Canada: Canada Inks FTA With Peru, Concludes Negotiations With Colombia

Canada's most recent free trade agreement (FTA) with Peru, signed on May 29, 2008, is the second FTA to be signed this year and Canada's fourth FTA in the Americas (NAFTA, Chile and Costa Rica are the others). The Canada-Peru FTA is a comprehensive agreement comparable in scope to NAFTA, with side agreements on labour and the environment — unlike this year's earlier FTA between Canada and the States of the European Free Trade Association (EFTA) (Iceland, Liechtenstein, Norway, and Switzerland), described as a "first-generation" agreement limited to tariff elimination.

Further, on June 7, 2008, Canada announced the conclusion of FTA negotiations with Colombia. The text of the Canada-Colombia agreement is not yet available as it is going through a final "legal scrub," however it is being described as on par with the Canada-Peru FTA and having parallel labour and environment agreements. This is to be expected as the launch of negotiations for both agreements was announced by the Honourable David Emerson on the same date one year ago — June 7, 2007 — with the first four rounds of negotiations conducted together (two in Lima, one in Ottawa and one in Bogota).

With no reasonable prospects for the negotiation of the Free Trade Area of the Americas (FTAA), and with the paralysis of the Doha Round at the WTO, smaller sub-regional and bilateral FTAs are becoming the norm. This has resulted in a complex network of agreements that cover not only the traditional goals of trade integration and investment protection, but have also expanded to include other areas.

Major players have been actively negotiating such agreements. The United States, for example, approved five deals in the Americas with 10 countries since 2001, most recently signing deals with Peru (April 2006), Colombia (November 2006) and Panama (June 2007). Not to be outdone, Canada announced its re-engagement in the region on June 7, 2007, initiating trade negotiations with Colombia and Peru. The Canada-Peru FTA is the first deal Canada has endorsed in the Americas over that same period; the last was with Costa Rica in 2001.

Latin America and the Caribbean are an obvious priority for Canada. Canadian two-way merchandise trade with the region, excluding Mexico, reached over $20 billion in 2007, approximately doubling the trade volume of ten years ago. Canadian direct investment in these countries has grown even more dramatically, from $6 billion in 1990 to some $100 billion — several times the amount of Canadian investment in Asia. Canada also launched FTA negotiations in 2007 with the Dominican Republic and the Caribbean Community (CARICOM), and in May of this year agreed to participate in exploratory discussions on the possibility of FTA negotiations with Panama.

Growth In Canada-Peru Trade And Investment

Merchandise trade between Canada and Peru, both of which have similar-sized populations of some 30 million, totalled $2.45 billion in 2007, with Canadian merchandise exports to Peru totalling $330 million and imports from Peru totalling $2.1 billion. Canada's major merchandise exports to Peru include cereals, pulses, paper, technical instruments and machinery, while its services exports are in the areas of mining, energy and financial services. The major imports from Peru include gold, zinc, copper, oil, animal feed and vegetables. In terms of investment, Canada is one of Peru's largest foreign investors and the largest foreign investor in the mining sector. The other areas of major investment are in sectors such as banking, oil and gas, electrical power and printing.

Much of the growth in investment, estimated at $1.8 billion as of 2007, is attributed to the Canada-Peru bilateral investment treaty (BIT), otherwise referred to as a Foreign Investment Protection and Promotion Agreement (FIPA), signed on November 14, 2006. It is Canada's first BIT in eight years and the first BIT to be based on Canada's new 2004 Model FIPA. The investment chapter of the Canada-Peru FTA builds on and includes provisions from the Canada-Peru BIT. This can be contrasted with other investment chapters of Canada FTAs in the region, such as the Canada-Costa Rica FTA, which simply notes the existence of the Canada-Costa Rica BIT.

As of 2006, Peru was Canada's 45th largest export market (Colombia was 30th), with the main exports being cereals, followed by leguminous vegetables, machine parts, and cotton yarn. The average tariff rate imposed on industrial goods entering Peru is 9.7 percent; on agricultural goods, it is 13.6 percent. Peruvian goods entering Canada receive General Preferential Tariff treatment status and most goods enter duty-free or at low tariff rates. Apparel products are the exception, with tariff rates of up to 18 percent.

Highlights Of Canada-Peru FTA

In addition to its comprehensive investment chapter referred to above, the Canada-Peru FTA is, as mentioned above, a far-reaching agreement comparable to the NAFTA. In certain respects, it is even broader in scope. For example, it contains a chapter on co-operation to facilitate trade-related capacity initiatives with the objective of strengthening Peru's ability to maximize the benefits of the FTA. It also contains a chapter aimed at combating bribery and corruption, and a chapter dealing with trade conducted by electronic means.

In terms of market access for goods, tariffs on 95 percent of current Canadian exports will be immediately eliminated, with the rest to be eliminated over a five- to ten-year period. Products that will benefit from immediate duty-free access include wheat, barley, lentils, peas, selected boneless beef cuts, certain paper products, machinery and equipment. Canada will immediately eliminate 97 percent of its tariffs on Peruvian goods entering the country, with the rest to be eliminated over a three- or seven-year period. Over-quota tariffs on dairy, poultry, eggs and refined sugar are excluded from tariff reductions. A tariff-rate quota will apply to refined sugar.

In terms of services, the agreement is similar to NAFTA, with chapters covering cross-border trade and services and financial services that operate to enhance market access for Canadian services providers in key sectors such as mining, energy and banking. Canadian exporters and service providers will also be able to take advantage of rules designed to increase the transparency of relevant laws, regulations, procedures and administrative rulings.

Parallel Labour And Environment Agreements

Together with the FTA, Canada and Peru signed parallel agreements in the areas of labour and the environment on May 29, 2008.

Under the Canada-Peru Agreement on Labour Cooperation (LCA), the parties have committed to ensuring that their laws respect the International Labour Organization (ILO) 1998 Declaration on Fundamental Principles and Rights at Work. Labour protections for Peruvian and Canadian workers include protections for occupational health and safety and minimum employment standards, such as minimum wage and hours of work. The LCA is touted by the parties as setting a new global standard in terms of its enforcement obligations and associated penalties. Failure to respect the ILO laws or to enforce domestic labour laws may, after consultations have been exhausted and at the determination of an independent review panel, obligate the offending country to pay up to $15 million annually into a co-operation fund to be used to resolve non-compliance.

Under the Canada-Peru Agreement on the Environment (the Environment Agreement), the parties have committed to pursuing high levels of environmental protection and to expand and enhance their environmental laws and policies. The parties are required to enforce their domestic environmental laws effectively and to refrain from relaxing those laws for the purpose of encouraging trade or investment. The Environment Agreement also reaffirms both countries' commitments under the United Nations Convention on Biological Diversity. This is of particular importance to Peru as one of the most biologically diverse countries in the Americas. The dispute resolution mechanism provides for consultations (at the ministerial level when necessary) and the exchange of information.

FTA Benefits Expected January 1, 2009

In accordance with its Policy on Tabling of Treaties in Parliament, the Canadian government will table all three agreements in the House of Commons for a period of 21 sitting days. During this 21-day sitting period, Members of Parliament are able to review, debate, vote on a motion, or send the agreements to committee for further review. Following this period, the government will introduce legislation to implement the agreements aiming for an entry-into-force date of January 1, 2009.

Many are encouraging timely implementation of the Canada-Peru FTA in order to secure a level playing field for Canadian exporters to Peru as the US-Peru FTA has now passed congressional approval and is currently pending implementation (the US FTAs with Peru and Colombia were signed in 2006). For example, should the US Peru FTA come into force prior to the Canada-Peru FTA, US wheat exports would receive duty free treatment compared to Canadian wheat, which would continue to face a 17 percent tariff wall. Exports of wheat make up 75 percent of Canada's agricultural exports to Peru, and 35 percent of Canada's total exports to Peru.

Pro- and anti-FTA forces will no doubt be closely following the review and implementation of the Canada-Colombia FTA over the next several months. Its US counterpart appears to be indefinitely stalled in the US Congress due principally to human rights concerns, and it will be interesting to see how these concerns are raised and addressed in Canada. Since the date of the signing of the US-Colombia FTA in November of 2006, the US Department of Commerce estimates that over $1 billion in tariffs have been assessed on US products being exported to Colombia.

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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