On September 21, 2017 most of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union (EU) will come into force, opening significant business opportunities and potential competitive challenges for Canadian and European businesses. This bulletin highlights some of the more significant aspects of CETA.
Over 99% of Non-agricultural Tariffs Will be Removed Immediately
Canada and the EU have agreed to immediately eliminate tariffs on virtually all non-agricultural goods. The only non-agricultural goods that will still attract duty are some automobiles and vessels, and tariff on those products will be eliminated over periods of 3, 5, or 7 years.
The EU is the world's second largest importer of automotive goods, and has agreed to immediately eliminate the current tariffs of up to 22% on a range of Canadian automotive products, including parts, tractors, fire fighting vehicles, motorcycles, tanks, and chassis. Remaining automotive products and vehicles will see Canadian and European automotive tariffs removed in phases ranging from 3, 5 or 7 years, depending on the class of vehicle.
Canada's exports to the EU are currently dominated by precious metals, minerals, machinery and chemicals, and all of these will now enter the EU duty free. The major exports from the EU to Canada are machinery, chemicals and transport equipment, and those too will now be duty free.
Over 92% of Agricultural and Seafood Tariffs Will be Removed Immediately
Tariffs will immediately drop to zero on the vast majority of agricultural and seafood products. The notable EU exceptions are for imports of Canadian grains, corn, bison, beef, veal and pork. For these goods, the EU will provide increased access in the form of duty free quota and, in some cases, a transition period to zero tariff. In Canada's case, poultry and egg are fully excluded from the agreement. In the dairy sector, Canada has increased the EU's current cheese quota from the current 13,500 tons to almost 18,000 tons over 6 years. However, prohibitive duties will continue to apply to EU cheese once quota levels are reached. Canada's supply management system will remain in place.
Business Persons and Professionals Have Liberalized Temporary Entry
Both Canada and the EU agree not to limit the entry of key personnel such as intra-corporate transferees, business consultants and investors. While both parties can still limit the length of stay of these personnel, periods have been liberalized to as long as 3 years depending on the type of business being done or the profession. Both parties also allow investors temporary entry without the requirement of a work permit.
Significant Liberalization of Government Procurement Markets
CETA will open the vast majority of the EU and Canadian government procurement markets to participation by businesses from the other party. Those procurement markets include Federal, Provincial, Regional and Municipal entities, as well as the 'MASH' Sector. Given that the EU comprises of a supra-national administration, twenty-eight national governments, as well as countless regional and municipal governments, universities, schools and hospitals, this represents an exceptional opportunity for Canadian businesses. Not every public contract will be covered, there are monetary threshold to exclude low-value contracts, as well as specific exclusions of certain sectors such as research and development and the provision of health care. For example, for Canadian central government entities, thresholds for goods and services are set at roughly $236,000. For EU Member State central government entities, the threshold for goods and services is roughly €162,000. Nevertheless, the procurement chapter provides significant opportunities for Canadian and EU businesses to participate in each other's public sector contracts, either as sole bidders, as partners in a consortium or even as subcontractors.
Increased Review Threshold Under the Investment Canada Act
Under the Investment Canada Act, proposed investments in Canadian businesses that exceed a particular asset value require government approval. Canada applies a "net benefit to Canada" test to determine whether the investment should be approved. CETA increases the asset value threshold for triggering this investment review from $800 million to $1.5 billion.
The new threshold will not apply to state-owned enterprises, which remain subject to a $379 million asset value threshold, nor will it apply to investments in "cultural businesses" such as the production or sale of books, audio or visual recordings, which will be subject to review thresholds of $5 million for direct transactions and $50 million for indirect transactions.
Important CETA Rules Will Not Enter into Force on September 21, 2017
The investment chapter of CETA, contains rules to protect investors from discrimination, unfair or inequitable treatment, and expropriation without compensation, and those rules will enter into force immediately. However, the CETA provisions that give investors the right to file claims against the host state for alleged breaches of these rules will not enter into force until CETA is ratified by each of 28 Member States. This has not yet occurred.
On September 21, Canadian businesses will have favoured access to one of the largest markets in the world. European businesses will have access to an affluent, sophisticated Canadian market that trades with the US under the NAFTA umbrella. CETA will make it easier for firms to sell goods in each other's countries and to move employees between Canada and the EU for temporary work. It will be easier to invest in the other party's territory, and businesses in both Canada and the EU will have an unprecedented ability to bid on government procurement and infrastructure contracts in the other party's jurisdiction. And although the United Kingdom (UK) has begun the process of exiting the EU, CETA will apply to trade between Canada and the UK at least to the point when the UK leaves the Union. This is important because two-way merchandise trade between Canada and the UK amounted to nearly CAD$25bn (£12.9bn) in 2015. The UK is Canada's single largest export market in the EU and Canada's third largest trading partner. The UK is Canada's fourth most important source of foreign direct investment.
While much business focus has been on the NAFTA negotiations, the CETA is upon us now. Given the scope of CETA, can businesses afford not to consider its opportunities and challenges, and how they can take advantage of those opportunities and meet those challenges?