Free Trade with Europe: A deal at last

| January 5, 2014 | 0 Comments
Prime Minister Stephen Harper and José Manuel Barroso, president of the European Commission, announce they reached a political agreement on the key elements of CETA.

Prime Minister Stephen Harper and José Manuel Barroso, president of the European Commission, announce they reached a political agreement on the key elements of CETA.

After more than a year of being told the end of the negotiations was nigh, Canada and the European Union finally reached a deal on the Comprehensive Economic and Trade Agreement (CETA) last October. This is Canada’s most significant bilateral trade agreement since the North American Free Trade Agreement, which is now 20 years old. For the EU, CETA is also significant because it is the first deal agreed to with a G7 country as well as being the most elaborate trade and economic agreement it has achieved so far. Furthermore, CETA will influence the EU’s negotiations, begun last summer, for a similar agreement with the United States (known as the TTIP or Transatlantic Trade and Investment Partnership).
At the beginning of the negotiations, we were told that reaching an agreement would take a couple of years. In reality, it took more than four years. Why did it take so long? One of the reasons is that the timeline was simply too unrealistic. Most seasoned trade negotiators will tell you that negotiating such an ambitious “second-generation” free-trade agreement, involving not only the reduction, if not elimination, of trade barriers at the border (e.g., tariffs and quotas) but also of barriers beyond the border (thus, the second generation label), such as regulations, for instance, is not something that can be done easily and quickly.
Furthermore, the EU requested that the Canadian provinces and territories be an integral part of the negotiations. That means they were sitting in the negotiating rooms discussing the issues that fell within their jurisdictions, which is the case for many beyond-the-border trade and investment barriers. The reason for this unusual request, given that only the federal government is constitutionally entitled to negotiate and sign international trade agreements, is that the Europeans feared that if the provinces did not actively participate in the negotiations, it would have been easy for them to say they were not obliged to respect the agreement’s contents.
It is indicative of the provinces’ importance to the negotiations that a deal was announced in principle between Canada and the EU only when an agreement had been reached on two agricultural issues that were deemed of vital interest for three of Canada’s largest provinces. In fact, these issues were ultimately pitted against each other politically and were only resolved when Prime Minister Stephen Harper got involved. Alberta was pushing for the EU to increase its quota for beef and pork imported from Canada tariff-free, which is something producers in the EU were not very keen on. In exchange, the EU was asking Canada to increase its quota of dairy products (cheese, for example) imported from Europe tariff-free, which Canadian dairy producers, mainly in Quebec and (eastern) Ontario, opposed.
In the end, the prime minister sided with Alberta, but offered (still to be determined) compensations to Canadian dairy producers should they eventually suffer losses as a result of greater cheese imports from the EU. This decision makes sense for the prime minister and his Conservative party, given that their political base is predominantly located in Western Canada, especially in Alberta.
Nevertheless, the prime minister could not completely ignore dairy farmers’ complaints of being sold out at the expense of beef and pork, a position the Ontario and Quebec governments strongly defended. This is because those provinces will be responsible for implementing significant portions of CETA. As a result, provinces such as Ontario and Quebec could threaten not to implement certain provisions of the agreement unless the federal government compensates dairy producers for the losses that would result from CETA. Such threats could ultimately have scared away the Europeans from accepting an agreement, which they would have seen as not worth their while (if Ontario and Quebec, with the two largest public markets in Canada, decided not to enforce the non-discrimination rules applying to government procurement contracts found in CETA). So even though the provinces are legally not parties to CETA, it does not mean that they were devoid of any leverage during the negotiations.
According to documents released so far, the agreement will eliminate tariff duties on all non-agricultural goods over a seven-year period, with 98 percent of tariff lines brought to 0 percent immediately when CETA comes into force. In the case of agricultural goods, approximately 95 percent of them will be traded duty-free, with some goods benefiting from a transition period of up to seven years. As mentioned above, EU tariffs on beef and pork imports from Canada will remain in place, except that quotas for imports free of duties will be significantly increased from their current levels. Conversely, Canada will maintain tariffs on the importation of dairy products from the EU, but will increase the quotas under which such goods (mainly cheese) can be imported tariff-free. Canada’s current protective measures for poultry and eggs will be maintained, however.
CETA will also reduce trading costs arising from technical barriers to trade (for example, technical regulations or testing and certification requirements). It will do so by specifying the steps necessary to have regulations recognized as equivalent by the other party to the agreement, thereby avoiding the costly need for goods to be produced using different standards depending on whether they are meant to be exported or sold at home. Moreover, CETA will make it possible for testing and certification bodies to be recognized in both jurisdictions, eliminating duplication in the certification of product and process. Finally, the agreement establishes mechanisms to encourage regulators and standard-setters from Canada and Europe to co-operate on the development of future technical regulations.
Similar regulatory co-operation will take place to facilitate trade in services. For instance, CETA will streamline the processes used for the mutual recognition of professional qualifications. This means engineers or architects, for example, should be able to offer their services in both jurisdictions, regardless of where they are actually certified. To further facilitate trade in services, the agreement will enhance the mobility of skilled professionals and businesspeople between Canada and the EU by making it easier for them to visit or relocate temporarily in the other jurisdiction to provide services or oversee investments and operations.
One final key element found in CETA is the opening of government procurements markets, whereby firms from Canada and the EU will no longer be subject to discrimination on the basis of their nationality when having their offers of goods and/or services evaluated by public authorities, agencies and enterprises, whether they are municipal or supranational (for now, this non-discrimination rule applies only to the national and supranational levels). There are, however, some exceptions. For instance, procurement contracts below certain thresholds (from $205,000 for general goods and services to $7.8 million for construction services) are exempted from the non-discrimination obligation.
So what is the big deal with CETA? For one, Canadian firms will have easier access to the world’s largest economy and the country’s second most important economic partner. Moreover, they will be in a privileged position to benefit from Europe’s eventual rebound from the financial crisis. Finally, as a result of CETA, Canada should see increased investment from European firms, which are already the country’s second largest investors after American businesses. Not only should the above benefits help the Canadian economy grow, they should also make it less dependent on the ebbs and flows of the U.S. economy.
The EU, for its part, will face similar benefits from CETA. For instance, its firms will have cheaper access to a major world economy (similar in size to India’s). The agreement will also offer EU firms the possibility to establish a privileged position to access U.S. markets until the TTIP negotiations are concluded (the EU already has a free-trade agreement with Mexico). Finally, as a result of CETA, the EU should see increased investment from Canadian firms, which are already among the largest investors in the region.
Failure to agree to CETA would have been a serious blow for Canada. Not only would Canada have lost all credibility when it comes to negotiating trade agreements, it would have been left in a position to wait for the TTIP negotiations to conclude and then accept whatever deal was on offer from the Americans and Europeans.
Now, instead of being a deal-taker, Canada is in a (albeit indirect) position to influence the future of transatlantic trade through CETA. In the context of Asia’s economic rise, this is particularly important. It will not only improve the transatlantic region’s economic wealth prospects, but also provide a strong negotiating platform from which to influence future international trade rules, whether multilateral or bilateral. Let’s now hope that the EU and the U.S. can reach an agreement on TTIP relatively quickly and that it is close enough to CETA to lead to the formation of an economically integrated and prosperous transatlantic economic area. The future of the world economy may not lie solely in the Asia-Pacific after all.

Patrick Leblond is an associate professor in the Graduate School of Public and International Affairs at the University of Ottawa and a research associate at CIRANO in Montreal.

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Category: Diplomatica

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Patrick Leblond is an associate professor in the Graduate School of Public and International Affairs at the University of Ottawa and a research associate at CIRANO in Montreal.

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