Canada: Free Trade With Europe: Challenges And Opportunities

Last Updated: April 23 2013
Article by Clifford Sosnow, Peter E. Kirby and Claudia Feldkamp

With President Obama's announcement in February 2013 that the United States will be launching trade negotiations with the European Union ("EU") this summer, the pressure is on for Canada and the EU to complete the Canada European Union Comprehensive Economic and Trade Agreement ("CETA") negotiations. Both Parties are said to be engaged in intense negotiations. Political choices may be inevitable in an agreement of this size and complexity.

This bulletin highlights five key areas of ongoing negotiations with significant implications for Canadian businesses: government procurement, financial services, investor protection, IP for pharmaceuticals, and rules of origin. We address strategic considerations.

A. Government Procurement

A critical 'ask' for the EU is access to procurement contracts at the provincial and municipal level and other parts of the "MASH" sector (municipalities, academic institutions, schools and health and social services organizations). This was a condition for the EU to commence negotiations with Canada. Canada is seeking reciprocal access to EU state and sub-state entities and enterprises previously closed to Canadian businesses.

This has been one of the more politically sensitive aspects of the negotiations. Opening the Canadian sub-federal procurement market may result in greater competition for provincial and municipal contracts from new European entrants into the Canadian market. Although not an element of the negotiations, opening provincial procurement markets to European investment may have the effect of causing the provinces to further liberalize inter-provincial procurement. Similarly, through enhanced access to the much larger European procurement market, the CETA may provide opportunities for Canadian businesses to supply the EU procurement market and to link more effectively into global supply chains established by EU multinationals. Canadian firms with expertise in key growth sectors in the EU such as the green technology sector stand to gain from this access.

B. Financial Services

Both Canada and the EU have well-developed financial services industries and markets. Access to the EU's 500 million consumers may provide opportunities for Canada's financial services sector, including its insurance companies. We understand that Canada is seeking a "prudential carve-out" of its financial rules respecting, for example, capital requirements, liquidity and risk management, which would exempt such rules from trade obligations in the CETA. The EU seeks to have financial institutions investing in Canada the opportunity to challenge Canadian financial regulation directly through an arbitral panel process similar to the current NAFTA "investor-state" dispute settlement process. Canada wants to limit any such disputes to a government-to-government dispute settlement process whereby only a government, and not companies, can initiate the dispute.

C. Investor Protection

The CETA will contain provisions regarding the legal and regulatory requirements that may affect Canadian and European investors looking to make, or that have, investments in each other's markets. Negotiators are seeking a balance between protecting investors and their investments, without unduly compromising a government's ability to pursue public policy objectives which may negatively impact the activities of investors. In this regard, we understand that Canada and the EU are trying to agree on rules that limit a government's obligation to pay compensation to a foreign investor for regulatory action that seriously impacts the ongoing operation of the foreign investment. This is referred to as an "indirect expropriation". In addition, the EU is seeking an exemption for its investors from the screening provisions of the Investment Canada Act.

D. Intellectual Property – Pharmaceuticals

Another key issue that has yet to be resolved is harmonizing European and Canadian intellectual property rights for innovator producers of pharmaceutical products. The EU is proposing: (i) providing innovator companies with the same right of appeal in court proceedings as generic manufacturers; (ii) implementing patent term restoration to compensate for time of a patent lost during the regulatory approval process (Canada is the only country in the G7 that does not provide this); and (iii) extending term of data protection (and market exclusivity) from 8 years to 10 years, matching the term in effect in Europe. Canada has yet to indicate whether it will agree to these proposals.

E. Rules of Origin

Although the CETA is a 'second-generation' trade agreement, focussing on eliminating non-tariff barriers to trade, tariffs on traded goods remains an important issue on the table. The parties have agreed to immediate duty free treatment upon implementation for most tariff items (notable exceptions include products under Canada's supply management regime); however, real market access can be effectively denied depending on the rules of origin model adopted by the parties. "Rules of origin" determines the extent to which manufacture can occur outside of the EU or Canada and still be labelled 'European' or 'Canadian' and benefit from available duty free treatment. Some sectors, such as automobiles and textiles and apparel, are organized on a North American basis and without rules of origin that recognise that business reality, it may be difficult for Canadian goods to qualify for preferential European tariff treatment. Given the NAFTA with its own set of duty free tariff rules, favourable CETA rules of origin could result in a situation whereby a Canadian company would be able to use NAFTA to import materials from the U.S. or Mexico duty free to manufacture a product in Canada and then apply the CETA rules of origin to export the finished product to the EU on a duty-free basis.

Strategic Considerations

While the issues raised above no doubt will require political decisions, likely at the highest level, in the event an agreement is reached, Canadian or European companies seeking to take advantage of opportunities in the other market may wish to better understand the CETA rules that are being negotiated and develop strategies to access that market. Equally, Canadian and European companies operating in sectors where their cross-Atlantic Ocean competitors are strong may wish to familiarize themselves with the rules being negotiated to better understand the impact of the CETA in changing the competitive environment in their home market, as well as consider strategies that respond to these rules. The signing of the CETA does not mark the end of the legal process. The CETA will need to be brought into law in both markets through a process of "ratification", and it will be important for businesses operating in both markets to inform themselves on how the agreed CETA rules will be implemented into law.

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