from the free trade rules.
I Broad Reach of CETA
CETA will provide for the following:
Industrial Tariff Elimination
Ninety-nine percent of industrial tariffs will be eliminated when CETA comes into force, and full elimination will occur within seven years. Automobiles will be eligible for duty-free treatment provided that 50% of the content is Canadian (automobiles were a particularly contentious subject during the negotiations because the EU wanted to avoid indirectly benefiting U.S-produced automobiles exported from Canada). Furthermore, an additional 100,000 Canadian-produced automobiles with Canadian content as low as 20% will benefit from a tariff-free quota.
Agricultural Trade and Tariff Elimination
In the case of agricultural tariffs, 94% will be immediately eliminated. Certain politically sensitive products – poultry and eggs – have been fully excluded from CETA, and others – dairy, beef and pork – will benefit from tariff-free quotas, but will also continue to face certain protectionist measures. Canada was, however, able to secure duty-free treatment of Canadian dairy exports into the EU. Canada’s beef import quotas into the EU increased from 15,000 tonnes to 50,000 tonnes, and its pork quotas from 6,000 tonnes to 81,000 tonnes. The EU obtained an increase in cheese import quotas into Canada of 16,000 tonnes. CETA therefore allows Canada to continue its supply-managed marketing system for dairy products, poultry and eggs.
Services Trade and Labour Mobility
CETA adopts NAFTA’s “negative list” approach to the liberalization of services. Trade in all service sectors should therefore benefit from non-discriminatory treatment and market access, except for those expressly excluded. The parties have also agreed to a substantive and binding mutual recognition of certain professional qualifications, which is intended to increase labour mobility. CETA will also reduce the usual barriers that hamper the ability to engage in international services trade, such as citizenship and residency requirements, barriers to temporary entry, and ownership and investment restrictions.
CETA will expand the ability of businesses to compete in the national, regional and local public procurement markets exceeding certain threshold values (depending on the sector), ranging from 130,000 to 5 million special drawing rights, which correspond to a range of value (based on 2012–2013 conversion rates) from $205,000 for goods and services to $7.9 million for construction services. Certain exclusions and exceptions will apply for national security matters, cultural industries, Aboriginal businesses and measures related to social and environmental criteria or that are necessary to protect human, animal and plant life or health.
CETA will allow EU pharmaceutical companies to apply for patent term restoration for up to two years, while also safeguarding consumers’ interests. Canada has also agreed to expand its list of protected geographical indicators (GIs) – a GI is a sign or name for a product based on its specific geographical origin (e.g., Cognac).
Although the final text has yet to be released, leaked drafts of the investment chapter suggest that the parties have agreed to a broad definition of investment covering “any kind of asset,” as well an approach modelled on the negative list within NAFTA, whereby the parties must specifically exclude subject matters from the scope of CETA. In terms of substantive rights, CETA will guarantee investors both “national treatment” and “most-favoured-nation treatment,” meaning that foreign investors cannot be accorded treatment that is less advantageous than that accorded to domestic investors or investors of any other country. It appears that the investment chapter will also provide for a “fair and equitable treatment” clause, although its exact scope will depend on how it is framed within CETA. The agreement will also provide for the now well-accepted investor-state dispute mechanism that enables foreign investors to enforce their rights against the host-state of the investment in a neutral arbitration proceeding. However, to prevent abuse, CETA will apparently provide for a process to weed out frivolous claims as well as stale claims. The Canadian government will also maintain its right to conduct ministerial reviews of high-value investments under the Investment Canada Act, and its decisions will not be reviewable under the dispute-settlement provisions of CETA.
II Canada’s Objectives and Achievements
While the goal of any free trade deal is to liberalize the exchange of goods and services, Canada (like most countries) had a list of key industrial sectors it viewed as particularly capable of competing in the EU market. Canadian negotiators therefore sought to have EU tariffs eliminated for export industries in which Canada has a comparative advantage: forest products, information technology, chemical and plastic products, automobiles and certain agricultural sectors (pork, beef, seafood) are just a few of the Canadian industries that stand to benefit from the elimination of EU tariffs. The immediate elimination of 98% of all EU tariffs (both industrial and agricultural), and almost all tariffs within seven years, should help Canada decrease its declining net export trade with the EU. In particular, the elimination of all industrial EU tariffs levied on Canadian exports within seven years should render Canadian industrial goods cheaper and more competitive in the EU market. Canadian goods will also benefit from non-tariff barriers on the basis of the requirement to be accorded national treatment within the EU – meaning that they should be treated equally to local goods on regulatory issues applicable both at the border and once imported into the EU territory.
Agricultural Trade and Tariff Elimination
Agriculture is often the most contentious issue in international trade negotiations, with parties usually having their own strong political and often divergent local interests to placate during negotiations. Trade liberalization of the hog and cattle sectors was particularly important to Canada due to the strong export capabilities of this sector. However, Canada was also unwilling to abandon long-standing policies for its dairy, poultry and egg agricultural sectors, which are protected by the supply management system. CETA allows Canada to continue this system, albeit with a small increase in European cheese quotas as a concession to the EU member states. Canadian companies pushed for unlimited access to the EU agricultural market, while aware that agricultural quotas are rarely completely eliminated in trade agreements. The elimination of approximately 95% of EU agricultural tariffs should increase opportunities for Canadian agricultural interests. The increase in Canadian pork/beef quotas by the EU, in exchange for Canadian concessions in relation to EU cheese quotas, appears to have provided the compromise deal.
A growing share of Canada’s export-oriented economy is in the services sector, and further liberalization should therefore benefit Canadian businesses. Currently, Canada already has a trade surplus with the EU in professional services, including legal, architectural and engineering services. The reciprocity now offered under CETA will require provincial governments to reduce barriers for interprovincial labour, which will not only help EU service providers to engage in international trade in services but should also help the Canadian services sector to compete across provincial borders.
Canadian provinces, regions and municipalities were concerned about an open market in which EU companies could freely bid for procurement contracts, and where “local development criteria” could not be applied to protect local companies providing goods and services to important sectors and assets, such as public transit and utilities. Complete liberalization would hamper governments’ abilities to enact rules with local development conditions (otherwise known as offsets).
CETA’s framework appears to deal with these Canadian concerns, while still enhancing the ability of businesses from both sides to secure opportunities to supply goods and services. The high-value threshold ensures that governments can continue to support local development, particularly for small and medium-sized enterprises. The value is much higher than the $25,000 value under the Agreement on Internal Trade, and instead compares with the values found in the WTO Agreement on Government Procurement. The built-in exceptions mirror those found in other agreements and offer alternative grounds for local protection (particularly for Canada, since it allows Canadian regional economic development as a basis for an exception whereas a similar exception is not provided for EU countries).
Early in the negotiations, Canada sought to include an investment chapter in CETA that would protect Canadian investors in the EU, especially in the less-developed member states. Investment chapters are included in all Canada’s free trade agreements with developing countries, whereas the same is not true for the EU. However, as negotiations progressed, it was the EU that began to push for comprehensive investor-protection rules, objecting to Canada’s proposal to restrict the applicability of the rules in certain industries and to permit expropriation without compensation for “legitimate” social policy objectives.
Ultimately, Canada appears to have come out slightly on top in negotiating an investment chapter that is similar to the template used in its FIPAs (foreign investment protection agreements) and Chapter 11 of NAFTA. Although Europe was able to negotiate fewer restrictions to the investment rules than Canada wanted, Canada did successfully secure its ability to conduct discretionary reviews under the Investment Canada Act despite the EU’s attempts to have European investors exempted. However, Canada has agreed to raise the threshold to $1.5 billion for reviewing foreign acquisitions from the EU under the net benefit test. This higher threshold under CETA will also benefit investors of other countries with which Canada has free trade agreements that contain a most-favoured-nation provision.
III EU’s Objectives and Achievements
Access to Canada’s cheese market was one of the main issues that stalled negotiations at their inception in 2009. Europe wanted Canada to open its supply-managed dairy sector and substantially increase duty-free cheese quotas for EU exports. The EU was only partially successful. Indeed, the quota for duty-free EU cheese will be effectively doubled by CETA, and this is reportedly the first time Canada has granted dairy market access under a bilateral free trade agreement beyond its WTO commitments. On the other hand, Canada managed to preserve its supply management system for dairy, eggs and poultry and made no new commitments on access to eggs and poultry.
Another key goal for the EU was access to Canada’s government procurement markets at all levels of government and to sell to sensitive provincial Crown corporations. This appears to be one of the EU’s largest successes in the CETA negotiations because Canada has committed to opening up all levels of government public procurement markets.
Intellectual Property and Geographic Origin
The EU vigorously pushed for recognition of GIs for many of its agricultural products. The EU was successful to some extent in that Canada agreed to a limited list of particularly politically sensitive food product geographical indicators within certain member states, mainly related to meat and cheese. However, Canada was able to negotiate a compromise with regard to a handful of cheeses that it saw as generic; for instance, without affecting the current use of names by sellers of such cheeses, future users will be able to use the names of certain cheeses (e.g., asiago, feta, fontina) by using expressions such as “kind,” “type,” “style,” etc.
Another controversial issue was Europe’s demand for additional patent protection for pharmaceuticals protected by eligible patents in Canada. Europe wanted to provide for an additional five years of patent term protection. Again, Europe was only partially successful since the parties compromised on an additional two years of patent term protection to offset time lost during the approvals process. Canadian media have reported that the changes to patent protection could cost Canadians up to $900 million a year. The federal government has indicated that the cost impact will not likely be felt until 2023 (assuming CETA is ratified in 2015) and that it is prepared to address any increase in medicine costs with Canadian provinces.
Trade in Services
CETA enables the temporary movement of company personnel between the EU and Canada, making it easier for European firms to run their operations in Canada. This can be seen as a win for the EU, given Canada’s recent measures that discourage companies from bringing temporary foreign workers; but the process of implementing these labour mobility rules should also ease interprovincial barriers that exist for Canadians seeking opportunities in other provinces.
The European Commission estimates that the elimination of industrial tariffs will save EU exporters around €500 million (almost C$700 million) annually in customs duties when exporting to the Canadian market. The rapid liberalization of 92.8% of Canadian trade lines in agriculture is expected to increase exports from the EU, particularly of prepared agricultural products (PAPs) in which the EU has a major export surplus with Canada (CETA will eliminate all the PAP tariffs). Wines and spirits within the PAPs group have particular export relevance because the EU is the source of half of Canada’s wine imports. Hence, the tariff elimination, along with the removal of other relevant trade barriers, will significantly improve access to Canada’s wine and spirits market.
The EU also pushed for strict rules of origin so as to prevent CETA becoming a way for U.S. exporters to indirectly access the European market. Although the details are not finalized, it appears that the EU has conceded to more flexible rules of origin. With respect to automobile exports, Canadian cars eligible for the tariff benefit will be required to have 50% Canadian content for the first seven years and 55% Canadian content once tariffs drop to zero. Canada was also able to secure what is effectively a waiver of EU rules of origin for up to 100,000 automobiles per year. In turn, Canada has agreed to recognize a list of 17 EU car standards as comparable to its own, with a commitment to further harmonization of standards in the future.
IV Strategic Planning Required for Canadian Businesses
In our experience, few Canadian business are sufficiently familiar with the framework of international trade and investment law rules relevant to their business activities, including the existing multilateral rules of the WTO (1995), the regional rules under the NAFTA (1994) and all of the relevant bilateral free trade agreements (FTAs) that Canada has in force with Israel (1997), Chile (1997), Costa Rica (2002), Peru (2009), the European Free Trade Association (2009), Colombia (2011), Jordan (2012) and Panama (2013).
Running a business without knowing the fundamental rules of international trade can lead to surprises, more often than not unfavourable ones. Many of the opportunities presented by Canada’s current free trade arrangements are either not fully understood or incorporated into the strategic business plans of Canadian enterprises. Often, critical investment decisions are made without the decision makers fully comprehending the potential competitive threats that exist when competing businesses are taking or can take advantage of market liberalization initiatives.
CETA adds to the maze of very critical trade and investment rules that need to be analyzed by Canadian businesses to ensure all eligible advantages are being derived, and that their favourable comparative position is not being reduced or eliminated by business competitors that are better informed and strategically inclined toward utilizing the beneficial rules available under the bilateral and regional FTAs and the multilateral rules of the WTO.
1 Osler Update, Canadian Businesses Urged to Adopt Strategic Policy Measures in Face of Flagging Doha Round Negotiations.
2 Osler Update, Canada/Europe Free Trade: A Looming Surprise?
Part of the Corporate Review - November 2013