On October 18th, 2013 Canada and the European Union penned an agreement in principle to the Canada-EU: Comprehensive Economic and Trade Agreement (CETA). While negotiations and drafting of the exact final text will continue over the coming months, the signing indicates that all major issues between the parties have been settled.
The exact content of CETA is not yet known, but the agreement is vast in scope, presenting new opportunities and challenges for Canadian business. A joint Canada-EU study in 2008 predicted that CETA would create 80,000 new jobs in Canada could add C$12 billion to the Canadian economy annually.
CETA is a massive project and its provisions will touch virtually every sector of the economy. Like any trade agreement, it deals with reducing barriers to trade in goods and services, but it goes much further, implementing protection for investors, opening public procurement markets, and introducing new rules in areas such as intellectual property, competition, telecommunications, and electronic commerce.
This Bulletin is only a brief introduction to the Agreement and its impact on Canadian business. In the weeks and months to come, Fasken lawyers in our Canadian and European offices will be providing insight and analysis on specific areas of the Agreement.
Trade in Goods
Trade in goods is the central pillar of all trade agreements, and CETA contains several chapters aimed at facilitating the flow of goods between the partners.
When CETA enters into force (and this will likely be a few years from now) European tariffs on Canadian goods will drop to zero for 98% of all goods. All non-agricultural tariffs will immediately fall to zero, and 94% of agricultural tariff will be eliminated. Of the remaining items that will still attract duties, half will be eliminated over seven years, and the remainder will stay in place.
Rules of Origin
Rules of origin are the rules that define how goods qualify as Canadian in order to benefit from duty free entry into Europe. None of the rules of origin have yet been released, but these rules will be critical in determining CETA's value to Canadian manufacturers. If CETA is to present real opportunities for Canadian manufacturers, the rules of origin will have to recognize that virtually all goods manufactured in Canada necessarily contain a significant amount of non-Canadian content. This is especially the case for automobiles.
New Tariff Barriers
While tariffs are the most obvious barrier to trade, non-tariff barriers can often be significant. CETA will address non-tariff, barriers with measures designed to ease the import process, harmonize regulation measures, ensure mutual recognition of standards and a joint effort to apply uniform sanitary and phytosanitary measures. Once again, the details of the proposed measures have not yet been released.
Investment and Investor Protection
CETA will contain rules protecting investors and their investments. Those rules will require non-discriminatory and fair and equitable treatment of investors and investment, and prohibit expropriation without compensation. Canada will maintain its right to review certain proposed investments under the Investment Canada Act, however the thresholds for such review will be raised.
Investors will continue to benefit from the right to sue for compensation for a breach of the investor protection rules by a host state, but there is concern that the investor's right to protect its investment may be limited. The Canadian government has said that CETA "also includes provisions to guard against frivolous claims in order to ensure that the process will not be abused". The notion that an investor would "frivolously" engage in investor-state dispute settlement to such an extent that the agreement may provide some type of gatekeeper mechanism that allows a state party to block an investor's claim is a significant departure from the NAFTA and raises serious questions.
Trade in Services
Services (including accounting, banking, insurance, architectural design and the like) account for 70% of Canada's GDP, and CETA aims to boost Canada-Europe trade in services by easing restrictions, and providing clear and transparent rules. Where CETA applies, neither Canada nor Europe will be permitted to discriminate against service providers from the other party, and the Agreement will apply in all areas except those specifically excluded. Excluded Canadian service areas will include health care, public education and certain social services. CETA also includes a most favored nation provision in services, which means that if either party negotiates more favourable access in free trade agreements in the future, the other partner will benefit from the more favourable treatment. This is particularly important for Canada, given that the EU and the U.S. have just begun negotiating a free trade agreement.
Documentation released to date states simply that telecommunications providers have "fair access to networks and services" and "service providers and investors will benefit from increased transparency and predictability of the regulatory environment". Stakeholders will need to wait to see the text of the agreement to understand specifically how CETA will affect telecommunications.
In what appears to be a tremendous opportunity for Canadian business, public procurement by the national, regional and local governments of the twenty-eight member states of the E.U. will be opened to Canadian business. In addition, Canadian businesses will be able to sell to the European Commission, the European Parliament, and the European Council. In procurements where the agreement applies, Canadian firms and Canadian goods will be given the same consideration as European firms and European goods. CETA will apply to virtually all E.U. and member state procurements over a certain threshold, which is currently believed to be $250,000 for goods and $7.5 million for construction.
Canada claims that CETA's provision on copyright "echoes the recent Copyright Modernization Act", which implies that CETA will not change Canadian rules in the area of copyright protection.
In the pharmaceutical sector, Canada has agreed to extend the period of protection for pharmaceutical patent holders. Once again, the precise details of how this increased patent protection will operate are not yet known.
The European Union has been fighting hard to gain protection for its geographic indicators ("GIs") which are exclusive marks that indicate the origin of a particular foodstuff. While Canada already recognises a limited number of GIs, it has agreed to recognize an undisclosed number of additional GIs.
The CETA text has not been released because it has not been finalized, and when it is finalized, it must be translated into the 22 languages for the EU member states. Once that happens, CETA must be ratified by both Canada and EU, and the Agreement may even require ratification by all member states of the E.U. It will be some years before the Agreement comes into force.
In virtually every area of the Agreement, we have promising indications. However, there are few details, and the details are key to determining the extent of the opportunities provided by the CETA. What we now know is that the CETA promises opportunities to Canadian businesses of unparalleled size and potential, and will bring competitive pressure that will force adaptation and change.