Canada: Does Business Benefit From The Proliferation Of Regional Trade Agreements?

Last Updated: November 16 2005

Article by Cliff Sosnow, Greg Kanargelidis, Navin Joneja and Prakash Narayanan,©2005, Blake, Cassels & Graydon LLP

In the wake of slow-paced and limited WTO negotiations, Canada is negotiating an increasing number of investment treaties. The relative immediacy of deeper tariff cuts and investment protections seems like an obvious justification to this activity. But this growing array of agreements may cost businesses more than the purported liberalization is worth.

Regional trade agreements (RTAs) are an essential element in the landscape of international trade, and their significance is only increasing. Recent years have seen a proliferation of RTAs around the world, with new agreements being negotiated at an accelerated pace. As of January 2005, 312 RTAs have been notified to GATT/WTO, of which approximately 170 are currently in force. In the last 10 years alone, 196 new RTAs have been notified, and it is estimated that a further 65 RTAs are currently in force but have not yet been notified. But are so many RTAs a good thing?

The Canadian Perspective

As an industrialized country with a medium-sized economy, Canada has historically depended on trade for much of its economic prosperity. As a result, Canada has actively entered into, and conducted negotiations on, a wide variety of RTAs. Canada is a Party to seven RTAs, 22 bilateral investment treaties, and is currently negotiating six RTAs.

Benefits Arising From Regional Trade Agreements

RTAs quickly and efficiently reduce tariff and non-tariff barriers to the movement of goods and services in a way and at a pace not currently possible solely from the multilateral system.

RTAs permit flexibility not available in multilateral agreements. Canada and Chile have agreed not to impose anti-dumping duties on products originating in either country. This is the only free trade agreement in the Americas that has taken this innovative step.

RTAs, like NAFTA, protect Canadian investments abroad by requiring the Parties to afford to investors of the other Parties non-discriminatory treatment and most favoured nation treatment with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

NAFTA also allows investors to submit complaints of Chapter 11 violations to binding arbitration.

RTAs also allow for more focused and specialized negotiations involving certain industries or issues that are important to each country involved. For instance, the automobile industry is crucial to the Canadian economy. Article 403 of NAFTA therefore contains specific provisions dealing with automobiles.

Difficulties Encountered With Regional Trade Agreements

RTAs are not without their drawbacks.

Potential Lack of Clarity in Application of Rules. First, Canadian businesses attempting to comply with international trade rules need to determine which rules apply. In Canada, there are 13 different tariff treatments for any particular good due to the various trade agreements to which Canada is a party. Having to follow different rules for different parts of the world increases transaction costs for businesses.

There is conflict in the application of safeguard measures. NAFTA requires its members to exclude imports from each other from the application of safeguard measures where the imports do not "account for a substantial share of total imports". The WTO Agreement on Safeguards, on the other hand, requires safeguard measures to be applied to all products consistently, irrespective of their source.

Government procurement provides yet another instance of concern. In RTAs, the rules on government procurement apply to 1) specific types of procurements, 2) that meet or exceed specified financial thresholds, and 3) are undertaken by those entities specifically listed by the Parties. For any business that is bidding to supply a government entity, the bidder needs to review each of the named agreements and determine whether their coverage is identical and, if not, which thresholds apply. This increases the complexity of doing business and in determining the applicable rules.

Conflicting Decision-Making. A persistent challenge with RTAs is the potential for conflicting decisions. One stark example is the dispute between Canada and the United States concerning softwood lumber. Canada has challenged the anti-dumping and countervailing duties imposed by the United States on imports of Canadian softwood lumber through a number of avenues. In the most recent decision under NAFTA – by the Extraordinary Challenge Committee – the Committee ruled that the U.S. softwood lumber industry was not injured and that applicable duties should be removed. However, most recently, a WTO panel decided against Canada at roughly the same time thereby providing the U.S. with grounds to justify the continued imposition of duties.

Suggested Recommendations For Enhancing The Utility Of Regional Trade Agreements

RTAs are not a new phenomenon, though their success and proliferation is a relatively recent trend. The rise of RTAs, to some extent, is linked with the frustration that countries have felt with the slow pace of multilateral negotiations and their desire to reap the benefits of liberalization, even if limited, through more easily negotiated RTAs.

Further, while Canada remains committed to the WTO, Canada is likely to continue to pursue RTAs around the world.

RTAs may be beneficial if they cover subjects that are not covered by existing multilateral agreements, and preferably not part of ongoing multilateral negotiations. This ensures minimal confusion between RTAs and multilateral agreements. Further, Canada could attempt to maintain a uniform structure in the RTAs that they enter into – in terms of subject matters covered and in the language used. Adopting a "model form", as Canada has done in relation to its bilateral investment treaties, is a useful starting point.

Finally, strategic issues need to be taken into consideration when considering new RTA negotiations. It is not immediately clear what Canada’s strategic plan is in deciding with which countries RTAs would be beneficial.

Concluding Thoughts

Businesses have opportunities to be involved in the process of finding the right balance between RTAs and multilateral trade agreements and should utilize them. Consultations with governments are only one way of making negotiators aware of the concerns of businesses. Businesses can also participate in conferences and seminars to highlight the issues of concern.

Ultimately, both RTAs and multilateral trade agreements are intended to benefit businesses and therefore it is crucial for businesses to gain an understanding of the issues involved and to develop a response that will allow them to reap the benefits of trade liberalization.

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.

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