After almost ten years of preparatory work and negotiations, Canada and the European Union are now quickly moving towards implementation of the Comprehensive Economic and Trade Agreement (CETA). CETA is the most intensive and wide-ranging international trade and investment agreement completed by either party. It is often touted as the first in a “new generation” of trade agreements designed to address perceived weaknesses of past deals, including those relating to sustainable development, labour and environmental standards. The successful implementation of CETA will be a significant accomplishment in the face of growing populist and anti-globalization movements that have caused the collapse of the Trans-Pacific Partnership Agreement (TPP) and are threatening progress on other ambitious trade initiatives such as the US-EU Transatlantic Trade and Investment Partnership (TTIP).
On February 15, 2017, the European Parliament voted to ratify CETA. Simultaneously, Bill C-30 – An Act to implement the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States and to provide for certain other measures – passed third reading in Canada’s House of Commons and is on track to quickly pass through the Senate. It is anticipated that CETA could come into force provisionally as early as May of this year.
If they haven’t already, companies should be carefully considering the opportunities and threats CETA creates for their domestic and international markets and developing an effective strategy to address the new trade and investment dynamic. The following is intended to provide an overview of the key features of CETA, the process for implementation, and its timelines. In the coming weeks, we will be providing a more in depth look at the different aspects of CETA, including a more detailed analysis of the new government procurement regime and the novel investor-state court process.
The successful negotiation and implementation of CETA reflects two of Canada’s key priorities – foreign investment and international trade in goods and services. The agreement between Canada and the EU opens up one of the world’s largest markets to Canadian exporters, investors, and service providers. As a modern agreement, it abolishes tariffs, makes strong commitments to open access for foreign service providers, and takes major steps in simplifying compliance with regulatory standards and practices.
We have set out below a very brief summary of the key areas of CETA.
Trade in Goods & Services
CETA will see tariffs permanently removed from over 98% of all goods. Some of the changes will be implemented over a staggered period of time, for example, tariffs on certain vehicles, ships, and agricultural products. This process will be complete by 2024 – with the only tariffs remaining in place largely being those related to supply managed goods.
CETA also provides EU suppliers with access to Canada for certain supply managed goods - most notably a near doubling of the quota for EU cheese. For its part, the EU has provided greater access for Canadian pork and beef producers in its own markets
Given Canada’s strong service based economy, CETA’s commitment to providing broad and open access to the service sectors is of critical importance. Unlike the World Trade Organization’s General Agreement on Trade in Services (GATS), CETA follows a “negative list” approach – that is, the commitments the parties make are universally binding unless a service (such as legal services) is explicitly excluded or limited.
The market access commitments apply to both “in country” provision of services and to cross-border provision of services. This means that it is now easier for a Canadian service provider to both engage with and assist EU customers from a Canadian base of operations and allow them to deploy personnel and resources in the EU to assist customers “in country”.
Technical Standards & Labour Mobility
One of the more interesting aspects of CETA is its focus on non-tariff barriers to trade (NTBs). In many cases, regulatory requirements and technical standards applied post-entry are protectionist in nature and effectively act as NTBs. Similarly, having to comply with divergent regulations that appear substantively identical but contain a few significant differences, can require companies to establish separate production facilities and lines to ensure full global compliance. This also increases costs by limiting economies of scale.
CETA takes steps to tackle this issue by requiring Canada and the EU to observe and enforce the Protocol on the Mutual Acceptance of the Results of Conformity Assessment. This will require governments to recognize a finding by regulators of the other party regarding a conformity assessment of that product with the regulations of that other party. This streamlines the assessment process. However, this does not mean that Canada and the EU will have a single set of regulations. Products that are to be sold in Canada must still meet Canadian regulatory standards. That said, Canada and the EU have committed to unifying their regulatory structures and engaging in negotiations and consultations to this end.
CETA also provides a mechanism to allow professional regulatory bodies to set up mutual recognition of certifications or licenses. The new mechanisms do not automatically provide for mutual recognition, but provide a framework to allow the parties to negotiate such agreements on an expedited basis and along a standard pattern. Certain professions, such as architects, have already indicated an intention to avail themselves of this process.
Labour mobility is also a major commitment under CETA. While general and low-skilled labour is not covered by CETA obligations, CETA allows for additional rights of entry for independent professionals, business visitors, and intra-corporate transferees. Canada and the EU have also committed to not maintaining numerical restrictions or economic needs tests for the temporary entry of businesspersons.
Commitments to open and fair government procurement have been a standard component of Canadian free trade agreements since NAFTA. The commitments made in this area under CETA are comparable to those Canada has already agreed to under the WTO’s revised Agreement on Government Procurement.
However, the key for both sides in these negotiations was not so much the specific commitments themselves, but rather the entities to which those commitments apply. Canada and the EU have, to an unprecedented degree, extended the scope of the commitments to a wide array of sub-federal entities. Broadly speaking, this includes provincial government entities, hospitals, municipalities, utilities, and a wide range of provincial and federal crown corporations. As a result, CETA effectively liberalizes public procurement markets worth more than $3 trillion.
Importantly, many of these commitments, including those providing access to speedy dispute settlement and against bias in technical specifications, are open to both Canadian and EU suppliers. If you are seeking to supply governments in any Canadian or EU jurisdictions, understanding your rights and remedies under CETA will be critical to protecting your interests.
CETA contains broad commitments regarding the protection of intellectual property. This includes commitments on copyright, trade-marks, and patents. The two most notable features of these commitments include Canada’s agreement to more than twenty new “geographic indicators” (GIs) and the parties’ commitment to a two year “patent restoration” process.
The first provides strong new protections for producers of geographically significant foods - for example, Prosciutto di Parma, Roquefort, or Parmigiano Reggiano. These items will now have additional protection against imitator products that either do not originate in the indicated region, or which are not made using the guidelines recognized by the region for the good to be officially sanctioned.
The second provides additional length of patent protection for pharmaceutical products under certain conditions. This additional protection can “restore” up to two years of the patented term for novel pharmaceuticals. It is meant to compensate for time required for clinical trials and testing during which the patent “clock” would otherwise be running.
A feature of many, if not all, modern trade agreements, investment protection is designed to promote foreign investment. The investor-state provisions of the CETA investment chapter are largely functionally inoperative until final ratification and their inclusion remains one of the most controversial elements of CETA. Canadian investors in the EU, and EU investors in Canada, benefit from guarantees to fair and equitable treatment, protection against expropriation without compensation, and guarantees that they will not be required to use domestic labour or other inputs.
The process originally outlined in CETA was already one of the most transparent in existence and also the most forgiving towards government action. As a result of changes negotiated in February of 2016, the investor-state dispute mechanism under CETA relies on a new “investment court” process in which all judges are screened and chosen by the governments. This process replaces the previous ad hoc arbitration system used in Canada’s other trade agreements in which investors had equal right to choose arbitrators to ensure an impartial hearing.
The ongoing implementation of CETA is neither simple nor complete. However, recent steps by both the European and Canadian Parliaments indicate that the agreement is likely to be implemented sometime in the Spring of 2017.
On January 24, 2017, the International Trade Committee of the European Parliament voted in favour of approving CETA. This was followed on February 15, 2017 with a vote by the European Parliament in favour of ratifying CETA. However, EU implementation does not end here. The EU, through a Proposal adopted on October 2016, recognized that different parts of CETA fall within the competency of both the EU and the individual member countries. Elements within the competency of the member countries include segments of the investment protection chapter, portions of the financial services chapter, and certain intellectual property protections.
For final ratification and implementation, each of the EU member countries must vote to ratify the agreement. Until the EU member states implement CETA themselves, CETA cannot enter into force permanently. However, it is hoped that the benefits of provisional approval may put additional pressure upon the member countries to ratify the agreement for fear of losing all the benefits they have experienced.
The Canadian government began its implementation process with the introduction of Bill C-30 in the House of Commons. The federal legislation includes not only complete incorporation of CETA into Canadian federal legislation, but it makes a slew of changes to a number of federal laws to give full effect to Canada’s commitments under CETA.
On February 14, 2017, Bill C-30 passed through third reading in the House and has moved to the Senate. It is expected that it will receive a very positive reception in a Senate that is controlled by appointees of the Liberal and Conservative parties, both of which strongly support CETA. The government is targeting Spring of 2017 for final implementation and royal assent.
However, even after Bill C-30 receives royal assent, there will be certain elements of CETA that require provincial commitment and implementation. For example, the provinces have agreed to provide considerable access to provincial government procurement. Given the division of powers between the federal and provincial governments, this cannot simply be imposed by the federal Parliament. Therefore, until the provinces have enacted their own commitments, it is hard to see how CETA will be fully implemented. For example, in Ontario there has been no substantive debate and no explicit implementation act to implement Ontario’s commitments.
With Bill C-30 through the House of Commons, and the recent approval of CETA by the European Parliament, CETA is now an imminent reality. At a time when political movements attacking international order, globalization and trade are gaining strength, CETA will create one of the largest free areas in the world. CETA provides a firm foundation for Canadian firms to diversify risk over a global customer base and supply chain, and attempt to remedy what some have viewed as overdependence on US markets.
CETA also puts Canada in a potentially enviable position as a destination for foreign investment. If recent indications are true that Canada will not suffer as much as initially anticipated with the “tweaking” of NAFTA by the Trump Administration, it stands to be in the best position of any of the major trading partners of the United States. With its continued outward looking policy in the negotiation of trade and investment agreements, Canada has the potential for establishing itself as an attractive springboard for access to US markets.
In the coming weeks and months, the International Trade and Investment Law Group at McCarthy Tétrault will issue in depth analyses of the key CETA components and continue to monitor and report on other important developments in international trade and investment.