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Canada Releases Technical Summary of EU-Canada Trade and Investment Deal

On October 29, 2013, Prime Minister Stephen Harper tabled the Technical Summary of Final Negotiated Outcomes of the Comprehensive Economic Trade Agreement (CETA or Agreement). Canada and the EU reached an agreement in principle on CETA on October 18, 2013. Both parties will now seek to conclude the formal legal text of the Agreement. Once the "legal scrub" of the Agreement is finished in the next four to six months, it will then need to be ratified by legislatures within both parties.

McCarthy Tétrault has already provided a basic synopsis of the Agreement based upon the materials released by the parties at signing. Yesterday, the Technical Summary was tabled in the House of Commons. The details released are summarized below.

1. Market Access and Tariff Treatment

As expected, CETA will significantly liberalize the tariff treatment of non-agricultural goods. On entry into force CETA will eliminate EU duties on Canadian products for over 98% of tariff lines. Duty reductions will also occur over seven years culminating in the complete elimination of EU tariffs on 99% of tariff lines. Key sectors subject to this "phase-out" approach are automobiles, fish and seafood products. Similarly, Canada will be eliminating duties on 98.4% of its tariff lines as of the date of entry into force, which will expand to 98.8% duty-free within seven years. Automobiles are, again, one of the "phase-out" tariff lines, together with ships.

Automotive Trade

In the case of automobiles, tariffs will be phased out in periods of three, five, and seven years for both parties (staggered on the basis of vulnerability). This will eliminate tariffs on Canadian automobiles that range as high as 22%. However, more interesting than the mere elimination of tariffs is the new structure on Rules of Origin contained within CETA.

CETA will create a bifurcated system for purposes of determining whether an automobile is "Canadian" in origin, apparently reflecting the current complex North American supply chain for automobile manufacturing. The general rule will be that no more than 50% of the materials used in construction of the vehicle may be non-originating (decreasing to 45% after seven years).

However, up to 100,000 vehicles have a "liberal" origin rule – up to 70% of the transaction value or 80% of the net cost of the vehicle may be non-originating. Given that Canada currently exports approximately 10,000 vehicles to the EU annually, this should give Canada ample room to expand with current supply chains.

Furthermore, the EU and Canada have both recognized the impact that a trade agreement between the EU and US will have on trade in automobiles between the three countries. CETA contains provisions that will allow auto parts originating in the United States to count as "originating" for the production of a vehicle produced in Canada or the EU with certain, as yet to be negotiated, conditions.

This will be important to watch to determine if similar language will appear for other products in the final treaty language. An eventual agreement between the EU and US could set the stage for a larger more encompassing trading agreement between all three counties. In this regard, it is interesting to note that the EU already shares a preferential trading arrangement with Mexico.

Fish Products

Similarly, for fish products, the tariff elimination is almost secondary to the non-tariff reforms introduced in CETA. While the precise rules have not been released, the governments have stated that the majority of Canadian fish and processed products will qualify for preferential treatment. In particular, there will be derogation quotas allowing for more liberal rules of origin for up to 3,000 tonnes of preserved salmon, 2,000 tonnes of cooked and frozen lobster, 200 tonnes of prepared and preserved sardines, and 5,000 tonnes of processed shrimp.

Wine and Spirits

The Technical Summary has also confirmed our previous conclusions on the subject of wine and spirits. CETA will incorporate the Canada-EU Wine and Spirits Agreement and eliminates ad valorem cost of service fee applied to imported alcoholic beverages by some provincial liquor authorities. The elimination of ad valorem cost differentials has the effect of decreasing the cost of service fee and this has given rise to concern by some local wine producers including in Ontario.

However, CETA will continue to protect Quebec’s domestic bottling requirements for retail sale, private outlet shops in Ontario and BC, and winery sales across Canada. Further, CETA will eliminate the federal blending requirement that all imported foreign spirits be blended with Canadian spirits.

2. Labour Mobility

A true point of emphasis in the Agreement will be labour mobility. Regulators of professionals in both parties will be provided with a framework to negotiate mutual-recognition agreements. Though this process may be more difficult for some professions, others, such as architects, have already engaged in mutual recognition discussions.

There will also be rules for temporary entry. These commitments will include coverage of intra-corporate transferees, investors and business visitors for investment purposes, short-term business visitors, and contract service suppliers/independent professionals with contracts of 12 months or less. This measure will give businesses and entrepreneurs greater freedom to travel within both parties to conduct business affairs.

3. Government Procurement

CETA has generally greatly expanded opportunities for companies from each party to bid on the other’s government contracts. The EU has provided Canada with access equivalent to what it provides amongst its member states within the EU’s internal market. The EU has excluded ports and airports, broadcasting, the postal sector, and shipbuilding and maintenance from the scope of CETA. By contrast, they have provided more comprehensive coverage than Canada in the areas of energy, cultural industries, and public transit. They have also agreed to provide for pre-contractual remedies to Canadian suppliers for the first 10 years of CETA. This provision allows Canadian suppliers to stop the award of a contract prior to it being signed. However, if the Canadian provinces and territories do not reciprocate in their procurement procedures, this benefit will disappear.

Canada has also agreed to a significant liberalization of its procurement regime. During the CETA negotiation, there were significant concerns expressed by certain non-governmental organizations that CETA would eliminate the ability of Canadian municipalities to favour local suppliers. Though it is true that CETA represents the most favourable market treatment Canada has offered a free-trade partner to date, there are still significant protections.

As mentioned in our previous alert on the subject, there will be thresholds set on all procurements below which CETA will not apply. This includes a threshold of $315,000 for procurement by municipalities, academia, school boards and hospitals. Further, Quebec and Ontario will be allowed to retain a 25% Canadian value requirement for procurement of public-transit vehicles. Canada has also excluded a wide range of procurement activities from the application of CETA. These include health care, set-asides for Aboriginal businesses, certain regional development exclusions, the cultural industries in Quebec, shipbuilding and repair, certain sensitive goods procured by security-mandated entities, and ports and airports. Utilities and crown corporations are however subject to the procurement obligations of CETA.

Interestingly, for both EU and Canadian companies, CETA will mandate that Canada create a single point of electronic access for procurement within five years of CETA entering into force. This should create efficiencies for any company seeking to bid on government services.

4. Agrifood and Dairy

The EU has agreed to eliminate 93.6% of all agricultural tariff lines on the day that CETA enters into force. This includes complete elimination of the duties on Canadian exports of maple syrup, fresh and frozen fruits, processed fruits and vegetables, and processed grains. Current duties on these products typically range from 8-18%. There will also be a seven year "phase-out" of duties on durum, common wheat, rye, barley, and oats. While the duties on sweet corn will not be eliminated, the EU has agreed to a duty-free quota of 8,000 tonnes.

Supply Management

Much of the discussion in the media has focused on supply management. The Technical Summary released yesterday indicates that the Canadian Government has specifically excluded 7.1% of all tariff lines from liberalization. There will be no reduction in over-quota tariffs for supply-managed products. Both poultry and eggs have been excluded from the Agreement altogether.

There are two significant changes to the Supply Management system. First, Canada has agreed to increase the quota for EU cheese by 18,500 tonnes. This increase is comprised of two components: 16,800 tonnes of regular cheese and 1,700 tonnes of industrial-use cheese. Second, Canada has agreed to phase-out its milk protein substances tariff. This concession has already been provided to the United States. Canada has also secured the right to monitor the impact these measures will have and explore other methods of preventing companies from circumventing the import-control measures.

In exchange for the greater access to Canada’s cheese market, the EU has agreed to fairly substantial concessions in the beef and pork industry. As released earlier, Canada will receive immediate duty free access for 50,000 tonnes of beef – which will be divided into a quota for frozen beef (15,000 tonnes) and fresh chilled beef (35,00 tonnes). The EU will also eliminate the in-quota duty of 20% on 15,000 tonnes of "high-quality beef"; this will be over and above the other quota concessions.

Rules of Origin

The rules of origin on agricultural products will also be drafted so as to qualify the majority of Canadian agricultural goods. Certain specific goods will have a system similar to that of automobiles covered above – where a certain quantity of goods with a lower "Canadian" content will qualify as originating. This includes more liberal rules for up to 30,000 tonnes of high sugar products (such as drink mixes and instant hot chocolate), 10,000 tonnes for chocolate and confectionery, 35,000 tonnes for processed foods (such as pasta, rice, and baked products), and 60,000 tonnes for dog and cat food. Importantly, these volumes will be reviewed every five years when fill rates are above 60%.

Genetically Modified Organisms

The one point of caution within the Agreement in relation to agricultural goods is the lack of specific language protecting Genetically Modified Organisms. Though the Agreement promises to promote "efficient science-based approval processes" on biotechnology, there is no language indicating whether this standard will focus on proven, rigorous, scientific testing or on the precautionary principle. It is likely that any more liberal measures would not have been politically feasible in the EU because of the traditional consumer preference for non-GMO products.

5. Intellectual Property

The information released yesterday provides more detail than that available previously. Canada has avoided any movement on "data exclusivity". In the course of clinical trials and regulatory approvals, innovator pharmaceutical companies are required to provide extensive amounts of clinical data to the regulator. Data exclusivity is a policy designed to prevent generic manufacturer’s from simply referring to the data provided by the innovator company, and then proving pharmacological equivalence so as to demonstrate safety. Generics must either wait until the exclusivity period has expired, or conduct their own clinical safety testing. The EU had been pushing for a full 10 year term for data exclusivity. Instead, Canada has "locked in" its current regime which provides for a six year "no-filing" period in which generics are unable to apply for regulatory consideration, and a two-year "no-marketing" period in which generics can progress towards market readiness, but cannot be sold.

However, Canada has taken steps to protect innovator pharmaceutical companies from generic competition. CETA creates a new "patent restoration process". An innovator who has had a drug lose some of its effective patent life during extended regulatory approvals can apply to the government to have up to two years of that term "restored" to the patent. This process would not be automatic and is designed to restore innovators who have been harmed by excessive regulatory oversight, and not punish generics. Canada has attempted to placate the generic pharmaceutical industry by allowing generics to be made and exported during the period of additional protection.

The other major change CETA has made in this sector is to Geographical Indications. Usually, GIs prevent products that do not originate from a specific region from being labelled with that region’s name (for example, Champagne). In CETA, Canada has extended GI protections to a large number of products at the request of the EU. However, Canada has maintained the right of companies to use terms in common use regardless of product origin such as Valencia orange, Black Forest ham, or Munich beer. This right allows them to use the product names in French and English only, and not in the native language of the term.

Canada has also limited the impact of certain GIs. For instance, "Brie de Meaux" and "Gouda Holland" will be protected, but "brie" and "gouda" can still be used on their own. Canada will also allow companies that currently use certain GI terms such as Asiago, feta, fontina, Gorgonzola, and Munster to continue to use these names in Canada. Future users will be required to add the term "kind", "type", "style", or "imitation" to any name which uses these terms. Finally, no protection will be extended to the GI "Budejovicke" so as to not conflict with the Budweiser trademark.

It will be important for all companies involved in the production, marketing, and selling of food products to monitor the situation to determine whether they have any products that will be affected by this change. As the situation develops, and more information is released, we will continue to update the list of GIs protected, and the extent of that protection.

6. Investment Protection

Canada has preserved the Investment Canada Act, and has officially confirmed that the threshold for a transaction to be reviewed has been increased to $1.5 billion. Canada has also confirmed that this new threshold will also be extended to its other free trade agreement partners.

Further, while the Technical Summary has maintained that the financial services sector will be subject to the investment protection rules, it has also maintained that "a robust prudential exception" will exist. There has been no further detail on this point; however, the Technical Summary does state CETA has taken on the "main elements" of Canada’s existing model for trade in financial services. The Technical Summary has clarified that, subject to the carve out, all investment into the financial services sector will be subject to national treatment, most-favoured nation and treatment of investors obligations as well as expropriation protections.

The investment protection provisions are designed to require that all foreign investors be treated in a fair and equitable manner. However, these protections will only be available on a "post-establishment basis". In other words, there will be no requirement to provide equitable treatment to foreign investors seeking to establish an initial presence in the other party’s territory; the protection only applies to expanding existing investments. This deviates strongly from Canada’s Model Bilateral Investment Treaty which requires protection on a pre-establishment basis.

While the dispute settlement provisions will specifically protect foreign investment from direct and indirect expropriation, the annex to CETA will specifically carve out "good-faith measures to protect health, safety and the environment" from the definition of expropriation.

CETA will also provide a robust provision on minimum standards of treatment that will be modeled on Chapter 11 of the NAFTA. The Technical Summary notes that this will be "substantively the same as the customary international-law minimum standard of treatment". As such, it appears as if the parties may have agreed to a fair and equitable treatment standard as envisaged by the NAFTA Commission in its Interpretive Note.

Procedurally, while the dispute settlement mechanism provides for mediation as an alternative, arbitration under the ICSID Convention (with provision for the additional facility rules until such time as Canada finalizes the process of ratifying the ICSID Convention) will likely be the most common approach. Such arbitration will be generally open to the public and transparent. Furthermore, the process allows for third party stakeholders to file amicus curiae interventions to be heard by the arbitral tribunal. These two measures alleviate two of the major qualms that groups have with investor-state arbitration – a lack of transparency or input from the affected community.