CETA : The Canada-EU Agreement. A New Standard in Trade Liberalization

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1 Nº /7/2016 ECONOMY CETA : The Canada-EU Agreement. A New Standard in Trade Liberalization Honorable Stockwell Day, P.C Canada s Minister of International trade when CETA negotiations were initiated. He is currently an advisor to the Canadian law firm McMillan LLP Geoffrey Kubrick Co-Chair of the International Trade Group of McMillan LLP On July 5, the European Commission proposed to the Council of the EU the signing and celebration of a Free Trade Agreement between the EU and Canada: CETA (Comprehensive Economic and Trade Agreement). After a Council Decision, the agreement will be implemented in a provisional manner. Its full enforcement will be subject to the EU s ratification, through a Decision of the Council with the approval of the European Parliament, and of all National Parliaments of all Member States in accordance with the appropriate ratification procedures.

2 2 While serving as Canada s Minister of International Trade I had the honour of officially launching the Comprehensive Economic Trade Agreement ( CETA ) negotiations in Prague with Prime Minister Harper of Canada and the President of the European Commission. The details below of four years of robust negotiations demonstrate that seemingly intractable obstacles can indeed be overcome where participants are convinced that trade agreements can be beneficial to the sovereign participants. As an active player in several rounds of the Doha WTO negotiations, it became clear to me that if comprehensive global trade discussions begin to lose momentum, it is important to pursue other bi-lateral and multi-lateral opportunities. It is key to progress, from a political perspective, that each participating government establish their own domestic process of allowing full input from their own trade groups and associations, prior to and during the international negotiations. Various fora which meet the domestic needs of each country should also be established so that legitimate concerns of national groups can be meaningfully and openly addressed. With the many challenges facing global GDP growth now and in the decade ahead, the case for the ongoing increase in standard of living, which historically accompanies trade agreements, needs to be made consistently in open media reporting. For instance, a successful Trans Pacific Partnership ( TPP ) will undoubtedly be beneficial to the citizens of each participating nation. The argument for that is made below. However, because those encompassing benefits may not be immediately apparent to all concerned, the case needs to be made in an open yet robust manner. Background Canada and the European Union entered into negotiations for a Comprehensive Economic and Trade Agreement ( CETA ) in the spring of In 2010, the EU was Canada s second most important trading market with an estimated 20.5% of total external trade. When negotiations began, trade in goods and services between Canada and the EU was in the range of 60 billion euros per year, and investment flow between Canada and the EU exceeded 25 billion euros. After more than four years of negotiation, Canada and the EU concluded CETA with the political declaration in principle signed on October 18, 2013.

3 3 Canada and the European Union entered into negotiations for a Comprehensive Economic and Trade Agreement (CETA) in the spring of 2009 CETA was officially signed on September 26, 2014, though negotiations were reopened in 2016 to revise the Chapter on investor state dispute settlement (more on this later). Economic theory tells us that free trade benefits consumers of goods and services. While there may be potential winners and losers among potential suppliers of goods and services, the net result is beneficial for all economies involved and in particular for buyers of those goods and services. This article provides an overview of industries that are seen to be primary beneficiaries of the implementation of CETA. CETA will significantly liberalize trade between the parties. On the day the agreement enters into force, tariffs will be reduced to zero on 98% of goods currently traded between Canada and the EU (99% for industrial goods). Most remaining tariffs will be phased out in stages after 3, 5 and 7 years, depending on the product. Once fully phased-in, tariffs will only remain on certain politically sensitive agricultural products. CETA is not yet in effect. Translation into all 23 treaty languages of the EU must be completed, as well as approval by the European Counsel and the European Parliament. The Canadian Parliament must also ratify the agreement. CETA is clearly significant in its own right. But its importance is enhanced by its role as a precedent in further bilateral and plurilateral negotiations by either party with other countries or trading blocks. For example, while the EU maintains that negotiation of the Transatlantic Trade and Investment Partnership ( TTIP ) with the United States is independent of CETA, it is evident that certain EU concern with potential U.S. positions on issues such as agricultural trade and investor state dispute settlement weighed heavily in the CETA negotiations. Agriculture Perhaps the most contentious issue for negotiators was agriculture, and indeed all of the exemptions from tariff reduction under CETA were for politically-sensitive agricultural products. A listing of these goods can be found listed in staging Category E of each party s tariff reduction schedule.

4 4 Economic theory tells us that free trade benefits consumers of goods and services. The net result is beneficial for all economies involved on it There is a certain irony that a sector comprising such a small component of Canada-EU trade was to be the most problematic, and which ultimately proved to have added significant delays to completion of the agreement. In the CETA negotiations, it was evident that each side was trying to protect its own politically sensitive agricultural products, while seeking to extend trading rights in products for which their own markets were already quite open. The battle was fought over requests for increased access of specific products. Canada wanted increased access to the EU market for beef and pork. The EU sought unlimited access to the Canadian cheese market. These issues were a deal breaker for both sides, and were only resolved through last minute quota concessions. While quota may not be a preferred approach in free trade negotiations, it would seem that this was the only way to permit the extensive trade liberalization in all other industry sectors that was already otherwise agreed. Canada received a significant increase in quota for hormone free beef and pork exports to the EU, with planned tariff free access for 65 thousand tonnes of beef and 80 thousand tonnes of pork. Bison shipments will no longer be subject to beef restrictions, but will have separate quota of 3 thousand tonnes. The value of these concessions has been estimated by Canadian officials to be in the range of 700 million to 1 billion per year. In return, the EU will more than double its tariff-free cheese import quota for sales to Canada from about 13 thousand tonnes per year under existing arrangements, to a reported 29 thousand tonnes. While the numbers seem big, it should be understood that the Canadian cheese market is estimated to be in the range of 500 thousand tonnes per year. As a result, the concessions mean the total annual import share of the market will increase from about 4% to 8% of annual Canadian consumption (including imports from all sources). Geographical indications were treated as a separate negotiating item, though they were ultimately extended exclusively to European agricultural products, and the establishment of certain intellectual property rights in the geographical origin, or indication of those products.

5 5 Geographical indications ( GI ) arise where products from a specific place or region are accorded certain intellectual property protection. The EU began negotiations with an extensive list of hundreds of product names that it wished to see protected. Many of these are considered generic product names in Canada. In addition, some of the requested designations had existing Canadian trademarks. Since taking away these rights would likely be considered an expropriation of an asset under NAFTA, there was a concern that yielding on this issue would give rise to NAFTA Chapter 11 proceedings by Mexican or American investors in Canadian enterprises holding these trademarks. Ultimately the EU agreed on a very limited list of goods with particular political sensitivity. The GIs recognized are primarily related to meats and cheese, and include: Grana Padano, Roquefort, Elia Kalamatas Olives, Aceto balsamico di Modena, Prosciutto di Parma and Prosciutto di San Daniele. Canadian companies that have existing trademark rights in a product name subject to the geographical indicators contained in CETA will have a grandfathered right; that is, they will continue to have the right to use that product name in Canada, but no other entity can have such rights. The experience of CETA will likely inform the TTIP negotiations. Europe continues to maintain a significant level of protection in a number of agricultural sectors, and the United States favours certain agricultural sectors through farm support programs. The EU s reluctance to open its market unreservedly to Canadian beef and pork products, likely reflects a much more significant concern of the impact of unrestrained American competition for the French and Irish beef industries. While fresh fruits and vegetables were not a concern for Canadian negotiators, it is likely to be more of an issue, as the United States can be expected to seek enhanced access for fresh fruits and vegetables from American producers. Some other issues that are likely to arise are standards applicable to genetically modified organisms ( GMOs ) for which market access will likely be a goal of U.S. negotiators. The EU can be expected to push back on areas where there is significant protection in the United States, such as for growers of beet and cane sugar. The EU may be more focused on avoiding concessions to American negotiators than obtaining fresh markets for European agricultural products. Automotive The automotive market was another sensitive issue. The EU view was that automobiles made in Canada did not have sufficient local content to meet EU rules of While quota may not be a preferred approach in free trade negotiations, it would seem that this was the only way to permit the extensive trade liberalization in all other industry sectors that was already otherwise agreed

6 6 The experience of CETA will likely inform the TTIP negotiations. Europe continues to maintain a significant level of protection in a number of agricultural sectors origin, and would not be considered a Canadian product eligible for tariff removal. Integration of automotive production under the North America Free Trade Agreement ( NAFTA ) has meant that a Canadian made car may also include parts and steel from both Mexico and the United States (and their products contain Canadian inputs). The use of these other NAFTA-sourced inputs by Canadian automotive producers exceeds levels permitted by EU rules of origin, and was a major stumbling block to expanding Canadian sales opportunities in Europe. Canada ultimately received a waiver of EU rules of origin for up to 100,000 automobiles per year a substantial increase from the approximately 8,000 autos currently shipped. Canada will also have unlimited access for Canadian-built autos that can meet the content origin rules of the EU. The agreement also contemplates that any change in EU rules that might be accorded in other trade treaties will also apply to Canada. This may be of particular significance in the context of the results of TTIP negotiations between the EU and the United States. In return, the EU obtained a phase-out of the Canadian 6.1% tariff on imported automobiles. While seemingly a modest concession, the absolute dollar value of the tariff can be substantial in the context of the import luxury automobile market segment. In CETA negotiations, both sides contemplated integration of CETA rules with the outcome of the TTIP negotiations, including cumulation of origin across free trade areas. This may prove beneficial to European car manufacturers in rationalizing shipments into North American through one specific port of entry for finishing operations. This may lead to freight expense economies in servicing the North American market. Pharmaceuticals Intellectual property rights for pharmaceutical production was another difficult issue. The EU had sought an extension of patent protection for EU goods by 5 years, to match the length of EU rights. The EU also sought to have time in product approval not counted against the length of the patent. Canada ultimately agreed to granting additional pharmaceutical patent protection for up to 2 years to account for the approval process. While the concessions were something less than what was being sought by the EU, it is nevertheless a victory for European drug manufacturers against a strong lobby from generic drug producers in Canada.

7 7 Trade in Services On trade in services, Canada was seeking temporary access to the EU market for a range of Canadian workers (similar to NAFTA). The EU balked at this request on the ground that individual member states of the EU maintain sovereignty over immigration from non-eu sources. Canada was successful, however, in negotiating preferential access for a number of employment categories, including: information technology workers, professionals (e.g. accountants, engineers), investors, environmental services, scientific/technical personnel, and workers in the energy distribution sector. Preferential treatment will be reciprocal. The two-way trade in services will likely be enhanced by procedures set up to establish mutual recognition of professional standards. It must be noted that the opening up of trade in services will offset a common non-tariff barrier to trade in goods. Where complex or highly technical products are sold, they often require assistance in installation and in providing related training for the use of those goods. Opening up trade in services under CETA will accordingly facilitate trade in such goods. Government Procurement Government procurement concessions have extended far beyond those in NAFTA. EU companies will be able to bid on Canadian Government contracts; however, since the Provinces have also agreed to attorn to the terms of the agreement, access for EU suppliers will be extended to both provincial and municipal government contracts. Canadian companies will have reciprocal rights to bid on contracts tendered by all EU institutions, as well as with all 28 member countries and their regional and local governments. The ability of vendors of goods and services to have access to contracts put out for bid by all levels of government, is a remarkable and wide ranging achievement. Not only will this enhance the two-way trade in goods and services, but it will also act as a cost restraint that may prove beneficial to taxpayers in Canada and the EU. The combined CETA procurement market has been estimated to have government expenditures approaching 3 trillion euros. A cost saving of only a few percentage points can represent a huge cost saving measured over the free trade area. The two-way trade in services will likely be enhanced by procedures set up to establish mutual recognition of professional standards

8 8 The CETA experience is most unlikely to be reflected under TTIP. Canada went to great lengths to bring all of its provinces and territories into the negotiation, and in so doing was able to get their agreement to this unprecedented level of access to government contracts. Given the scope of States rights in the United States, there is little chance that the United States can even offer access to state and municipal contracts in the American market. It should be noted that this issue was discussed in the context of the Canada-U.S. Free Trade Agreement (which preceded NAFTA), and the issue was ultimately tabled for further discussion. Nothing further was ever accomplished. Thus, European vendors of goods and services will have significantly greater access to government procurement contracts in Canada than is available to American interests. Rules of Origin Rules of origin proved to be a thorny issue for Canadian negotiators. For certain products, tariff concessions conferred no benefits where non-canadian inputs were employed, even if those inputs represented only a small portion of the value of the goods. Some examples included American fish processed in Canada, and textiles made from imported thread. This issue was resolved through a process known by the acronym, TPL (trade preference level), that will allow derogation from normal EU rules of origin, though phase in of these rights may occur over 3, 5 or 7 years. Canada has much less complex rules of origin than in the EU, so this was not seen as a restraint on access to the Canadian market by EU negotiators. The negotiations in TTIP will likely have to deal with a process for the cumulation of origin within a free trade area. This would be relatively straight forward in the context of NAFTA parties (including Mexico with which the EU already has a free trade agreement); however, the procedures required to certify origin will likely be complex, particularly with the recent signing of the Trans-Pacific Partnership ( TPP ) between twelve Pacific economies, including all three NAFTA parties. Investment The EU had pressed hard on a number of investment issues. Negotiators had requested unrestricted access to Canadian banking, and a removal of any review of EU takeovers under the Investment Canada Act. EU banks will be able to do busi- European vendors of goods and services will have significantly greater access to government procurement contracts in Canada than is available to American interests.

9 9 Canada has much less complex rules of origin than in the EU, so this was not seen as a restraint on access to the Canadian market by EU negotiators ness in Canada as before, including being deposit-taking institutions, but Canadian ownership limits for Class A banks will remain, preserving Canada s current chartered banking system. On monetary limits for Investment Canada Act review, the EU will obtain a level higher than currently applied under NAFTA; it should be noted that this new level will ultimately have to apply to the United States and Mexico as well, under the terms of NAFTA. Both sides did agree on a process to protect investments of the other party. While the parties were substantially in agreement on the principle, the negotiations were protracted as there was a mutual aim of devising a system that would constitute a gold standard as a precedent for future trade treaties. CETA had initially contemplated a process of investor state dispute settlement ( ISDS ) modelled somewhat on the NAFTA experience, with experienced commercial arbitrators chosen by each side to rule as to whether an investor s rights had been impaired. Governments were still permitted to make such political decisions as deemed necessary, but would be required to pay compensation in certain circumstances, such as in the case of the expropriation of an investment. This process was subsequently changed after the agreement was signed. The revisions insisted upon by the EU in early 2016 replaced experienced commercial arbitrators with a permanent investment Tribunal and an Appellate Tribunal. Members of these bodies would be nominated by governments, removing any right of an investor to choose an arbitrator. Strangely, this post-signing amendment demanded by the EU may actually be to the benefit of Canada. Canada has been a principal target of ISDS proceedings under NAFTA. More recently, the focus has been on the actions of provincial governments in Canada, depriving foreign investors of property rights. Thus, in the absence of skilled commercial arbitrators, including one selected by an investor, one might argue that the revised ISDS process under CETA will make it more difficult for European investors to challenge government actions in Canada that impair their investments. It may be that the EU was looking ahead to TTIP negotiations with the United States, and feared potential actions by litigious American investors. It is unlikely that the United States will agree to attorn to the jurisdiction of the bodies created under CETA, even with the addition of American jurists.

10 10 Technical barriers to trade can include testing and certification requirements, regulatory practices, as well a sanitary and phytosanitary measures Maritime Concessions There was agreement to eliminate significant tariffs and to facilitate trade that did not garner much attention, but nevertheless provide significant trading opportunities for both Canada and the EU. For Canada, the EU agreed to phase out very high tariffs on a wide range of seafood products from Canada going into the EU. The net benefits extend to both the Canadian fishery, and to Canadian processing plants that will be permitted to source American-caught fish under the trade preference level concessions. The EU will obtain removal of the substantial tariff levels in place against the import of ships and other marine craft. In addition, the government procurement concessions will also improve the access of European ship builders to government purchases of a wide range of ships and other marine craft. Technical Barriers Differences in product standards are often seen as a non-tariff barrier to trade. Technical barriers to trade can include testing and certification requirements, regulatory practices, as well a sanitary and phytosanitary measures. CETA aims to remove these barriers through mutual recognition of standards. While both partners continue to adhere to World Trade Organization ( WTO ) obligations in this regard, it became evident to negotiators that both Canada and the EU maintained exceptionally high standards of product safety and consumer protection. Accordingly, a mechanism was devised to allow for mutual recognition of standards, without necessarily having to harmonize those standards exactly. Essentially, this would mean that if the appropriate standards are met in one jurisdiction, then a vendor of goods would not have to incur the considerable expense of proving that the product also meets the regulatory standards of the other jurisdiction. By reducing what can be a significant cost in meeting regulatory requirements, these provisions will certainly enhance the trade in goods by reducing the overall cost to consumers. Conclusion The Canada EU negotiations were very complex. Each party had extensive consultation with both industry and political interests. Canada had representatives

11 11 CETA is an important treaty that extends to 5 economics in the G7 and 24 other countries. We may expect a significant increase in Canada EU trade in the coming years from all provinces in its delegation, and the EU shared its progress with all member nations. There were some contentious points of particular political sensitivity where the outcome may not have satisfied all stakeholders, but Canada and the EU understood that the substantial agreement reached on most issues could not be summarily discarded, and certain accommodations were required. The result is an important treaty that extends to 5 economics in the G7 and 24 other countries. If the experience of the Canada-US Free Trade Agreement and NAFTA is any guide, we may expect a significant increase in Canada EU trade in the coming years. papeles@fundacionfaes.org Actividad subvencionada por el Ministerio de Educación, Cultura y Deporte FAES, the Foundation for Social Studies and Analysis, does not necessarily identify with the opinions expressed in the texts it publishes. FAES, Fundación para el Análisis y los Estudios Sociales and the authors.