Canada and the European Union Agree to Historic Trade and Investment Deal

On October 18, 2013, Prime Minister Stephen Harper announced that Canada and the European Union (EU) have reached an agreement in principle on terms of the Comprehensive Economic Trade Agreement (CETA). Both parties will now seek to conclude the formal legal text of the agreement. Once the final legal agreement is signed, it will then need to be ratified by respective legislatures, which could take an additional 18-24 months.

Though the legal text has not been released, the following details were disclosed today regarding the agreement in principle.

1. Market Access and Tariff Treatment

When CETA comes into force, 99% of European tariffs on Canadian industrial products will be eliminated; the remaining 1% will disappear over the ensuing seven years.

These reductions in tariffs are expected to give a major boost to Canadian manufacturing which currently faces tariffs of up to 22% on some of its exports. The European tariffs subject to gradual phase-out include tariffs on fish and seafood products, grains, forest products, passenger vehicles, automotive parts and maple syrup. In the same vein, Canadian tariffs on European passenger vehicles, certain agricultural goods, and ships will also be subject to the gradual phase-out.

Furthermore, the EU will allow for the acceptance of test results and product certification by designated Canadian bodies. This is the first EU trade agreement that has allowed for foreign safety certification and gives Canadian businesses an advantage by reducing the costs associated with having to obtain additional EU certifications. Technical non-tariff barriers such as safety certifications have increased around the world in recent years and the elimination of the need for separate certifications will undoubtedly pave the way for more Canadian exports with less administrative hurdles. This process will also be reciprocal, and will lead to recognition of a list of EU passenger vehicle standards which may make importing from Europe more feasible.

CETA also includes specific provisions governing market access and non-tariff barriers for wines and spirits. CETA is reported to have effectively reduced the ‘cost of service’ fees that provinces levy on European wine. This will inevitably have an adverse impact on the health of the Canadian wine producing industry. The Canadian government did however manage to secure certain rights for domestic wineries, as foreign wine will only be eligible for retail sale from the provincial liquor stores, whereas domestic wine may be sold at the vineyard or at certain retail locations.

In addition to the reduction in tariffs, CETA will create new rules for the Canadian automobile industry which are highly beneficial. While the two sides have agreed on a seven-year phase out of tariff rates on passenger vehicles, there was great disagreement on what the "rules of origin" for these products should be.

Such rules of origin are of critical importance given the integration of the Canadian auto industry with the American auto industry in the wake of NAFTA. Without this liberalization of the rules of origin, it is unlikely that a lowered tariff would have had a large impact.

CETA accounts for this integration by creating a bifurcated system. First, up to 100,000 passenger vehicles may be exported to Europe using the existing supply chain process, more than 12 times the current average export level. Second, an unlimited number of vehicles may be exported to Europe on a duty-free basis provided they meet a higher Canadian content requirement.

2. Trade in Services

CETA is the first trade agreement signed by the EU that contemplates more open trade in services. The Parties have adopted a "negative listing" approach to trade in services, which means that all foreign service providers must be treated no less favourably than domestic ones unless specifically excluded.

Furthermore, the two Parties have adopted a framework for establishing "mutual recognition agreements". These agreements are designed to allow professional workers to have their qualifications recognized by the professional bodies of the other Party. For example, an engineer in London, Ontario will have the opportunity to have his or her certification accepted by a licensing body in London, England without extensive certification or assessment. CETA will be the first Canadian free trade agreement to include substantive and binding provisions on mutual recognition of professional qualifications.

However, in Canada these qualifications are usually granted by provincial bodies – such as the College of Physicians and Surgeons and the various Law Societies. As such, this area will be of particular interest to understand how the Federal government will entice these semi-autonomous provincial bodies into agreements with their European counterparts.

CETA will also expand the liberalization of services (and investments in the services sector, as detailed below) in the financial sector. While the draft provisions have yet to be released, CETA will not exempt the financial sector from its application. However, the two sides have apparently agreed to "prudential measures" that can be taken to protect the integrity of their financial systems; the content of such measures has not yet been announced.

Finally, CETA will create a "lock in" mechanism for any regulatory liberalization granted to service providers or investors. Once a regulatory liberalization has been granted to a foreign investor or service provider, this will become the new CETA obligation for that party. This change happens automatically, without either party being obligated to renegotiate or amend the agreement.

3. Government Procurement

CETA will greatly increase the ability of EU companies to sell to provincial, municipal and federal governments in Canada and for Canadian companies to sell to the EU governments (The European Council, the European Parliament, and the European Commission) and all levels of State government within EU member states. The EU government contracting market is worth over $2.7 trillion annually and the Canadian market well over $100 billion annually.

Federal government contracting is subject to international disciplines under NAFTA and the WTO Agreement on Procurement. However, allowing access by European companies to lucrative provincial and municipal procurement markets is a game-changer. Up until now, the provinces and municipalities have not been subject to widespread international disciplines governing their procurement process and contract awards. Though some provincial government entities are subject to the procurement disciplines in the Canada US Agreement on Government Procurement vis-à-vis US suppliers, municipalities have never been subject to permanent international trade disciplines in public procurement. This means that Canadian government contractors bidding on large lucrative provincial and municipal procurements will encounter much more competition from EU companies. On the other hand, these same companies ought to have more access to EU government contracts at all levels so hopefully it will all "balance out".

Given the size of the government procurement market in Canada, European firms should begin consultations with experts in Canadian government procurement to familiarize themselves with the Canadian government contracting rules, to optimize their chances of navigating the sometimes byzantine rules of government procurement in Canada.

However, CETA does not completely strip all protections from municipalities and provinces for local procurement, particularly when the procurement is supplied by a small business. The CETA rules on procurement will apply only to contracts above a certain value, roughly equivalent to the thresholds established by the WTO Agreement on Government Procurement. For 2012-2013, this threshold is 200,000 Special Drawing Rights (SDRs) – approximately $315,500 for goods and services. For contracts for procurement by utilities that number is 400,000 SDRs ($631,000). Finally, for construction services the threshold for applicability is 5 million SDRs ($7.8 million).

These thresholds are much higher than those set out in the Agreement on Internal Trade (the document that applies to all government procurements in Canada) and, for contracts other than construction services contracts, are also higher than current Canadian federal government commitments in NAFTA.

Finally, the new agreement will preserve the ability of both Canada and the EU to give certain preferences to domestic companies – such as grants, loans, and fiscal incentives. Furthermore, certain industries (such as education and health-care services) will be excluded from the agreement altogether.

4. Agrifood and Dairy

CETA liberalizes tariff and other restrictions on both raw ingredients and processed foods. It would also liberalize, to a degree, the European beef and pork markets, and the Canadian cheese market.

On the day CETA is signed (which could be as far away as another 18-24 months), 94% of agricultural tariff lines will be exported to Europe duty-free. This includes elimination of high tariffs on agricultural goods such as durum and high-quality common wheat, fresh and frozen produce, oils, and iconic products such as maple syrup.

Furthermore, the parties have committed themselves to establishing firm science-based policies related to biotechnology. While there is some hope that this will liberalize the EU’s harsh rules on genetically modified organisms, currently the agreement only focuses on low-level presence of GMOs.

However, the biggest agricultural issue has always been the friction between Canada’s insistence on maintaining supply management and Canada’s desire to gain greater access to EU markets for beef and pork.

CETA will not dismantle supply management, and the Canadian Government has been insistent that the continued existence of supply management is in the country’s best interest. However, the Canadian Tariff Rate Quota (TRQ) for cheese will be increased from 20,000 tonnes to 37,000 tonnes, of which the portion available to the EU specifically will rise from 13,000 tonnes to 30,000 tonnes.

In exchange, the EU will agree to give Canadian farmers a duty-free TRQ for 80,000 tonnes of pork, 50,000 tonnes of beef, and 3,000 tonnes of bison. There will also be a duty-free TRQ for up to 15,000 tonnes of "high-quality beef".

5. Intellectual Property

CETA will contain extensive measures related to intellectual property and represents a strong commitment to intellectual property rights for Canadian and EU innovators.

The Parties have agreed on a framework that resembles the Copyright Modernization Act. The summary texts released by the government claim to bring Canada into line with its WIPO Internet Treaties.

CETA will also expand Canada's list of protected geographical indicators. These are used for goods that are recognized as coming from specific regions, the name carrying with it special geographic connotations. Examples include Champagne, Grappa, and Scotch. Current indications from the Canadian and EU are that this list will include numerous items including Grana Padano, Roquefort, and Elia Kalamata Olives. Importantly, some European geographic indicators, such as Prosciutto di Parma and Prosciutto di San Daniele, will be authorized to use their name in Canada for the first time in 20 years.

Furthermore, CETA appears to be a victory for Canada’s innovative pharmaceutical companies. While CETA will not extend the current term of data protection on new drugs for an additional five years (as had been hoped), it will allow innovator companies to apply for patent restoration of up to two years to compensate them for time lost getting regulatory approvals. This step will be done in a way that protects consumers, as the Federal Government has already made assurances to the provinces that it will compensate them for any increased drug costs.

6. Investment Protection

CETA contains broad investment provisions intended to stimulate foreign direct investment by investors of the two parties in each other. Last year, Canadian direct investment in the EU made up 28% of all Canadian direct investment abroad. In the same year, EU direct investment in Canada accounted for over 24% of all foreign investment in Canada. CETA is also the first Canadian trade agreement with a partner that is an established industrialized partner to include an Investor-State arbitration provision since NAFTA.

The new rules are intended to ensure transatlantic investors that they will be treated equitably. The information available strongly suggests a formulation similar to that found in NAFTA and a number of other bilateral investment treaties signed by Canada. According to material released, the Parties have agreed both to most favoured nation status for foreign investors and to a national treatment standard guaranteeing that foreign investors will not treated worse than domestic investors.

The investment provisions also appear to contain a "fair and equitable treatment" requirement. This is a provision that bears monitoring, given that alleging violations of "fair and equitable treatment" clauses is becoming an increasingly popular cause of action in Investor-State arbitrations. Of particular interest will be whether or not CETA will officially import the NAFTA Commission note on "fair and equitable treatment" which sought to limit the independent effect of this wording.

CETA also takes steps to counteract what some have seen as major pitfalls of Investor-State arbitration, a lack of transparency and a lack of input from non-party stakeholders. The fact that this has been recognized by the Parties indicates a willingness to adapt the Investor-State arbitration framework. According to reports from the Canadian government, there will also be a pre-arbitration review mechanism to filter out frivolous claims to prevent abuse.

Canada has also secured EU agreement to maintain the discretionary review mechanisms under the Investment Canada Act. This is of particular importance given recent decisions by the Federal Government to block transactions under authority of the Act (such as the decision to block a takeover of Allstream by Accelero Capital Holdings). However, according to official releases, the threshold for review of an investment under the net benefit test will be raised when the investor is from the EU. According to unofficial reports, the new Europe-specific threshold will be $1.5 billion.