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Hedging our bets with CETA

Free trade deal with European Union will lessen dependence on the U.S. market
By Matthew Kronby
March 31 2017 issue

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Last month the EU Parliament gave its consent to the conclusion of the Canada-EU Comprehensive Economic and Trade Agreement, better known as the CETA. Canadian and EU officials are indicating that the CETA will take effect by June of this year.

Canadian businesses and investors are rightly concerned about the overtly protectionist attitudes of the Trump administration and the prospect of a NAFTA renegotiation that, for Canada, will be more about seeking to preserve North American trade flows than expanding them.

Because roughly 80 per cent of Canada’s trade is with the United States, those concerns may not be lessened much by the prospect of preferential trade with the European Union. However, it is worth recalling that the EU is, collectively, the world’s largest economy and, even without the United Kingdom, will remain larger than the U.S. It is also Canada’s second largest trading partner. The CETA will offer opportunities for Canadian businesses to expand into a market of some 440 million relatively prosperous inhabitants (over 500 million including the U.K.) and to reduce their export dependency on the United States. Three in particular, stand out.

One is the importation and exportation of goods thanks to the elimination of nearly all tariffs, including on 100 per cent of industrial goods and 95 per cent of agricultural goods. Most — about 98 per cent of tariff lines — will be eliminated as soon as the agreement takes effect and the longest phase-out period will be seven years. In these respects tariff elimination under CETA is more comprehensive and more rapid than under most trade agreements. And the rules of origin, which determine which goods qualify for duty-free treatment, are simpler and more flexible than under previous Canadian free trade agreements, including NAFTA.

Another is that Canadian suppliers of goods and services will be able to participate on equal footing with EU suppliers for a wide range of government procurement contracts at the EU, member state, regional and local levels. Canadian businesses will have an advantage over suppliers from the United States and other non-EU countries as a result of commitments that go beyond those the EU has made under the WTO’s Agreement on Government Procurement.

A third is that the CETA will enable various categories of Canadian businesspeople and skilled professionals to work temporarily in the EU without visas or work permits. This will help businesses operate more effectively, whether as pure service suppliers in consulting industries, to service and support export sales or to manage investments. Temporary entry will be available for terms of up to three years in the case of intra-company transferees and up to one year for contractual service suppliers and independent professionals. These latter categories include lawyers providing advice on foreign law.

However, other parts of the agreement offer less than on close examination that may at first be apparent. One such area is trade in services. The CETA largely commits the parties to maintain existing levels of market access for services although in most cases it will lock in any subsequent liberalization. The same is true of financial services, despite their being the subject of a dedicated chapter in the agreement.

Another area where the agreement falls short is on the regulatory front. After decades of tariff reductions at the WTO and unilaterally, regulatory requirements are often a far greater impediment to trade than customs duties. The CETA makes very limited progress toward regulatory harmonization or even the recognition of regulatory equivalence between the parties. It does offer institutional arrangements that could achieve future progress in these areas but persuading recalcitrant regulators will require concerted effort on the part of businesses that could benefit from deeper regulatory integration. The automotive sector is one that may be interested in making the effort.

Finally, it is important to note that not all of the CETA will take effect this spring. It is, in the parlance of the EU, a “mixed” agreement, within the competency of both the EU itself and its member states so it will not formally enter into force until it has been ratified by each of those 28 states (or 27 post-Brexit). Because that might not happen for several more years at least, Canada and the EU provided in the text that most of the agreement, the parts that are not exclusively within the competence of the member states, could be applied on a provisional basis.

That is what will happen this spring, once both parties have enacted the necessary implementing measures. In Canada, this is being accomplished through Bill C-30, now in the Senate, and by some changes to provincial and territorial procurement regimes.

Nearly all of the CETA will be provisionally applied, including the commitments already described. A notable omission will be investment protection commitments that were an important cause of the agreements prolonged gestation period. However, the practical consequences are limited because Canadian investors already have direct access to foreign investment protection agreements with seven of the more risky EU member states and may have indirect access to others depending on how their EU investments are structured.

Despite some shortcomings, the CETA will create real opportunities for Canadian businesses. Those opportunities can grow over time thanks to the institutional and substantive arrangements built into the agreement. With provisional application just a few months away, now is the time for companies to assess how to take advantage of what the CETA has to offer.

Matthew Kronby is a partner in the international trade and investment law group of Bennett Jones LLP. Before joining Bennett Jones he was the government of Canada’s chief counsel in the CETA negotiations.

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