Canada: Canada-EU Trade Agreement: Breaking The Log-Jam

Breakthrough

Canadian Prime Minister Stephen Harper and European Commission President José Manuel Barroso today announced a breakthrough in the long-running negotiations to conclude a Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union. After well over four years of intense and often controversial negotiations that also engaged the 28 EU member states and Canada's provincial and territorial governments, the parties appear to have reached agreement in principle on all key areas. This is the largest, most complex and far-reaching trade agreement ever negotiated by Canada, exceeding even the NAFTA.

The breakthrough comes on the heels of an intense push in recent months by the Prime Minister, International Trade Minister Ed Fast and senior officials in the Prime Minister's Office and the Department of Foreign Affairs, Trade and Development to fashion compromises on some of the most highly-contested topics, including increased access for Canadian beef and pork into European markets and European dairy products into Canada, liberalization of government procurement at the provincial and municipal levels and patent protection for pharmaceutical products. It appears that the agreed terms will result in significant trade and investment liberalization in a broad range of sectors resulting in substantial gains for the Canadian and European economies.

Overview

The main elements of the agreement include the following:

Tariff Elimination and Quotas: Some 98 percent of all EU tariff lines will be duty-free on the day CETA comes into force. No tariff phase-out will exceed seven years. By then all EU tariffs on Canadian industrial goods (including automobiles), fish and seafood will be eliminated as will 95 percent of EU agricultural tariffs. Canada will gain significant additional quota allocations to export beef and pork products duty-free in the EU. In return, the quota for EU cheese that will not face Canada's prohibitive dairy tariffs will be effectively doubled, although it will still amount to less than five percent of the Canadian market.

Rules of Origin: Rules to determine which products qualify for preferential tariff treatment were complicated by the EU's desire to avoid extending benefits indirectly to Canada's trading partners, most notably the United States. For automobiles, which were a particular concern, the EU has agreed that vehicles with 50 percent Canadian content will qualify for duty-free treatment, and has granted a duty-free quota of 100,000 vehicles to those with Canadian content as low as 20 percent.

Government Procurement: While details remain to be disclosed, each side has granted the other considerable access to its public procurement markets, including at regional and municipal levels. Thresholds to qualify for access may in some cases be quite high but the agreement should nevertheless create significant new opportunities for Canadian companies to access the EU's nearly $3-trillion procurement market and for EU companies to access a Canadian market of well over $100 billion at all levels of government.

Services: The liberalization of the services trade is based on a "negative list" approach: services in all sectors are granted market access and non-discriminatory treatment subject to specific exceptions listed in the CETA. The details of the specific exemptions have yet to be disclosed. In addition, the parties agreed to a Most-Favored Nation clause for services, meaning that if either party gives better treatment to the services of another country – for example the EU to the United States in their free trade negotiations now underway – the other CETA party will also receive that better treatment.

Investment: The CETA includes the first investment protection regime binding on the EU as a whole. The investment protections in the CETA appear to be similar to those found in other such Canadian agreements such as Chapter 11 of the NAFTA, in that they include both market access and non-discrimination commitments as well as guarantees of fair and equitable treatment and compensation in the event of expropriation. It will be interesting to see to what extent these protections are more reflective of the Canadian model, which tends to offer somewhat greater discretion to governments, or that of EU members such as Germany and the Netherlands, which tends to be more favourable to investors. The CETA will include an investor-state dispute settlement mechanism.

Labour Mobility: Increased labour mobility rights were an important demand for Canada, which saw them as critical to ensuring the ability of Canadian businesses to operate effectively in the EU. The CETA will include provisions allowing for the temporary entry of certain business investors, services providers, and employees into the EU without the need for visas or work permits. It will also facilitate the mutual recognition qualifications to enable professionals of one party, such as engineers and architects, to work in the other party.

Intellectual Property: One of the most controversial issues in the CETA was the EU's demand for greater patent protection for its pharmaceutical industry. The parties have reached a compromise on the key issues, which will afford new drugs an additional two years of patent term protection (not the five years the EU sought) to offset time lost during the approvals process and expand appeal rights in respect of patent challenges, while preserving Canadian practice on data protection. Canada has also granted additional recognition to geographical indications, in particular for certain EU meat and cheese products, such as Grana Padano cheese and Prosciutto di Parma. 

Next Steps

Despite today's announcement, there remain a range of issues, both technical and substantive, for negotiators to resolve before there is a final treaty for the parties to sign and bring into force. Resolving these issues will likely take at least two months. Following this, the text of the treaty, which was negotiated in English, will undergo a legal review and translation into French and 21 other official EU languages. It appears likely that the process for then ratifying the treaty, which on the EU side may well include ratification by each member state, will take at least two years. However, it is also likely that Canada and the EU will agree to implement that tariff elimination and other elements of the agreement on a provisional basis once the treaty is formally signed but before it is ratified.

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