World Trade Executive: North American Free Trade & Investment Report, Vol. 21, No.11
In May 2009, Canada and the European Union ("EU") began negotiating an ambitious and wide ranging Comprehensive Economic & Trade Agreement ("CETA") and those negotiations are on track for conclusion by the end of this year.
The proposed agreement would have a major impact on the Canadian economy, and would begin the process of lessening of what many see as Canada's excessive and strategically risky dependence on trade with the United States. With a GDP of $19 trillion in 2009, the 27 Member States of the EU make up the world's largest single market and enhanced access to even a fraction of that market could bring enormous economic benefits for Canadian exporters. The negotiators will shortly exchange offers – a critical step in the negotiations - and then focus on the remaining unresolved issues. Here is a summary of some of the issues to watch.
Market Access for Non-Agricultural Goods
Tariffs on most products traded between the EU and Canada are relatively low or non-existent but, in a few particularly sensitive areas, tariff rates remain high and the negotiators will be looking for major concessions in those areas. The limited high tariff sectors include shipbuilding, textiles and automobile and both Canadian and European negotiators are looking to move to a zero tariff across the board when the agreement comes into force; i.e. there would be no phase-in.
Apart from the few instances of high tariffs, the most important trade in goods issue will be the rules of origin or how goods will qualify as Canadian or European.
Under NAFTA's influence, industrial production has rationalized on a North American basis and Canada no longer has the manufacturing depth to support origin rules that require a majority of Canadian content. Canada needs rules of origin that will permit a significant amount of non-Canadian content but the EU does not want Canada to serve as a back door to the EU market for U.S. or Mexican goods. Traditionally, the EU has required 60% domestic content to confer origin and Canada does not have the manufacturing depth to be able to produce manufactured goods with 60% Canadian content. The Canadian government admitted as much in the 2010 budget when it unilaterally eliminated all tariff on imports of manufacturing inputs. It made that concession to allow Canadian producers to have duty-free access to inputs that were not produced in Canada.
Without origin rules that are significantly more lenient than is usual, zero tariffs will be simply irrelevant for Canadian manufacturers, and that would be major blow for Canada's automobile industry.
Market Access for Agricultural Goods
Talks on market access in the agriculture and agrifood sectors are proving tough. Farmers everywhere have serious political clout and both the EU and Canada aggressively protect their farmers with a wide range of protectionist measures.
The EU protects its farmers with high tariffs, regulatory barriers and massive subsidization. Canada does it through supply management and tariff rate quotas which exclude all but a small amount of imports in supply managed commodities. Canada also maintains a monopoly in wheat and other grains through the Canadian Wheat Board.
Canada's negotiating strategy is complicated by the differing goals of the Provinces and regions. Ontario and Quebec's main objective is to protect supply management and that means excluding European cheese and butter. The Western provinces are pushing for greater access to European markets for Western beef, pork and wheat and are much less concerned about imports.
Getting the right rules of origin is also important for Canada. Given the reality of cross-border livestock movement in Western Canada and the degree of integration between the Canadian and U.S. producers, the definition of what constitutes a Canadian product will need to be flexible. However, the EU does not want the CETA to be a backdoor to the European market for U.S. farmers and will be looking for strict rules of origin.
Finally, the EU is pushing hard for recognition of geographical indicators (GIs) for many agrifood products. Recognition of GIs would prohibit Canadian producers from using certain names (or even derivations or variations of those names) on Canadian products. In the recent EU‑Korea FTA, Korea agreed to recognize a wide range of EU GIs including: Roquefort, Camembert de Normandie, Brie de Meaux, Emmental de Savoie, Jambon de Bayonne, Mortadella Bologna, Prosciutto de Parma and Gorgonzola.
While recognition of the GIs themselves is unlikely to pose a problem, the EU policy is that the use of derivatives or variations of the GI are also prohibited. Recognition of its GIs has been a major policy goal of the EU for a long period and it is unlikely that the EU will sign any agreement that does not provide protection of its GIs and many Canadian producers will be surprised to realize the impact of that, for example, in 2005, the European Court of Justice that only cheese originating in Greece could be called "feta".
Trade in Services
Liberalizing trade in services is, in many respects, more difficult to negotiate than liberalizing trade in goods but carries enormous economic potential for the Canadian economy. Traditionally, service negotiations have focused on specific service sectors such as financial, insurance, telecommunications and the four modes of delivery of those services, with concessions being made on a "per sector/per mode" basis. The CETA negotiation appears to be going well beyond those traditional approaches.
For the first time ever in trade negotiations, the EU has agreed to adopt a "negative list" approach to service coverage, whereby all services and all modes of delivery are included unless specifically excluded. That has been such a radical departure for the EU, it has stalled the offer process as the Member States take their time to make sure that everything they want excluded is listed. In return, the EU has asked for major service concessions from provincial and municipal governments (who have traditionally offered little or nothing) in sectors such as water treatment, transport, education and health care. If provinces and municipalities offer concessions in those sectors, it will be a first for Canada and will provide significant opportunities to EU companies.1
The single most important goal for the EU in these negotiations is to get access to Canada's government procurement market, at the federal, provincial and municipal levels. The EU insisted that the provincial governments be included in the negotiations as a pre-condition for the start of talks. The EU wants to eliminate discriminatory procurement practices by provincial governments that favour local suppliers, like Montreal's decision to award a subway railcar contract to Bombardier without tender or Ontario's preferences for local products in its Green Energy Act.
Canadian provinces (and some municipalities) have shown their willingness to give up discriminatory practices temporarily by signing the 2010 Canada – U.S. Agreement on Government Procurement and its seems a safe bet that Canadian provinces, territories and municipalities will make significant concessions on procurement in the CETA because without such concessions there will be no agreement. What remains to be seen is the extent to which the EU will provide access to its own sub-national procurement markets to Canadian exporters.
In many cases, it is not high tariffs that are keeping Canadian goods out of the European market but complicated regulatory standards that vary both in content and application, form one country to another. Thus, a Canadian exporter may face twenty-seven different sets of requirements – one for each country in the Union. The issue of technical barriers to trade and, in particular, the lack of uniformity, clarity and transparency in regulatory standards is a major issue for Canadian negotiators.
All governments regulate to promote policy goals in areas such as health, safety, environmental protection, consumer protection and the like, but those regulations can be, and often are, used to protect domestic goods against imports, either by effectively excluding them or by making the cost of compliance so high as to dissuade foreign competition.
In these negotiations, Canada is looking for a formal, cooperative framework that would see EU and Canadian regulators obliged to regularly meet and consult on regulatory initiatives. While no country will abandon its right to regulate as it sees fit in the public interest, a formal mechanism to examine regulatory differences may well be as much progress as Canada can expect. Greater transparency, advance notice of regulatory initiatives and some efforts at mutual recognition of approvals or certification would all go a long way to easing the regulatory burden that faces businesses in foreign markets.
Intellectual property is proving to be a difficult area of negotiation for Canada. In a leaked draft of an early version of the negotiating text, it seems that the European position was that Canada should simply adopt the EU's strict rules for the protection of intellectual property. The EU is seeking greater copyright protection, longer patent protection for pharmaceuticals and recognition of its geographic indicators (GI).
The Harper government is committed to providing stronger copyright protection but has repeatedly failed to get the necessary legislation through Parliament. Now, with a majority government, revisions to the Copyright Act are expected to be passed quickly and the new legislation is likely to satisfy the EU on copyright protection.
Extended patent protection or pharmaceuticals is a much thornier issue. Canada hosts a strong generic drug sector and the Harper government has not shown that it is ready to extend the life of drug patents; any attempt to do so would be opposed by Canada's generic drug industry, would significantly add to the cost of Provincial medical plans and would be widely unpopular with consumers. It is impossible to predict what Canada will do on the issue but it is unlikely that any concessions will be made in the CETA negotiation.
A major Canadian objective is to gain greater access to the EU labour market for Canadians, particularly for temporary business entry and inter-corporate transfers and to make progress on the mutual negotiation of qualifications. The deal will likely have easier access to the EU for temporary entry for businessmen and professionals but will not touch permanent entry or visa issues. On the difficult mutual recognition issues, the most likely outcome will be an institutional framework within which progress can be made over time.
While the prospects for an ambitious deal look good, there are still road blocks ahead. Five provincial elections will be held this fall, including one in Ontario and the proposed agreement calls for major concessions from the provinces. While the negotiators proudly claim agreement on well over 90% of the issues, they have pushed all of the difficult issues to the end, hoping that once politicians see how much is on the table, difficult political choices and concessions will become easier. In Canada, those difficult choices will include making concessions on supply management, provincial monopolies such as Hydro-Quebec and the LCBO procurement and many others.
Even if a deal is signed, implementation may take years. While the 2009 Treaty of Lisbon gave the EU increased authority to act in international matters, it is not clear that it has the authority to sign the agreement and bind all the Member States. If any part of the CETA requires ratification by Member States, that process could easily take five years. The issue is still unresolved. In April the EU published the text of the EU Agreement with Columbia and Peru and the title page contained a bracketed reference to [Member States] as signators – confirming that doubt still exists on the EU's authority to sign comprehensive trade agreements. In light of that, the negotiations are exploring provisional implementation pending ratification.
In the 2010 Canada-U.S. Agreement on Procurement, provinces and municipalities did provide significant but temporary access to their procurement markets in return for limited concessions on U.S. Buy America rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.