Good news for Canadian business amidst the uncertainty posed by the ongoing NAFTA renegotiations: the key elements of the Canada-EU Comprehensive Economic and Trade Agreement, better known as the CETA, take effect this week, on September 21.
The EU is, collectively, the world’s largest economy. It is also Canada’s second largest trading partner. Even if Brexit goes ahead and the United Kingdom eventually leaves the EU—a likely but by no means certain outcome—the EU will remain larger than the U.S. economy and provide a lucrative market. The CETA will facilitate access for Canadian businesses to a prosperous market of more than 440 million inhabitants (over 500 million including the UK). It will offer Canadian businesses significant opportunities to diversify their export sales and reduce their export dependency on the United States.
What are these opportunities? In our view, three in particular stand out:
Exporters and importers will benefit from tariff elimination that is faster and more comprehensive than under most trade agreements. Tariffs will be eliminated on 100 percent of industrial goods and 95 percent of agricultural goods. For about 98 percent of tariff classifications, tariffs will disappear immediately on September 21 and all tariff elimination will be completed within seven years. In addition, the rules of origin, which determine which goods qualify for duty-free treatment under the CETA, are simpler and more flexible than under NAFTA and other Canadian free trade agreements.
Canadian suppliers of goods and services will be able to participate on an equal footing with EU suppliers for a wide-range of government procurement contracts at the EU, Member State, regional and local levels. Canadian businesses will have an advantage over suppliers from the United States and other non-EU countries as a result of commitments that go beyond those the EU has made under the WTO’s Agreement on Government Procurement.
The CETA will allow various categories of Canadian business persons and skilled professionals to work temporarily in the EU without visas or work permits. This will help businesses operate more effectively, whether they are pure service suppliers in consulting industries, or looking to service and support export sales or to manage investments. Temporary entry will be available for terms of up to three years in the case of intra-company transferees and up to one year for contractual service suppliers and independent professionals.
Other parts of the CETA offer less in the short-term but lay the groundwork for future gains. The CETA largely commits the Parties to maintain existing levels of market access for services, including financial services, although in most cases it will lock in any subsequent liberalization by a government of a Party, down to the local level.
In the case of regulatory requirements, which can be greater trade barriers for business than customs duties, the CETA will make it easier for producers in Canada and the EU to have certain categories of goods, including machinery and electronics, recognized as conforming with the other Party’s regulations, but otherwise it provides limited short-term benefits. However, it does establish institutional arrangements, including a Regulatory Cooperation Forum, which could achieve progress toward regulatory convergence including the recognition of regulatory equivalence for businesses that are willing to invest the effort. The automotive sector is one that may be interested in doing so.
While most of the key aspects of the CETA will come into force this week, some elements that require ratification by the EU’s Member States will not yet become operative. The EU’s constitutional arrangements allocate jurisdiction—or “competency” in EU parlance—for a few parts of the CETA to the Member States rather than the EU itself. Those parts will not enter into force until CETA has been ratified by each of the Member States, which could take several more years. What will occur on September 21 is the provisional application of the parts that are within the competency of the EU. This will include the tariff and other key commitments discussed above.
The most notable omission from provisional application will be the investor-state protections that were an important cause of the CETA’s prolonged gestation period. However, the practical consequences are limited because Canadian investors already have direct access to foreign investment protection agreements with seven EU Member States, including some of the more risky ones - Croatia, Czech Republic, Hungary, Latvia, Poland, Romania and the Slovak Republic—and may have indirect access to others depending on how their EU investments are structured.
It also is worth noting that the benefits of the CETA for Canada-UK trade could be cut short by Brexit. As of Thursday, that trade will be largely duty free but once Brexit occurs, and until Canada and the UK conclude their own preferential trade agreement, trade will revert to pre-CETA terms, including WTO MFN duty rates.
Despite some limitations, the CETA will create real opportunities for Canadian businesses to expand their presence in the EU, and for EU businesses to do likewise in Canada. Those opportunities can grow over time thanks to the institutional and substantive arrangements built into the agreement. Companies that have not already done so should be assessing how to take advantage of what the CETA has to offer.