Sexy Vanilla: Canada-EU Free Trade

by Robert Hage

The same week that celebrity British street artist Banksy upset New Yorkers by saying the new World Trade Center is “vanilla…and looks like something they would build in Canada”, an Economist headline stated, “Canada doesn’t get any sexier than this.” What so excited the Economist was a trade agreement: the Canada-EU Comprehensive Economic and Trade Agreement (CETA).

So what are we—vanilla (safe, conservative maybe a bit uninspiring) or sexy (interesting, intriguing even, with some flair)? Probably a bit of both. Since 1976, Canada has been trying to strengthen its economic relationship with the European Union. Last month, after four long years of negotiation, Prime Minister Harper and European Commission President Barroso unveiled the main aspects of the final agreement—a trade agreement that is both unique and comprehensive.

It is unique for the EU since this is the first time the EU has negotiated a free trade deal with a non-European industrialized country. And it is unique for Canada since, for the first time, the provinces were at the negotiating table. This is fitting, given that Quebec Premier Jean Charest took the first steps in 2007 to initiate the negotiations. Provincial participation has helped make the CETA truly comprehensive by ensuring that matters under both federal and provincial jurisdiction are included—particularly government procurement, labour mobility, regulatory co-operation domestic licensing and professional qualifications.

Should the US and EU succeed in their ambitious Transatlantic Trade and Investment Partnership, the door is open to an EU-NAFTA accord.

There has been some controversy over the federal government’s statement that potential gains could create more than 80,000 jobs and inject more than $12 billion per year into the economy. Both claims are based on economic modeling; it could be less, it could be more. Nevertheless, there are significant and somewhat surprising benefits for Canada.

First, like the 1988 Free Trade Agreement with the United States, CETA is a Canadian-inspired agreement. Canada was a founding partner in NAFTA, an eager participant in the failed Clinton Free Trade Area of the Americas, and has now joined the US-led Transpacific Partnership—all with an eye to guarding our access to the US market. And as Canada concludes its negotiations with the EU, the United States is commencing its own under the Transatlantic and Investment Partnership (TIP). Canada will now have free trade with the world’s two largest economies, comprising $33 trillion in combined GDP.

Second, CETA will make Canada a more competitive player internationally, and (strange as it may seem) should help to bring down trade barriers between provinces. In 2008, Canada and the EU published a comprehensive and surprisingly frank joint study of the costs and benefits of an economic partnership. It underlined the importance of increasing competition in both markets, but especially Canada’s. The study indicated that Canada has one of the highest coefficients of restrictions on foreign direct investment among OECD countries (the EU has about the lowest). In telecommunications, the study showed that Canada has some of the world’s highest mobile phone and Internet charges. Canada and the EU have invested a whopping $350 billion in each other’s economies. To stimulate further European investment, CETA increases the threshold of investment review for EU private investments in Canada from $1 to $1.5 billion. It also guarantees that EU companies will be able to take advantage of further loosening of foreign investment restrictions in the telecommunications sector.

There are, however, some vanilla aspects. CETA does not seem to offer much liberalization in other areas the study identified, such as the restricted Canadian air transport and financial services sectors. As well, aside from an increase in the EU cheese quota, it does not touch Canada’s consumer-unfriendly supply management system for dairy, eggs and poultry.

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It is paradoxical that Canada has not yet achieved the single market in goods and services among provinces that the EU has achieved among its member states. One analysis indicates that inter-provincial trade barriers cost Canadians $8 billion per year. Unlike the EU, our provinces restrict the free flow of labour and some goods. There are a stunning 440 occupational regulatory authorities in Canada. Under CETA, the provinces have agreed to open their domestic markets to EU competition and service providers. How long can Canada’s provinces continue to practise protectionism among each other while providing better access to the EU?

Lastly, CETA is a thoroughly modern 21st-century agreement covering all aspects of today’s economy. It also puts in place an ongoing bilateral consultative mechanism to ensure implementation and the ongoing updating of the agreement. Canada’s previous FTAs have focused heavily on trade in goods. Since the services sector generates about 70% of each side’s GDP, and about the same percentage of employment, the study saw this sector as offering the potential for the greatest gains. Canada convinced the EU to switch from its previous approach in its other trade agreements of listing those services it agreed to liberalize; instead, CETA goes along with Canada’s preference to assume that all services are covered except those listed on a ‘negative list’.

CETA also recognizes that liberalized trade in goods and services can be undermined by differing regulations, licensing and qualification requirements, as well as by differing product certification methods and restrictions on the movement of people. In a first for Canada, the agreement includes requirements on regulatory cooperation, domestic licensing regulations and professional qualifications, along with a product conformity assessment mechanism and temporary entry business and service providers. This is a bureaucratically labour-intensive area, and both sides will have to commit the negotiating resources at all levels to make it work.

If CETA has suddenly made Canada “sexy”, the future offers something more even attractive. Should the US and EU succeed in their ambitious Transatlantic Trade and Investment Partnership, the door is open to an EU-NAFTA accord. (Mexico has had an FTA with the EU since 1997.) This would create a market of one billion people, comprising more than a third of the world’s trade and 50% of its GDP. Now what would the Economist say to that?

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