An Evaluation of the Public Policy Debate
and Assessment of its Potential Results
Jonne Kregting
Master Thesis
3/1/2011
The EU-Canada Comprehensive Economic Trade Agreement
Table of Content
Executive Summary ...................................................................................................................... 3
General Introduction .................................................................................................................... 8
Chapter 1.: Overview of EU-Canada Relations .............................................................................. 12
1.1 Historical Overview of Bilateral Relations.........................................................................12
1.2 The Political Economy of the CETA....................................................................................15
1.2.1 Canada’s Political Economy...........................................................................16
1.2.2 The European Union’s Political Economy......................................................18
1.2.3 The World Trade Organisation ......................................................................20
1.3 Bilateral Trade....................................................................................................................21
1.3.1 Trade in Goods...............................................................................................21
1.3.2 Trade in Services.............................................................................................23
1.3.3 Foreign Direct Investment..............................................................................25
1.4 Barriers to Bilateral Trade..................................................................................................25
1.4.1 Tariff Barriers..................................................................................................26
1.4.2 Non-Tariff Barriers..........................................................................................26
1.5 Room for Improvement......................................................................................................28
Chapter 2.: Literature Review ...................................................................................................... 30
2.1 The Joint Study ................................................................................................................... 31
2.2 Sustainable Impact Assessment ......................................................................................... 34
2.3 The Out of Equilibrium Study ............................................................................................. 37
2.4 A Case Study of the EU-Mexico FTA ................................................................................... 41
2.5 Evaluation ........................................................................................................................... 45
Chapter 3.: External Factors ......................................................................................................... 47
3.1 Long-Term Dynamic Effects of Investment ........................................................................ 47
3.2 Effects of Price Movements of Natural Recourses on International Markets .................... 49
3.3 Effects of Exchange Rate Movements ................................................................................ 51
3.4 The Role of the US Economy .............................................................................................. 53
3.5 Other External Demand Shocks .......................................................................................... 55
3.6 Evaluation ........................................................................................................................... 55
Chapter 4: Internal Factors ................................................................................................................... 57
4.1 Canada’s Provinces ............................................................................................................. 58
4.2 Government Procurement ................................................................................................. 60
4.3 Intellectual Property Rights ............................................................................................... 61
4.4 Investment Facillitation ...................................................................................................... 64
4.5 Labour Mobility .................................................................................................................. 66
4.6 Competition Policy.............................................................................................................. 67
4.7 Rules of Origin .................................................................................................................... 68
4.8 Reflection ............................................................................................................................ 69
General Conclusion ............................................................................................................................... 70
Reference Guide ................................................................................................................................... 77
Appendices ............................................................................................................................................ 84
Appendix 1: List of Abbreviations ............................................................................................ 84
Appendix 2: Table 7 .................................................................................................................. 85
The EU – Canada Comprehensive Economic Trade Agreement.
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Master Thesis
Msc in EU Business and Law
Aarhus University School of Business
The EU – Canada Comprehensive Economic Trade Agreement
An evaluation of the Public Policy Debate and assessment of its Potential Results
Aarhus School of Business, Aarhus University, Denmark
&
The Royal Netherlands Embassy, Ottawa, Canada
01/03/2011
Version: Final 1.1
Abstract:
The EU and Canada recently started negotiations towards a Comprehensive Economic Trade
Agreement (CETA). The resulting public policy debate that evolved is based on a number of
studies that predict its macroeconomic effects. This paper investigates their validity and forms
its own (limited) predictions on the effects of CETA. It finds that the validity of the studies is
low as there are a number of independent variables exogenous to the models, and because of
the uncertainty regarding the legal provisions. Therefore, this paper limits its predictions to
individual assessments of these factors and finds that when the CETA manages to achieve the
large degree of openness that is aimed for at the negotiation tables, it could positively
influence the EU’s and Canada’s economies.
Author: Jonne Kregting
Academic Supervisor: Dr. A. Alavi
Local Supervisor: P.A. de Waal
The EU – Canada Comprehensive Economic Trade Agreement.
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Executive Summary
i. Motivations
In 2009 the EU and Canada announced the launch of negotiations towards a new
Comprehensive Economic Trade Agreement (CETA). Although they already share tight
cultural, historical and political bonds, the CETA will mark a new era of cooperation. Both
the EU and Canada only recently adopted new global commerce strategies in which the
conclusion of FTAs forms an important element. Since certain contents of Free Trade
Agreements like the CETA can significantly impact bilateral trade flows and domestic
economies, the debate that followed the start of the EU – Canada trade talks is hardly
surprising, yet, very interesting.
The traditional free trade debate is relevant to public policy. Business pressure supports a
proposed expansion of its markets, whereas civil society groupings are more nervous about
negative externalities such as job losses. This paper directly connects to these policy debates
as various studies have been published that predict possible effects of the CETA. It
investigates how reliable the results of a number of policy papers are in predicting the
effectiveness of the CETA. Two key questions will be answered: How should we rate the
validity of the predictions done by a number of public policy papers regarding the effects of
the CETA? And if the possible effects of FTAs are so uncertain, why do the EU and Canada
engage in them?
ii. Overview of the Results
This paper conducted a literature review of three studies that attempt to predict the potential
gains and losses of the CETA: the Joint Study, the Sustainable Impact Assessment, and the
Out of Equilibrium Study. Three important points were identified through the literature
research: 1. although the Joint Study predicts that the effects of the CETA on bilateral trade
can be quite substantial, the results on the domestic economies (GDP) and total trade are by
all studies predicted to be quite modest. A Mexico case study confirmed that the FTA did
hardly anything to influence the prevalent trends in these macroeconomic indicators. 2.
Irrespective of the final contents of the CETA all studies agree that there a number of
independent variables that will influence the effectiveness of it. 3. The set-up of the
The EU – Canada Comprehensive Economic Trade Agreement.
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quantitative models in the SIA and the Joint Study used some restrictive assumptions that did
not allow for a correct interpretation of the impact of a number of legal provisions internal to
the agreement, which nonetheless, will influence the effectiveness of the CETA.
For these reasons the paper concluded that the reliability of all studies was rather limited, this
was not because they were conducted poorly, but simply because there are so many factors
that will determine the eventual effectiveness of the CETA but are unknown today. Therefore,
this paper adopted a different approach to assessing the effectiveness of the CETA; by simply
evaluating the different determinants separately. It concluded that: investment, movements on
the international financial and commodity markets, the American economy and miscellaneous
demand shocks will continue to affect the EU and Canadian economies and trade flows
irrespective of the conclusion of the CETA. Furthermore, the paper argued that this makes the
contents of the legal provisions and the way in which they will be legally binding pivotal to
the effectiveness of the CETA. A number of key legal provisions were identified: political
mandate in Canada, government procurement mechanisms, IPR protection, investment
facilitation, labour mobility, competition policy and rules of origin.
This paper, supported by other empiric works, argued that the more open the CETA
agreement will be in respect to these legal provisions, the larger its effectiveness will be. This
would lead to increases in services trade and investment, which are expected to be the largest
gains of the agreement. Therefore the perspective that the CETA agreement will go beyond
the standard provisions of FTAs should be taken as positive.
However, there are a number of threats to the eventual openness of the agreement. 1. The
different levels of government, especially in Canada will have to deal with a significant loss
in policy space as a number of legal provisions will limit their abilities to continue
independent policy. 2. Particular levels of government and publicly backed enterprises might
suffer economic damages because of the elimination of tariffs, the increased costs of public
services, or the loss of dominant positions in particular markets. 3. Particular domestic sectors
will suffer from a loss of income; this could potentially increase temporary unemployment. 4.
The legal mechanism that will ensure that all levels of government comply with the legal
provisions is still unclear. This will to a large extent determine the effectiveness of the above
mentioned provisions.
The EU – Canada Comprehensive Economic Trade Agreement.
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iii. Possible Perspectives
The extent to which a number of legal visions in the eventual CETA will be legally binding
and implemented within the CETA structure remains on the negotiation tables. Moreover, a
number of factors that are external to the negotiations can significantly influence the
effectiveness of the CETA. Therefore, the predictions of the CETA that have been made so
far are rather limited in their validity and should mainly be seen as public policy tools
assisting the negotiators in their jobs. However, it should be clear that if negotiations
eventually succeed in establishing a CETA in which many of the provisions described in this
paper will be integrated, and will be sufficiently binding, then the effects of the CETA might
very well be positive for both economies.
iv. Outline of the Various Chapters
Chapter 1 will advance the political economy of the EU-Canada trade relations and the CETA
negotiations. It will describe the historical, economic and political ties between both trading
partners and provide facts and figures on the current relevant macroeconomic conditions and
trading relationship.
Chapter 2 will lay down a comprehensive literature review, of recent publications on the
CETA and compare their results to an EU FTA with Mexico. The main points in this chapter
is that the myriad of factors that influence its trade flows make quantitative projections open
to a very broad range of macroeconomic outcomes, and that, despite the uncertainty about the
exact contents of the CETA, there seems to be a general consensus that the results of the
CETA will be positive, though very limited.
Chapter 3 includes a critical evaluation of factors that are exogenous to the CETA agreement.
As these factors influence trade between both partners they will inevitably also determine the
effectiveness of the CETA. Yet, the factors are often not fully included in the quantitative
models posing some obvious threats to the validity of these works. This paper includes them
to put the projected CETA results into a better perspective. The conclusion drawn from this
chapter will be that there are a number of exogenous variables that could potentially upset the
projections made so far.
The EU – Canada Comprehensive Economic Trade Agreement.
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Chapter 4 focuses on how a number of factors, which are to be determined inside of the
CETA negotiations, can influence the EU and Canada’s economies. It is likely that the final
effectiveness of CETA and its potential results will, to a certain extent, be determined by the
various legal provisions that form it. Therefore, a relevant analysis of some key provisions in
the CETA and the general expectations on their final form will be undertaken in this chapter.
The main conclusion formulated in this chapter is that in order to achieve the largest gains to
trade, both negotiation partners should strive for the largest degree of openness, however,
there appear to be some significant political hurdles.
The EU – Canada Comprehensive Economic Trade Agreement.
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‘’The EU-Canada trade relationship appears significantly under-traded. Total trade between
the EU and Canada is about the same size as the EU’s total trade with India, even though the
Canadian economy is one and a half times larger than India’s. Furthermore, although
Canada’s GDP is one and a half times larger than South Korea’s, total EU-Canada trade is
some 25% lower than that with South Korea.”1
1 European Commission & the federal government of Canada (2008). Assessing the costs and benefits of a closer
EU-Canada economic partnership. A Joint Study by the European Commission and the Government of Canada,
p.15
The EU – Canada Comprehensive Economic Trade Agreement.
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General Introduction
On the 5th
of May 2009 the European Union and Canada announced the launch of
negotiations towards a new economic and Free Trade Agreement.2 Although, the EU and
Canada already share tight cultural, historical and political bonds, the Comprehensive
Economic Trade Agreement (CETA), when signed, will mark a new era of cooperation. For
the EU a CETA would be the first trade agreement signed with a major Western Economy,3
whereas for Canada it would mark the first FTA where the federal and provincial
governments are sharing jurisdiction.4 Moreover, for both the EU and Canada, who only
recently adopted new global commerce strategies, these FTA negotiations mark an important
element of the EU and Canada’s renewed efforts of promoting free trade.5
Certain contents of Free Trade Agreements like the CETA pack the potential to significantly
impact bilateral trade flows and domestic economies. Thus the debate that followed the start
of the EU – Canada trade talks is hardly surprising. Most empirical evidence suggests that the
conclusion of a FTA has beneficial effects on the domestic economy. Yet, in light of the
recent financial and debt crises that sparked a global wave of protectionism, the decision to
start new FTA negotiations is remarkable. Moreover, Free Trade has always had its opponents
as it is argued to bring with it some (short term) negative externalities.
This traditional free trade debate is relevant to public policy. Business pressure, obviously,
supports a proposed expansion of its markets, whereas civil society groupings are more
nervous about negative externalities such as job losses. The public bodies are ought to
objectively decide whether the trade deal benefits their society at large. The Joint Study, a
research into the macroeconomic effects of CETA commissioned by the EU and Canada in
2007 concluded that a trade deal would benefit their respective economies.6 It formed the
basis on which the European and Canadian public bodies entered into trade negotiations.
2 EC official press release. (05-05-2009). EU-Canada Summit to launch negotiations for a new economic and
free trade agreement. IP/09/701; Prime Minister of Canada web release. 06-05-2009. Canada and European
Union launch historic economic partnership 3 Although a Free Trade Agreement was concluded with South Korea in 2010
4 David Plunkett at the EU delegation to Canada in Ottawa. (02-11-2010). Developments in Canadian Bilateral
and Regional Trade Policy. [PowerPoint slides] 5 EU commission. (2006). COM(2006) 567 final. Global Europe: Competing in the World; Government of
Canada (2009). Seizing Global Advantage. A Global Commerce Strategy for Securing Canada’s Growth and
Prosperity 6 EU Commission & the federal government of Canada (2008). Assessing the costs and benefits of a closer EU-
Canada economic partnership. A Joint Study by the European Commission and the Government of Canada.
The EU – Canada Comprehensive Economic Trade Agreement.
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However, the macroeconomic landscape, because of the economic crises, has changed
considerably since the conclusion of the Joint Study. Furthermore, since the joint report’s
publication a number of new studies assessing the potential effects of a CETA have been
conducted. Therefore, re-evaluating the Joint Study under the new economic climate and in
the light of these recent publications would attribute to the debate. This paper investigates
how reliable the results of a number of policy papers are in predicting the effectiveness of the
CETA. Key questions will be: How should we rate the validity of the predictions done by a
number of public policy papers regarding the effects of the CETA? And if the possible effects
of FTAs are so uncertain, why do the EU and Canada engage in them?
In other words, this paper will evaluate the CETA negotiations within this renewed political-
economic landscape and attempt to include the findings of the new studies in the final
assessment on the overall reliability of the predictions on the effectiveness of the CETA.7 This
paper follows two goals. Firstly, it critically assesses the validity of the predictions quoted in
this debate about the welfare effects of CETA. Secondly, it evaluates the socio-political
debate surrounding the CETA negotiations, and tries to contribute to this by carefully
evaluating a number of factors that internally and externally affect the CETA.
This paper is constructive to the public policy debate as it will conduct a minor literature
review of three studies into the potential effects of CETA. Next to this, the paper will
introduce an alternative way of looking at the trade agreement. By refraining from making a
quantitative analysis it can investigate more deeply the internal and external factors that can
possibly impact the economic outcome of CETA without having to make the constraining
assumptions of equilibrium models. In other words, rather than running an equilibrium model
with strict macroeconomic assumptions that only include quantifiable factors, this paper will
critically evaluate the possible factors that influence the CETA that can be identified in
mainstream literature.
This paper adopts this approach for two main reasons. Firstly, it is an attempt to unify the
macroeconomic modelling that supports the free trade arguments with the more qualitative
approach often chosen by critics of FTAs. Secondly, given that a myriad of internal and
external factors influence trade flows, trade growth rates are hardly ever predicted correctly.8
7 By measure of national income
8 Because these factors severely restrain economists in isolating particular effects of FTA’s.
The EU – Canada Comprehensive Economic Trade Agreement.
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Nonetheless, the models find their foundations in mainstream economic theory, something
that should not be disregarded in the political-economic debate.
Because of this set up this paper will not focus on a particular academic field, rather it will
have an interdisciplinary approach. This allows the author to evaluate the multitude of
arguments that are being put forward in the public policy debate. Moreover, as FTAs are
affected by a number of macroeconomic factors and initiated for socio-economic reasons,
their effectiveness is to a large extent determined by a number of legal provisions. The
disadvantages might be that on occasion topics common to economists but unknown to legal
researchers and vice-versa might be discussed. In trying to avoid this, the paper tries to be
elaborate on these topics more than it usually would. The reader will also be assisted with
useful footnotes, and when needed there is a list of abbreviations in appendix 1.
For this reason the structure of the paper will be different from standard, legal, economic or
political work. The first chapter will cover the political economy of CETA, the second will be
a literature review, the third will be an overview of macroeconomic processes that affect the
CETA, whereas the fourth chapter will assess the legal provisions that will be in the CETA
and their economic consequences. More specifically each chapter will cover:
Chapter 1 will advance the political economy of the EU-Canada trade relations and the CETA
negotiations. It will describe the historical, economic and political ties between both trading
partners and provide facts and figures on the current relevant macroeconomic conditions and
trading relationship.
Chapter 2 will lay down a comprehensive literature review, of recent publications on the
CETA and compare their results to an EU FTA with Mexico. The main points in this chapter
is that the myriad of factors that influence its trade flows make quantitative projections open
to a very broad range of macroeconomic outcomes,9 and that, despite the uncertainty about
the exact contents of the CETA, there seems to be a general consensus that the results of the
CETA will be positive, though very limited.
Chapter 3 includes a critical evaluation of factors that are exogenous to the CETA agreement.
As these factors influence trade between both partners they will inevitably also determine the
effectiveness of the CETA. Yet, the factors are often not fully included in the quantitative
models posing some obvious threats to the validity of these works. This paper includes them
9 Chapters 3 and 4 will evaluate these factors, and how they could potentially affect the outcome of CETA
The EU – Canada Comprehensive Economic Trade Agreement.
11
to put the projected CETA results into a better perspective. The conclusion drawn from this
chapter will be that there are a number of exogenous variables that could potentially upset the
projections made so far.
Chapter 4 focuses on how a number of factors, which are to be determined inside of the
CETA negotiations, can influence the EU and Canada’s economies. It is likely that the final
effectiveness of CETA and its potential results will, to a certain extent, be determined by the
various legal provisions that form it. Therefore a relevant analysis of some key provisions in
the CETA and the general expectations on their final form will be undertaken in this chapter.
The main conclusion formulated in this chapter is that in order to achieve the largest gains to
trade, both negotiation partners should strive for the largest degree of openness, however,
there appear to be some significant political hurdles.
The glue to this paper should be, besides the relevance of the EU – Canada CETA and its
outcomes, that public bodies should not simply keep on repeating the one-to-one, direct
relations between the FTA and trade, and trade and welfare. This is a skewed simplification of
economic reality. Trade flows are influenced by a number of external factors that cannot be
disregarded in the trade/ welfare debate. Moreover, there are a number of internal provisions
to FTAs that strongly influence their effectiveness. Finally, there needs to be a distinction
between short-, medium-, and long term gains from FTAs. Short and medium term gains, or
static gains, are likely to be very limited, whereas long term gains, or dynamic gains which
stem from increased national competitiveness through freer flows of production factors, have
the potential to significantly impact the economy. Yet, the dynamic gains are unlikely to show
up in quantitative models.
Thus rather than popularizing and concluding FTAs because they are incorrectly assumed to
directly cause economic growth, public bodies involved in the CETA debate should focus on
the complex nature of international trade and the myriad of factors trough which deeper and
freer trade relations could positively benefit society at large. Furthermore, the exact contents
of the legal provisions that constitute the agreement become pivotal and difficult topics in
negotiations. They should not be ignored as the real benefits to an FTA no longer lay in
simply reducing direct tariffs to the trade in goods and services, but rather in the fine details
of such agreements.
The EU – Canada Comprehensive Economic Trade Agreement.
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Chapter 1: Overview of EU - Canada Relations
1.1 Historical Overview of Bilateral Relations
Dating back to 11th
century Viking settlements, the relation between Canada and Europe is a
longstanding one. 16th
and 17th
century colonization by the French and British empires, and
the subsequent development of Canada within the British Commonwealth lay the foundation
for modern day Canada and its relations to Europe.
The 1654 Treaty of Peace and Commerce between Great Britain and Sweden is the oldest
bilateral treaty still in force between Canada and an EU Member State. Many formal and
informal relationships and agreements have been established on different levels ranging from
local to multilateral and from private to public since then. The first formalized bilateral
relationship between Canada and the EU’s predecessor Euratom was concluded in 1959 by
the adoption of a cooperation agreement concerning the peaceful uses of atomic energy.10
It
was the first ‘European bilateral’ treaty of its kinds, and is still active today.11
Reflecting institutional change within the European Community and Canada and the changing
face of the global economy, the 1976 new framework agreement for commercial and
economic cooperation between both nations became the EU’s first formal bilateral economic
agreement. It set precedent, and created a framework for further commercial and economic
cooperation by agreeing to set up a joint cooperation committee with the purpose of
discussing further commercial and cooperation activities and the ability to establish specific
sub-committees.12
The framework agreement was supplemented with two cooperation
agreements in 1990 and 1996. It also spawned many smaller agreements of various shapes
and sizes aiming to improve mutual cooperation and trade in specific sectors, such as, an
agreement on scientific and technological cooperation (1996),13
an agreement regarding the
application of competition law (1999),14
and the Wines and spirits agreement (2004).15
10
24.11.1959. Agreement between the Government of Canada and the European Atomic Energy Community
(Euratom) for co-operation in the peaceful uses of Atomic Energy. Offical Journal of the European Community
(24.11.1959) 11
Although it has been amended by an exchange of letters in 1978 12
Commission Decision, of 17 September 1976, on conclusion of the commercial and economic cooperation
framework agreement between the European Communities and Canada; OJ L260 of 24/09/1976, p.22 13
Council Decision of 26 February 1996 concerning the conclusion of the Agreement of Scientific and
Technological Cooperation between the European Community and Canada; OJ L74 of 11/03/1996, p.25 14
Council and Commission Decision of 29 April 1999 concerning the conclusion of the Agreement between the
European Communities and the Government of Canada regarding the application of their Competition laws; OJ
L175 of 10/07/1999, p.49
The EU – Canada Comprehensive Economic Trade Agreement.
13
Moreover, in 1998, the EU and Canada adopted the European Canada trade initiative (ECTI),
which comprised an action plan towards negotiations for further trade related cooperation on
the multilateral, as well as on the bilateral levels. These meetings focussed on European
economic and monetary integration.16
The first decade of the 21st century has been marked by closer cooperation in many fields of
common interests. Various dialogues and consultations were set up, most notably in the fields
of fisheries, the environment, and energy.17
Furthermore, the EU and Canada embarked upon
an ambitious agenda to further increase social, economic and political ties. As a result,
negotiations were initiated towards a Trade and Investment Enhancement Agreement (TIEA)
in 2004. The intention was to move beyond traditional market access issues such as
investment facilitation and mutual recognition of standards, and included the 2004 bilateral
Framework on Regulatory Cooperation and Transparency and the adoption of a regulatory
roadmap.18
However, negotiations towards the TIEA were deemed too ambitious by some,
mainly from within the Canadian government, and were paused in 2006.19
Another main
reason for the pausing of negotiation was that an agreement could endanger commitments and
attitudes of other trading partners in the WTO’s Doha development agenda which was
scheduled to reach conclusions in 2007.
The Doha rounds never reached the projected conclusion stage. Partly, the ‘failure’ of Doha
together with the increased realization of the potential of Canadian - European trade relations
prompted renewed political interest on the topic.
With the adoption of the Lisbon agenda the European commission had also set out a new
European trade strategy which called for the increased competitiveness of the union and the
importance of trade liberalization to achieve this aim.20
The communication specifically
mentioned the conclusion of bilateral FTAs as a tool for further liberalization, and highlighted
the broad comprehensive scope that these should have. Interesting is also the more aggressive
15
Council Decision of 30 July 2003 on the conclusion of the agreement between the European Community and
Canada on trade in wines and spirit drinks; OJ L35 of 06/02/2004, p.1 16
For example the adoption of the common currency the Euro, and the renewed opportunities for trade that
stemmed from this; EU press release. (1998). EU-Canada Summit in Ottawa on 17 December. IP/98/1152. EU
press: Brussels: 18-12-1998. 17
Joint Study, p.2 18
Www.international.gc.ca. Canada- European Union: Comprehensive Economic and Trade Agreement (CETA)
Negotiations. Retrieved on: 20-12-2010 19
Cooper, J. (2006). Canada – Europe: a languishing relationship? Canada-EU business ties are strong but
experts believe more should be done to keep them so. Published on 01-08-2006, CMA management. Retrieved
from: http://www.allbusiness.com/management/4015181-1.html on 20-12-2010 20
EU commission. (2006). Global Europe: Competing in the World.. Brussels 4.10.2006. COM(2006) 567 final
The EU – Canada Comprehensive Economic Trade Agreement.
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tone that the EU uses in this regard as opposed to previous strategy reports.21
The report
mentions the goals of market expansion and competitive FTA conclusion.
Likewise, Canada published a global commerce strategy report in 2009. The report
specifically aimed to ‘maintain Canada’s comparative global advantage’ and to building ‘a
stronger, more competitive Canadian economy’.22
The report, broadly suggests three
mechanisms with which to achieve these goals. Firstly, by securing favourable terms of
market access with the main trading partners to secure Canadian interests abroad. Secondly,
by attracting foreign investment and innovation, and facilitating the export of Canadian
investments and innovations. Finally, by expanding its international commercial network to
provide support for Canadian multinationals and capitalize on local business opportunities.
Increased European and Canadian efforts towards the conclusion of bilateral FTAs and the
failure of the DOHA can therefore be pinpointed as the main motivations behind the
continuation of talks on improved trade cooperation in 2007. A direct result was that Canada
and the EU commissioned a study into the potential benefits of an FTA. The study,23
which
took almost two years to complete concluded that there was significant scope to improve
bilateral trade, and that it would yield positive benefits for both the EU and Canada. At the
2009 EU-Canada summit both partners decided that they would move ahead with further trade
negotiations and aimed to conclude a Comprehensive Economic Trade Agreement or CETA
within 2 to 2.5 years. Moreover, in combination with, and supplementary to, the trade talks
Canada and the EU are also talking about updating and amending the Framework Agreement
to accommodate the deeper cooperation between them.
21
Pérez Rocha, M.L., Aguirre Reveles, R. (2009). The EU-Mexico Free Trade Agreement Seven years on.
Awarning to the global South. Transnational Institute: Amsterdam. 22
Government of Canada (2009). Seizing Global Advantage. A Global Commerce Strategy for Securing
Canada’s Growth and Prosperity 23
The Joint Study
The EU – Canada Comprehensive Economic Trade Agreement.
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1.2 The Political Economy of the CETA
Canada and the EU share many common ties through history based upon cultural, economic,
and political values, traditions such as democracy, human rights, and the rule of law. Canada
is even likely to share common land borders with a European Member State (Denmark) by
2011.24
Recent economic developments have brought both partners closer together. As their
economies are becoming more dependent upon international trade because of the
globalization of value chains, economic cooperation between governments can yield greater
benefits.25
Empirical research and quantitative reason seem to support a deeper economic relationship
between Canada and Europe. The Joint Study has suggested that the bilateral trade
relationship is ‘significantly under-traded’ in comparison with other European trade relations.
Furthermore, the Joint Study and the Sustainability Impact Assessment (SIA) find that traded
volume will increase when an FTA is concluded.26
Finally, the increasing complexity of trade,
and the blurring of import-export distinctions are root to the increasing size of total trade, but
also a source to integrative trade.27
This has remained hidden from conventional trade figures,
and can be cause to amplified effects of FTAs.28
In order to put these into the proper perspective, the following section will briefly summarize
the political-economy persistent in Canada and the EU. The remainder of the chapter will then
describe bilateral trade flows and barriers.
24
Ivison, J. (2010). Hans Island Appears headed for joint custody. Published by the National post, 09-11-2010 25
Joint Study. p.i. 26
Kirkpatrick, C. e.o. (2010). A trade Sustainable Impact Assessment relating to the negotiation of a
Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. 27
Batson, A. (2010). How the Ipone distorts Trade. The Wall Street Journal. Published on 16-12-2010 in the
Wall Street Journal section, In the Globe and Mail Canada: Toronto. 28
Thériault, L & Goldfarb, D. (2010). Canada’s ‘’Missing’’ Trade with the European Union’’. Conference
Board of Canada
The EU – Canada Comprehensive Economic Trade Agreement.
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1.2.1 Canada’s political economy
Canada boosts a population of nearly 34
million people and is, measured in landmass,
the second largest country in the world.
Canada’s national income in 2009 amounted
to roughly US$ 1.4 trillion, making it the
tenth biggest economy in the world.29
Canada has highly developed high-tech industrial
economy. The main value-creating economic sector is the service sector, which accounts for
71% of GDP, and is followed by industry (26%) and agriculture (2%). The largest industries
are transportation equipment, chemicals, processed and unprocessed minerals, food products,
wood and paper products, fish products, petroleum and natural gas.30
Politically, Canada can be defined as: firstly, a parliamentary democracy,31
and secondly, a
confederation consisting of 10 provinces,32
and 3 territories,33
each of which with its own
provincial government which exercises its powers granted to it under the Canadian
Constitution act.34
This means that the Canadian government shares its jurisdiction to make
laws with the provinces in a system where none is subordinate to the other. In this system,
the federal parliament deals with matters that effect Canada as a whole such as national
defence, criminal law, money, patents, and the postal services, whereas, the provincial
governments deal with more local matters; the administration of justice, healthcare,
education, and property.35
This is of particular importance in the light of the conclusion of
international trade agreements because it has become clear that the sharing of legislative
powers between the provinces and the federal government creates internal trade and
economic frictions.36
Moreover, Canadian provincial governments have the legislative
mandate in a number of areas that are affected by international trade agreements such as the
29
According to the IMF statistical database 30
CIA world fact book 31
Based on the Westminster model 32
In descending order for GDP in 2009 as measured by StatCan (http://www40.statcan.ca/l01/cst01/econ50-
eng.htm): Ontario, Quebec, Alberta, British Columbia, Manitoba, Saskatchewan, Nova Scotia, New Brunswick,
Newfoundland & Labrador, Prince Edward Island 33
In descending order for GDP in 2009 as measured by StatCan (http://www40.statcan.ca/l01/cst01/econ50-
eng.htm): Northwest Territories, Yukon, Nunavut 34
Part of the Canada act of 1867 is that everything that is not mentioned as belonging to the provincial
legislatures comes under the national parliament 35
Knight, A. Confederation and Canada’s Government; Department of Justice, Canada (2009). Canada’s
System of Justice. 36
Sands, C. (2007). Canada’s Problem: Domestic Trade Barriers.
Table 1: Canada
Population size 33,759,742
Geographic size 9,984,670 sq km
GDP (ppp) US$ 1.335 trillion
GDP per capita US$ 39,154 Source: CIA world fact book (2010 Data)
The EU – Canada Comprehensive Economic Trade Agreement.
17
educational, medical and energy sectors. Chapter 4, will highlight some of the difficulties
that exist in the unification of this legal system with the legal provisions in the final CETA
agreement.
At present, Canada has a multitude of bilateral and multilateral agreements. It has
membership of various international organizations such as NATO, WTO, IMF, UN, G8, and
G20. Furthermore it has signed FTAs and other bilateral economic agreements with, among
others, Israel, Chile and the EFTA.37
Canada’s most important international trade
commitments lay with the NAFTA,38
which includes a free trade agreement with the United
States and Mexico and went into force in 1994. The NAFTA is of vital importance to
Canadian interests as trade with the US comprises 70% of GDP, 80% of total exports and
50% of total imports. The EU is Canada’s second largest trading partner.
Recent macroeconomic indicators do not show any clear trends. Figure 1.1 Displays Canadian
GDP growth over the past 15 years, and shows a trend very similar to that of the European
Union. 2008 and 2009 have been recession years for Canada and recorded some familiar
statistics: GDP growth came to a halt, and turned negative, government deficit drastically
increased, and unemployment levels rose.39
However, 2010 has been a year of recovery for
Canada, annual economic growth was recorded to be at 2.3%, and unemployment fell to
7.6%.40
In 2010 the Canadian Federal government recorded a moderate budget deficit of 3.4%
of GDP and total public debt now amounts to 82.5% of GDP.41
In 2011 these positive trends,
albeit moderately, are expected to continue.42
37
The European Free Trade Association (EFTA) 38
The North American Free Trade Association (NAFTA) 39
Country Statistical Profile: Canada 2010, source OECD stats 40
For november 2010 41
CIA world factbook, this includes provincial and municipal debt burdens, the budget deficit of the federal
government, which is often, ‘’wrongfully’’ quoted as Canada’s national budget deficit amounts to be under 30%
(source: Canadian Broadcasting Company) 42
Campbell and Associates Consulting (Dec 2010). Canadian Economic Review.
The EU – Canada Comprehensive Economic Trade Agreement.
18
Figure 1.1
GDP growth 1996 - 2009
-8
-6
-4
-2
0
2
4
6
8
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Time in Years
Gro
wth
measu
red
in
%
Canada Mexico European Union (27 countries)
Source: OECD statistics
1.2.2 The European Union’s Political Economy
Although the European Union is merely half
the geographical size of Canada, it has nearly
500 million inhabitants, and its national
product of over US$ 14 trillion represents the
largest single market in the world. The EU’s
economy mainly consists of service activities (73%), followed by industry (25%) and
agriculture (2%). Its main industries are among the world’s largest and most technologically
advanced, and include: ferrous and non-ferrous metal production and processing, metal
products, petroleum, coal, cement, chemicals, pharmaceuticals, and aerospace.
The EU encompasses both a political and an economic union. It consists of 27 Member States
who share a mandate with the European institutions in which the main decision making
bodies are the European Parliament, the European Commission, and the European Council.
Among themselves these bodies share the political mandate. The Commission and the Council
determine the common commercial policy, including the negotiation of trade agreements
which are conducted by Directorate General (DG) trade. Nonetheless, if the CETA is
concluded it would still have to be signed by the individual Member States. Despite being an
Table 2: The Eurpean Union
Population size 492,387,344
Geographic size 4,324,782 sq km
GDP (ppp) US$ $14.89 trillion
GDP per capita US$ 32,900 Source: CIA world fact book (2010 Data)
The EU – Canada Comprehensive Economic Trade Agreement.
19
economic unity, and operating a common currency43
the individual personal income levels,
industrial structures and tax systems differ across the EU. However, the EU has, ever since
the signing of the single European Act44
and the Maastricht Treaty,45
made significant
progress in the elimination of internal trade barriers, and the creation of a common internal
market. Arguably formal internal trade barriers in the EU, especially the non-tariff barriers
and barriers to the provisions of services, are lower than those experienced between Canadian
provinces. The largest economies within the EU are Germany, France, the UK and Italy.
Over the years the EU has signed many economic commercial and economic agreements of
various shapes and sizes. It operates a vast number of EPAs46
and FTAs with, among others,
the EFTA, Mexico, South Africa, the CARIFORUM states and South Korea.47
On a
multilateral stage the European Union is represented in various international bodies, although
often this presence is complementary to that of its Member States. In the WTO and the
OECD, the EU has taken up a mandate from the Member States, whereas in the UN,48
G849
and NATO it merely operates as an observer next to the Member States. In the G20 and the
IMF the EU operates under a seat rotation next to Member States who occupy a permanent
presence.
Recent macroeconomic indicators reveal that Europe is still recovering from the global
financial crisis, and they vary significantly between different Member States. Moreover, 2010
was marked by several emergency measures regarding the debt financing of several of the
EU’s Member States.50
Early 2011 the loss in trade has been recovered mainly driven by a
low Euro, strong growth of the German economy, and positive growth of global demand. Yet
strong differences still exist in the recovery of the European economies where the ‘southern’
economies still experience vast budget deficits, and ‘northern’ economies see growth
accelerating.
43
In 16 out of the 27 Member States 44
Europa.eu. The History of the European Union. http://europa.eu/abc/history/index_en.htm retrieved on 05-01-
2011 45
Europa.eu. The Single European Act.
http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_singleact_en.htm retrieved on 05-01-
2011 46
Economic Partnership Agreement 47
DG Trade (2010). Overview of Regional Trade Agreements. Retrieved from:
http://trade.ec.europa.eu/doclib/docs/2006/december/tradoc_111588.pdf on 21-12-2010 48
2 Member States, the UK and France hold a permanent seat in the security council 49
4 Member States, the UK, France, Italy and Germany 50
Greece and Ireland
The EU – Canada Comprehensive Economic Trade Agreement.
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1.2.3 The WTO
Both the EU and Canada are members to a number of international organizations. In the
context of CETA it is important to realize that the WTO regulates international trade, and
therefore has set certain regulations and guidelines regarding the formation of preferential
trade agreements. These are contained under the General Agreement on Trade and Tariffs
(GATT), article xxiv (24) on territorial application, frontier traffic, and customs unions.51
Both the EU and Canada are signatories to these agreements, and therefore have to construct
the CETA in a way that is consistent with this international law.
It is important to note that generally the principles of non-discrimination and reciprocity,
through the Most Favoured Nation clause (MFN) apply in the WTO law. This clause in effect
means that in a bilateral context the particular privileges granted to one trade partner are to be
extended to all member countries of the WTO. Under article 24 of the GATT, the CETA will
be understood as constituting a free trade area,52
and since FTAs grant extensive preferences
to the trading partners, they are exempted from the MFN clause. Moreover, this article
provides that legal issues regarding the agreement can be challenged under the WTO dispute
settlement mechanism.
Article 24 was included in the GATT in order to further promote free trade through the
formation of customs areas. There has been some debate surrounding the question whether it
is actually supporting this or rather preventing the further negotiations of the Doha rounds. As
these agreements are bilateral or regional and thereby favour some imports over others they
have the potential to distort trade flows. Jagadish Bhagwati is the pioneer in assessing the
(negative) effects of Preferential Trade Agreements (PTAs). He argues that instead of creating
a level playing field of competition, PTAs actually distort competition as they put third
country competitors at a cost disadvantage. This could create trade diversion and lead to
negative effects of FTAs on third country economies.53
The aim, according to him should be
to reap the gains from liberalization through a global FTA and focus on the DOHA rounds.
51
GATT: Article xxiv 52
A free trade area shall be understood to mean a group of two or more customs territories in which the duties
and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent
territories in products originating in such territories, GATT article 24, paragraph 8(b) 53
J.Bhagwati: Bilateral deals no substitute for Doha. (2008). Journal of Commerce (15307557), 9(29), 8.
Retrieved from EBSCOhost.
The EU – Canada Comprehensive Economic Trade Agreement.
21
1.3 Bilateral Trade
Bilateral trade between the EU and Canada can
be decomposed into a flow in manufactured
goods, one in services and one in investment.
By all measurements, Canada and the EU already share strong trading bonds. For the trade in
manufactured goods, Canada is the eleventh largest trading partner to the EU, and the EU is
the second largest trading partner to Canada.54
For services Canada accounts for 2.2% of the
EU total, and EU for 18% of the Canadian Total. In FDI, the EU is the second largest investor
in Canada which is the fourth largest investor in the EU.55
The following section will further
elaborate on these figures.
1.3.1 Trade in Goods
Canadian trade in manufactured goods is
dominated by the US. Obvious reasons such
as the narrow physical and psychological
distances between both nations form the
foundation of this intense trade relationship.
Furthermore, the asymmetric size of both economies adds to the Canadian dependence on the
US. Two key industries fuel the trade dynamics between Canada and the US: the American
car industry is dependent upon many intermediary component manufacturers in Canada,56
and
the Canadian natural resource industries satisfy US demands. This leads to highly integrated
value chains across borders between the US and Canada.
Dependence upon the US, and trade figures with the EU differ across Canada. The imports of
EU goods seem negatively related to their geographic distance. The most proximate
provinces, the Atlantics have the EU as its main source of imports (26%), Germany accounts
54
Joint Study 55
Joint Study 56
Mainly in Ontario and Quebec 57
The Atlantic region in Canada, as defined by industry Canada, composed of the provinces: Newfoundland and
Labrador, Prince Edward Island, Nova Scotia and New Brunswick 58
Central Canada region, as defined by industry Canada, composed of the provinces Québec and Ontario 59
The Prairies region in Canada, as defined by industry Canada, composed of the provinces: Manitoba,
Saskatchewan and Alberta 60
These are composed of the province British Columbia, and the territories: Yuko, Northwest Territories, and
Nunavut
Table 3: Canadian Trade in goods
Partner Export Imports
United States 75% 51%
The European Union 8.3% 12%
United Kingdom 3.4% 2.5%
Germany 1% 2.5%
France 0.8% 1.5%
Italy 0.4% 1.5%
The Netherlands 0.8% 1% Source: Industry Canada (2009)
Table 4: Canadian provinces trade with EU
Provinces Exports Imports
The Atlantics57
9% 26%
Central Canada 58
11% 13%
The Prairies59
3% 8%
B.C. & the territories60
12% 6% Source: Industry Canada
The EU – Canada Comprehensive Economic Trade Agreement.
22
for roughly 13% of this, whereas, the US only accounts for 16% of total imports. British
Columbia has the lowest EU import penetration. Interestingly, the EU shares in exports of the
provinces behaves differently, here Central Canada and B.C relatively have the highest export
rates. The key to understanding why this is the case probably lay with their main industries.61
For the EU trade is much more diversified, its
largest trading partner is also the US but it
accounts for only 16% of total trade, China
accounts for 13%, whereas Canada is the 11th
largest trading partner, accounting for 1.8%
of total EU merchandise trade with the world measured in total value.
Thus the motivations for both trading partners for entering in a CETA can be slightly
different. The EU could be looking to defend its success in the Canadian markets and may
build on this by diversifying into different sectors such as the procurement and service
markets. Canada, on the other hand, could be looking to increase its market share in the EU
more by creating a competitive edge for its exporters, or by creating a level playing field with
third country producers who already have preferential access into the EU. Canada as such
would be looking at a more technical and standard FTA, whereas the EU wants something
that goes beyond this in order to achieve the diversification of its exports to Canada. Clearly,
the potential gains on the large EU markets for Canada are larger than those for the EU which
might indicate why Canada would be more willing to give in to EU demands.
The goods traded between Canada and the EU are highly concentrated. The top 5 trade flows
from the EU to Canada comprise 40% of total Canadian imports and the flow Canada - EU is
even more concentrated (46% of all exports for the top5 industries).62
29% of total Canadian
exports towards the EU are in one way or another related to the extraction of natural
resources. The EU exports are much more diverse; however, they appear to mainly consist of
high value added product with pharmaceuticals, aerospace and motor vehicles capturing
nearly 29% of total exports. It is interesting that the EU exports oil & gas, and refined
products towards Canada, as Canada is one of the world’s main oil and gas producing
61
From the part about the top traded industries in this section it is clear that Aerospace and Chemicals, two
industries concentrated in Central Canada, with Bombardier, a major aerospace producer headquartered in
Quebec, and the Chemical industries spread around Montreal (Quebec) and Toronto (Ontario). The other top five
industries mainly consist of mining products, of which many originate in B.C. and the territories. 62
Industry Canada website
Table 5: EU Trade in goods
Partner Exports Imports
United States 16.3% 11%
Canada 3.3% 3.6%
Mexico 2.4% 2.6% Source: Eurostat (2009)
The EU – Canada Comprehensive Economic Trade Agreement.
23
countries.63
Finally, there appears to be a highly valued trade in aerospace products and parts
between both nations.
1.3.2 Trade in Services
Trade in commercial services suffers various difficulties in its measurement. Firstly, the
intangible nature of services makes the actual definition of what constitutes a service already
problematic. Additionally, integrated value chains and the increasing internationalization of
the firm make it almost impossible to measure and to define the size of service exchanges
between countries within firms. Finally, the increasing mobility of employees and
information, through media such as the internet, make reliable measurement almost
impossible.64
Therefore, not only the traditional statistics reported by the statistical agencies
of various institutions, but also the models that use them as a basic starting point lose validity.
Thériault et al. (2009) make an estimation for ‘missing trade in services’ between the EU and
Canada from 2008 data and find that as much as CAN$ 236bln is missing from the traditional
databases which show that the total value of the trade over that year was only CAN$ 28bln.
Nonetheless, services trade data monitored by Eurostat and StatCan, can show us where the
strong international trade connections are sector and geographical wise, and as such still serve
an important function. Eurostat puts services into three different categories: services relating
to transport, services relating to travel, and other services. Not surprisingly the latter category
represents the largest monetary value, about 45% of the total trade in services exported to
Canada by the EU reported at €10.6 bln. Large components of the ‘other’ category are,
63
This could be due to the large number of EU oil companies exporting their knowledge of building refineries
towards Canada (e.g. Royal Dutch Shell, British Petroleum, and Total). Furthermore it is cheaper to transport (by
pipelines) oil from the Middle east and Russia towards EU ports and then shipping it towards Eastern Canada
than to extract the more expensive oil from the Western Canadian Oil sands and transport this to Eastern Canada. 64
Theriault et al (2009)
Table 6: EU-Canada Trade by sector (top5)
Between brackets is the share in total trade in goods
EU Canada (40%) Canada EU (46%)
1. Pharmaceuticals (16%) 1. Gold & Silver ore (18%)
2. Aerospace (6.5%) 2. Aerospace (12%)
3. Motor vehicles (6.2%) 3. Non-metallic mining products (6%)
4. Oil & Gas (6.2%) 4. Iron ore (5%)
5. Refineries (4.3%) 5. Chemicals (5%) Source: Industry Canada
The EU – Canada Comprehensive Economic Trade Agreement.
24
insurance (€ 668mln) and financial services (€ 828mln), yet the majority value of ‘other’
services is too dispersed (or too intangible) to be defined more precisely.
According to Eurostat, Canada exported about €8.2 Bln worth of services to the EU, and as
such, operates a current account deficit on services to the EU. Total Canadian service exports
made up roughly 2.2% of all EU service imports in 2009. The OECD65
statistical unit reports
an increase in Canada EU bilateral trade in services, both in imports and exports.66
Figure 1.4
displays the shares of the EU and Canada bilateral service trade relative to their trade with the
rest of the world. It signals that, similar to the goods trade, the EU is a more important trading
partner to Canada, than the other way around. However, no clear upward or downward trend
can be observed for either Canada or the EU.
Figure 1.4
65
Data chosen from OECD because of impartiality, the comprehensible database, and availability of data free of
additional charge. The latter is also the reason why Statcan data cannot be included in this analysis. 66
they use a more conservative approach of the measurement of services.
The EU – Canada Comprehensive Economic Trade Agreement.
25
1.3.3 Foreign Direct Investment (FDI)
The EU and Canada share strong investment ties. After the US, the EU (adding together the
individual investments per Member State) is the second largest foreign investor in Canada.67
In Europe, Canada is the fourth largest foreign investor.68
Furthermore, the Joint Study and
the Statcan report show that the bilateral FDI flows between the EU and Canada have
witnessed stronger increase than bilateral FDI flows from either partner with the US. This
suggests that EU- Canada investment ties are strengthening.69
This could be an indication that
Canada and the EU are becoming more economically integrated. Both partners are net
exporters of FDI to the world, meaning that they invest more capital abroad than foreign
capital is invested domestically. The Joint Study shows, that the most important component of
EU-Canada investments is foreign affiliate sales.
OECD data, measured over a ten year period showing four destinations of European FDI in
the American continent, suggests that the movement of European FDI appears to be rather
volatile. This is to be expected when multinational business activity increases. For example a
Greenfield investment, acquisitions or merger will initially give a boost to FDI, but as the
business unit’s cash flows become internal to the multinational company, investments,
internal services and good import/exports will no longer show up in the traditional trade data.
As such the increasing stock of EU capital in Canada, and Canadian capital in Europe, as
measured by the joint report,70
is a further indication of EU-Canada trade integration.
1.4 Barriers to bilateral trade
Broadly interpreted, there exist two main barriers to trade: (1) the classical protectionist tools
such as tariffs and tariff-rate quotas. (2) Different kinds of regulations, standards and
requirements to products, workers, or investments can, although not necessarily conceived
with this purpose, seriously hamper trade and investment; such measures are coined as non-
tariff barriers (NTBs). The next sections first briefly describe the tariffs on the trade in goods
67
According to a Statcan, the Netherlands were the 2nd
largest investor in Canada in 2008 and 2009, the UK (4th
)
and Germany (5th
) also had strong positions; Japan was the 3rd
largest investor in Canada 68
after the US, China and Japan.68
69
Joint Study, p.26 70
Joint Study, p 27
The EU – Canada Comprehensive Economic Trade Agreement.
26
between the EU and Canada and then the NTBs that exist, followed by an evaluation on how
these impede bilateral trade in services.
1.4.1 Tariff Barriers
Tariffs on most traded goods between the EU and Canada are already very low, the highest
value traded sectors see average tariffs less than 3%. However, small tariffs can still pose
competitive disadvantage and, as such, serve as barriers to trade. Various studies have shown
the negative relationship between tariff barriers and trade flows;71
moreover, real world
experience combined with more liberal international trade has been a direct cause to increased
global trade flows.72
Nonetheless, one important trading sector faces significant tariff
protection; import tariffs on processed foods average 30% into Canada, and 17% into the
EU.73
In less significant sectors of trade between both nations tariff peaks still exist: 23% on
specific fish and seafood imports for the EU, and respectively 20% and 18% on footwear and
textiles imports for Canada. Furthermore, some quota’s and out-of-quota tariffs still exist, for
example a Canadian quote on cheese import and the out of quota tariff rate of nearly 250%. In
Europe too some products experience peak tariffs such as beef and pork.
1.4.2 Non-Tariff Barriers (NTBs)
NTBs consist of a myriad of government induced regulations, standards, ethics, certifications,
requirements, etc. Often they have been introduced to reduce negative externalities of certain
products, for example to protect the environment or public health. However, sometimes they
are also introduced for more protectionist reasons, for example measures to promote domestic
products, or entry barriers to protect a government backed monopoly. Yet, non-tariff barriers
are not always government motivated, cultural factors such as language or traditions also pose
strict barriers to trade. Nonetheless, the many levels of government included in the CETA
negotiations impose many different NTBs to trade. For example, in Canada the provincially
regulated retail and wholesale of alcohol and liquors is root to trade distortion between
71
Cameron, R.A., Loukine, L. (2001) Canada-European Union Trade and Investment Relations: The Impaxt of
Tariff Elimination. Ottawa: DFAIT, 2001 72
Among others the EU and NAFTA have seen drastic increases in internal trade by removing internal tariff
barriers. 73
Joint Study, p.23
The EU – Canada Comprehensive Economic Trade Agreement.
27
various provinces and within Europe different professional qualification standards continue to
severely impede movement of labour.
Under the 2004 voluntary framework on regulatory cooperation and transparency several
forums have been created for possible harmonization of certain regulations in order to reduce
non-tariff barriers. Moreover, several other bilateral treaties establish mutual recognition of
standards, in for example the wine and liquor agreement.74
Yet, there are still plenty of NTBs
that prohibit trade, most of those should be dealt under the legal provisions of CETA in order
for it to report positive results.
Services, as mentioned, are hard to quantify in the spectrum of international trade. Therefore,
there are mainly NTBs that impede trade in services. Common barriers are measures such as
barriers to commercial establishment, nationality requirements, discriminatory treatment of
national companies, and restrictions on the number and type of services that can be provided.
Key in the assessment of barriers to the provision of services is an evaluation of the freedom
of the movement of the production factors such as labour and capital. For example in Canada
the telecom sector operates under foreign ownership restrictions,75
preventing the imports of
European telecom services and providers. Whereas many Canadian architectural and
engineering firms face problems regarding domestic regulations in different EU Member
States such as licensing and professional qualification requirements.76
Lemaire and Cai (2006) describe that the increased international commercial presence of
many companies and ever further reaching global value chain are becoming more constrained
by NTBs than by tariff measures. 77
They identify the most important factors hampering trade
between the EU and Canada: regulatory barriers and requirements, divergent business
attitudes, language issues, increased costs, infrastructure, and provincial differences. The Joint
Study also includes a section discussing a survey done among businesses on both sides of the
Atlantic. Interestingly this section reports difficulties regarding foreign ownership restrictions
in sectors such as telecommunications, banking, energy and culture in Canada. With respect
to the EU different tax systems and social laws are reported as a problem.
74
EU Council Decision of 30 July 2003 75
Facilities based telecommunications suppliers must be controlled in fact by Canadians, 80% of the board must
have Canadian nationality, and 53% of the voting shares must be in Canadian hands 76
Joint Study pp. 43 77
Lemairs, D. And Cai, W. (2006). Lost over the Atlantic? The Canada-European Union Trade and Investment
relationship. Ottawa: conference board of Canada
The EU – Canada Comprehensive Economic Trade Agreement.
28
1.5 Room for improvement
Bilateral relations between Canada and the EU both on a political as well as on a socio-
economic and historical level are strong. They are not only signatories to many bilateral and
multilateral treaties, but also share strong trade bonds. Moreover, in recent years both partners
have adopted new international commerce strategies calling for increased competitiveness of
their economies by the conclusion of, among others, preferential trade agreements. However,
so far Canada and the EU do not yet have a mutual trade agreement. The negotiations towards
an agreement started 2004 but stalled in 2006. As of 2007 a new course has been set towards a
Comprehensive Economic Trade Agreement. The renewed interest in bilateral cooperation
was supported by empirical research (the Joint Study) that showed that current trade relations
provided significant scope so that a potential agreement could positively benefit the Canadian
and European economies.
Additionally, statistics have shown that Canada’s share in European trade is declining.
Conversely, the EU has had only very limited success in increasing its share in Canadian
trade.78
Tariff barriers between Canada and the EU are low on average, but small tariff
changes can already drastically change comparative advantage. Moreover, significant peak
tariffs and quota exist and drastically hinder trade in certain sectors. Thus, there appears to be
scope to lower tariff barriers to bilateral trade.
Although trade in services is difficult to measure, it is clear that it is mainly hindered by the
many NTBs which still exist between the EU and Canada. The EU’s share in Canadian
service imports are increasing, whereas vice versa Canada has a very limited share in EU
service imports. Investment has been shown to be a very close bond between Canada and
Europe, per capita Canada is the largest investor in Europe, and in absolute values the EU is
the second largest investor in Canada. However, FDI encounters many different forms of
NTBs, and given the preferential effect of other FTAs which both the EU and Canada have,
the investment position both nations have on each other’s markets should be protected and
perhaps even improved in a CETA by the elimination of a number of the NTBs. Furthermore,
various international analyses suggest Canada to be comparatively restrictive with regard to
its openness for FDI.
78
Table 3.1 and 3.2 display the Canadian share in EU trade and vice-versa
The EU – Canada Comprehensive Economic Trade Agreement.
29
The World Economic Forum’s global competitiveness report79
ranks nations’ openness to
trade.80
The EU achieves a score of 4.81,81
whereas Canada scores 5.30 and ranks tenth. For
Canada low scores in specific indices indicate that the country is relatively closed for foreign
competition as it scores low on trade tariffs (48th
place)82
, prevalence of trade barriers (45th
)83
this might be cause to or caused by the nature of competitive advantage on which it ranks only
56th
.84
The World Bank ease of doing business project confirms these findings.85
Conclusively, there appears to be some scope to lower various tariff barriers, although this is
not expected to be the main driver of positive growth derived from the CETA agreement.
More likely, the benefits would lay in improved cooperation with respect to NTBs to services
and investment. Thus there is sufficient room for improvement of trade relations between the
EU and Canada, and a CETA has the potential to do so. However, the results would strongly
depend upon the final contents and design of such an agreement. Thus, having established that
CETA can increase trade flows, the question remains whether the final agreement would
realistically change the existing bilateral trade situation and with it bring positive benefits for
society at large?
The remainder of the paper will reflect upon this issue. The next chapter will cover a literature
review of academic work that discusses both positive and negative outcomes of the CETA
agreement. The third chapter will then contribute to this debate by evaluating some external
factors that influence the bilateral trade relations between the EU and Canada, whereas the
fourth chapter will focus on the importance of the legal provisions in the final CETA and how
they influence the trade relations.
79
Global competitiveness report 2010-2011. World Economic Forum: Geneva, Switzerland 2010 80
The world economic forum measures in twelve pillars non of which directly address trade conditions, yet the
6th
pillar includes indices such as: prevalence of trade barriers, trade tariffs, prevalence of foreign ownership,
business impacts of rules on FDI and the burden of customs procedures. Whereas the 9th
pillar accounts for the
easiness of FDI and technology transfers, the 10th
pillar includes the country’s ease of access to foreign markets. 81
This would put it in a 28th
place. Individual Member States such as Sweden (2nd
), Germany (5th
), Finland (7th
),
the Netherlands (8th
) and Denmark (9th
) are more competitive than the either the EU or Canada. Mainly Southern
and Eastern EU member states rank lower, with Greece (83rd
) being the lowest ranked EU member state. 82
Prevalence of trade barriers for comparison France (27th
) ,Germany (36th
), UK (21st), Sweden (6
th)
83 Trade tariffs for comparison the entire EU ranks 4
th
84 Nature of Comparative advantage, for comparison France (15
th), Germany (3
rd), the UK (9
th), Finland (4
th)
85 IFC (2010). Doing Business 2011. Making a Difference for Entrepreneurs.
The EU – Canada Comprehensive Economic Trade Agreement.
30
Chapter 2: Literature Review
The EU and Canada, having concluded that there is significant scope for the improvement of
bilateral trade ties, officially launched negotiations towards a CETA at their summit in Prague
in May 2009.86
Expectations are that in the first half of 2011 the final market packages, or the
proposed provisions and contents of the deal will finally be tabled. The contents of these are
of vital importance as they significantly determine the layout of the deal and with it, its
potential economic, political, social and environmental effects. In 2008, the initial projections
on the economic effects of such an agreement were published in the Joint Study. At that time
the economic prospects were different from those prevalent today. Yet, the study still provides
a solid economic basis on which to conduct high level trade negotiations. Moreover, as the
spectrum moves from an economic playing field to a political one, where the lobbying of all
kinds of interest groups prevails, drivers other than purely economic ones are set to determine
the final outcome of the CETA. As such not everyone agrees with the results of the Joint
Study. So far a number of studies have been produced that suggest quite different outcomes to
the CETA.
This chapter will highlight the economic effects that have been predicted in three different
studies varying from liberal economics supporting comparative trade models to more
qualitative and sceptical studies concerned with the employment effects of free trade. The
Joint Study focused on quantitative welfare gains that go hand in hand with the elimination of
tariffs.87
The Sustainable Impact Assessment (SIA) of CETA gives a more balanced view
which also considers dynamic welfare effects and the social and environmental effects of
CETA.88
The `Out of Equilibrium Study` points out the potentially negative externalities
attached to CETA, and the weaknesses of general equilibrium models.89
This chapter will
demonstrate that the projected outcomes of CETA vary significantly per study. This is to be
expected as the final contents of the agreement are not yet clear, and thus different
assumptions about them exist among authors. The second section compares the projected
results to the initial effects of another FTA in a small case study of the EU-Mexico FTA
concluded in 2000.
86
Prime Minister of Canada web release. (06-05-2009). Canada and European Union launch historic economic
partnership 87
The Joint Study 88
The SIA 89
Stanford, J. (2010). Out of Equilibrium. The impact of EU-Canada Free Trade on the Real Economy. Ottawa:
CCPA, Canadian Centre for Policy Alternatives
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Furthermore, this chapter will demonstrate that these studies identify, at least, two dynamics
which hugely influence economic outcome modelling regarding the CETA. Firstly, there are a
number of external factors that are likely to influence the economic dynamics of the deal.
These will be discussed in the third chapter. Secondly, the degree of market access for both
trading partners remains to be determined on the negotiation tables, the extent of this is
reflected upon in the fourth chapter on the legal provisions of the agreement. It is clear that
both will have a large effect on the outcome of the CETA agreement.90
2.1 Joint Study
The Joint Study was commissioned by the European commission and the Canadian federal
government to investigate the potential benefits of a FTA between both trading partners.91
It
was completed in 2007 and reviewed in 2008. Its positive findings jumpstarted the CETA
negotiations and predicted both static (short run) gains on bilateral trade, as well as dynamic
(long run) gains from further investment and GDP growth. However, the static effects of the
strengthened trade relations on the economic growth of the trading partners are predicted to be
very modest. The report mentions that a number of provisions on matters that are uncertain
and hard to quantify within the context of the report, can provide less profound but potentially
large gains for both economies and thus can have a significant impact on the final outcome of
the trade agreement.
The Joint Study is a very extensive work, it compromises over 200 pages and provides
overview of current status of bilateral relations, trade, and barriers, conducts a quantitative
analysis of the impact of decreasing tariff and non-tariff barriers, as well as a qualitative
analysis of other factors influencing the flows of goods, services and capital between the
trading partners. It investigates how bilateral cooperation can be further advanced beyond the
FTA in order to support economic growth. Finally, it includes qualitative consultations with
the private sector, identifying the main problems, challenges and opportunities that face them
today with regard to the CETA.92
90
Table 7 in appendix 1 summarizes the results of all three studies by comparing the projected effects of CETA
on a number of key indicators 91
Joint Study 92
Joint Study, p.ii
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The starting point of the researchers has been a very mainstream inception of world trade; the
assumption that liberalization is beneficial to economic development as it develops national
comparative advantage, reduces trade costs, and increases competition on the domestic
markets. The argument is that the EU and Canada are already heavily dependent on
international trade and active in the globe marketplace and that there is an intensifying of
worldwide supply chains and the more general surge in international activities. This makes
that the private sector is becoming more dependent upon internationalization and therefore an
elimination of tariff and non-tariff barriers will benefit the economies as a whole.
Although the study is by far the most ambitious of the three that are discussed in this part of
the paper, it is also the most outdated one. This means that the quantitative part of the paper
contains some old data. Firstly, it was conceived before the financial crises, meaning that the
national incomes and trade flows at the starting point of the liberalization between both
markets are already higher than they are today. Furthermore, a fundamental assumption is that
the Doha rounds will be completed successfully, which would be especially important for
tariffs agricultural products, however, it does not look like there will be a conclusion to them
anytime soon. Finally, some of the assumptions that have been made in the econometric
model, especially those regarding: cost reductions due to liberalization of the service trade
and by the reduction of NTBs, and the development of macroeconomic indicators exogenous
to the agreement, would to a very large extent depend on the openness of the final agreement
and the development of the exogenous indicators. These are far from certain.
Nonetheless, the quantitative part of the study provides an excellent overview of all tariff
barriers between Canada and the EU, and concludes that although they are generally low tariff
peaks, they do exist and lowering would strongly benefit trade. The qualitative part that
investigates the views of the private sector also concludes that even low tariff barriers, or
NTBs could still serve as strong barriers to trade and therefore lowering them in the CETA
context can still provide huge opportunities for them. There is also a very detailed review of
the barriers to trade in services, which are found to be much higher than those to trade and
average out between 18-42 % into the EU and 24-52% into Canada. In order to achieve
integration similar to that of the internal service market of the EU, the costs related to the
bilateral trade in services would have to decrease by 2-10%. This in turn could potentially
lead to the largest gains expected from the CETA. Furthermore, the study identifies that there
The EU – Canada Comprehensive Economic Trade Agreement.
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is significant scope for a reduction in NTBs and recons that all kinds of measures could lead
to a cost reduction of 2%.93
Using a computable general equilibrium model the study then estimates that the liberalization
of trade in goods and services will bring benefits to the EU and Canada.94
The expected
annual income gain by 2014 will be 0.08% for the EU and 0.77% for Canada.95
Trade flows
would also expand; EU exports to Canada would be boosted by 24.3%, whereas Canadian
exports to the EU would increase by 20.6% by 2014.96
The study estimates that about 50% of
these gains would be due to the liberalization of trade in services. Direct tariff reductions on
traded goods and the elimination of NTBs on trade would each account for about 25% of the
projected gains.97
The study also suggests some pitfalls and challenges that might influence the gains from
CETA in the future. One of the challenges for the CETA would be to assure compliance by
the Canadian provinces and the EU member states to the agreement. It notices that the CETA
also offers plenty of opportunities; it could provide a framework for the facilitation of
investment, and the further cooperation on science and technology, energy and the
environment. This could boost European and Canadian innovative capacity and economic
competitiveness, and lead to further, less quantifiable gains from CETA in the future.
Conclusively, the study predicts that CETA would offer positive gains to the European and
Canadian domestic economies. The gains to the Canadian economy are expected to be
relatively bigger as Canada is more dependent on trade with the EU than vice-versa.
Moreover, the agreement would offer many opportunities for increased long term growth
through innovation and investment. However, the old data that are used in the equilibrium
model, together with some strict assumptions make that the quantitative results are difficult to
interpret and potentially lower the validity of the study. Furthermore, there appears to be a
slight bias in the set up of the paper, assuming that both the EU commission and the Canadian
federal government are neutral to the decision whether to enter into a CETA.98
The paper
includes advisory views by the private sector that is involved in trade between the EU and
93
Since significant trade cost savings are unlikely to be realised in commodity trade, the cost reduction is limited
to non-commodity processed goods. 94
A seven year scenario run from 2007, and based on 2007 GDP and prices. 95
This translates into roughly €11.6 bil for the EU and € 8.2 bil for Canada 96
This translates into an increase of EU Canada trade of €17 bil, and Canada EU trade of €8.6 bil 97
Joint Stud, p.vi 98
This might be a strict assumption since both governments have clearly stated in their trade strategies to
actively pursue FTAs and as such might just conclude FTAs to meet the goals they themselves set.
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Canada. This sector obviously supports the CETA as it would reduce the costs of trade and
thus bring extra benefits. These would directly allocate to them, whereas the potential costs
would lay with other agents.
2.2 Sustainable Impact Assessment (SIA)
This study focuses on the economic, social and environmental sustainability of the CETA.
Although commissioned by the EU, the SIA differs significantly from the Joint Study. 99
The
EU commission has since 1999 developed a tradition to commission independent impact
assessments before the conclusion of any FTA.100
Therefore the current SIA does not present
any official views of the commission; its purpose is to serve as an independent policy
evaluation tool. As such, it also includes views of other stakeholders such as industry and civil
society. In this sense it is much more balanced than the Joint Study as it can also capture the
expected negative externalities that are to be expected when concluding FTAs and are most
often linked to the re-allocation of production factors and could lead to unemployment or
environmental damages.
Nonetheless, the SIA conducts a similar quantitative exercise as the Joint Study in order to
predict and assess the potential socio-economic outcomes of CETA. Compared to the Joint
Study, the SIA is no less ambitious, the study’s draft version still comprises over a 100 pages,
and introduces an impressive econometric model. Although it uses similar strict
macroeconomic assumptions as the Joint Study, it does put the quantitative emphasis on some
other points.
An interesting difference is that the SIA models run the tests for different possible outcomes
of the CETA provisions ranging from rather conservative to a highly liberal and ambitious
agreement. This allows for a better evaluation of the effects that different legal provisions
could have on the potential gains and losses related to the CETA. Specifically, it includes two
scenarios in which they run the model with two different assumptions for the Rules of Origin
(ROO) provision. The first scenario includes the stringent rules of origin provisions most
likely preferred by the EU, and the second scenario applies much looser ROO much preferred
99
The SIA 100
EC. Sustainability Impact Assessments. Composed by DG trade.
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by Canada.101
Strict ROO are measured to slightly constrain total welfare gains from CETA
compared to lose ROO.102
Next to this the SIA identifies a number of cross-cutting issues that
can have an effect on the final outcomes of CETA. Particularly it mentions the importance of:
government procurement, IPR, investment, trade facilitation, labour mobility, free circulation
of goods, and competition policy provisions in the CETA agreement.
The SIA study also captures the mixed effects of CETA on third countries. Because of trade
destruction and diversion FTAs can change trade flows. The study, on the one hand, finds
small negative consequences for the US economy and the countries103
which have preferential
trade agreements with the EU.104
Mexico, on the other hand, is likely to benefit from
increased trade liberalization between the EU and Canada.105
As the study explains: ‘The SIA uses gravity modelling to estimate the responsiveness of
sectoral level FDI flows to liberalisation of investment flows between Canada and the EU,
and integrates the response elasticities into the CGE model to produce new results.’106
In other
words it tries to capture the long term multiplier effects of investment. This differentiates the
SIA from the Joint Study as it actually tries to measure the dynamic (long run) effects of
investment next to the static effects (short run) of the liberalization of trade rather than just
mentioning that they might add to the potential gains of the agreement in the future.
The Macroeconomic results from the SIA show that the results from a CETA would be most
beneficial to the domestic economies in the most liberalized scenarios. It finds that the EU
economy will expand by 0.07% in the most conservative scenario and by 0.15% in the most
liberal scenario. For Canada the results are a little bit more profound and the changes in real
GDP are projected between 0.72% and 1.72%. Compared to the Joint Study the SIA study
measures the effects on trade flows slightly different. Where the Joint Study measured the
effects on bilateral trade, and witnessed trade flows between the EU and Canada increase by
as much as 20%, the SIA study measures the effect CETA would have on total exports for
both nations. In this perspective the changes look much less dramatic. Total EU exports are
101
The findings are the ROO are especially relevant in the automotive industry, as mentioned this industry is
very integrated between the three NAFTA members. Looser ROO would qualify more products as actually
Canadian and hence more intermediary manufacturers would be able to profit of this. 102
SIA, p. 19-20 103
US national income is expected to shrink between 0.01 and 0.02% as the result of CETA, the preferential
trade agreement partners’ national incomes might shrink between 0.02% and 0.04%. SIA, p.21 104
Preferential trade agreement partners to the EU are mainly former colonies and developing nations that by
means of development aid get preferential access to the European single market 105
Gains to the Mexican economy are projected to be between 0.02% and 0.04% of GDP. SIA, p.21 106
SIA, p.15
The EU – Canada Comprehensive Economic Trade Agreement.
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expected to increase between 0.16% and 0.33% as the result of the CETA and total Canadian
exports are expected to expand between 1.16% and 3.08%.107
The SIA results differ on some significant points from the Joint Study, they show even less
gains from lowering bilateral tariffs, and therefore argue that the main gains to be expected
from CETA lay in the increase of the bilateral trade in services through the decrease in NTBs.
Moreover the SIA argues that dynamic gains are also expected to significantly amplify the
beneficial effects of the CETA. Furthermore, the results of the social and environmental
impact assessments add to understanding the wider impact upon national welfare and the
allocation of production factors.
For Canada the study notes that the less competitive goods producing sectors such as the
automotive and textile industries are likely to see declines in income. However, these would
be easily offset by growth in the services sectors such as transportation, telecom, and financial
services. This should lead to a Canadian economy that is less dependent on a few key sectors
which is viewed as a positive externality of the agreement. Furthermore, the Canadian wheat
and transportation equipment sectors are likely to benefit from the CETA whereas the diary,
processed agricultural goods, and metal manufacturing sectors are likely to be negatively
affected. The beef, pork, fishery, mining and petroleum sectors are not expected to be
significantly affected.108
The social impact of this would be a temporary displacement of workers who might be forced
to accept jobs in different sectors for lower wages. Although only a small percentage of total
Canadian workers is predicted to be affected, this still leads to the conclusion that certain
production sectors in Canada will experience a limited negative social impact. Yet, further
growth and investment liberalization will lead to an overall increase in income, welfare,
exports and employment.109
As such the overall social impacts will be positive. Additionally,
some other provisions on procurement, IPR, and investment will positively impact all sectors
as they increase the competitiveness of Canadian firms.
The effects of the CETA in the EU are expected to be similar to those in Canada. In short: the
dairy, processed agricultural goods, automotive and textile industries, transportation services,
107
SIA, p.21 108
This is because the mining and petroleum sectors already face limited tariffs and NTBs. For beef and pork the
sanitary standards, and other issues are not expected to be completely solved 109
SIA, p.2
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financial services, and business services are expected to see minor expansion, whereas the
wheat, mining and transport industries are expected to contract. However, as the EU economy
is much larger and more differentiated than the Canadian economy the effects are expected to
be much more diffused. Therefore, the social and economic impacts are predicted to be much
more limited. The environmental impact in both Canada and the EU is also expected to be
negligible which is mainly because the expansion is expected to occur in the low polluting
services industry, and if anything, decreases are expected in the Canadian manufacturing
industries which are generally more polluting.
2.3 The Out of Equilibrium Study
A study undertaken by the Canadian Centre for Policy Alternatives suggests that the
conclusion of the CETA would have negative consequences for the Canadian economy.110
The arguments put forward in this study are of a more protectionist kind. Although, not in line
with the general tone of the academic and political arguments, some of the points that are
raised in this paper, mostly those relating to employment effects and public benefits, should
be considered by policy makers. The study quite rightfully addresses some of the negative
externalities attached to the CETA and at the same time points out the weaknesses of the
equilibrium models used in the Joint Study and the SIA. However, because it ignores many of
the basic theories relating to international trade such as the theory of comparative advantage
and many of the possible gains from free trade such as the liberalization of the service
markets it, too, does not paint the complete picture of the CETA.
It is clear that the study is published by a Canadian civil society grouping from the fact that
the paper mainly deals with the loss of employment in the manufacturing sectors. This was
already demonstrated in the SIA, which agreed that this might lead to short term restructuring
of the labour markets, but also concluded that these would be offset by the creation of new
jobs in the services industries. The Out of Equilibrium study disagrees with the SIA that the
liberalization of trade will create new employment positions for these workers.
110
Stanford, J. (2010). Out of Equilibrium. The impact of EU-Canada Free Trade on the Real Economy. Ottawa:
CCPA, Canadian Centre for Policy Alternatives
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It is important to note that the term civil society grouping is interpreted quite differently on
both sides of the Atlantic, in Canada civil society groupings are seen more as pressure and
action groupings that behave in a way that is very much reactive to government policy. In the
EU, the main civil society grouping is much more involved in policy building and is
institutionalized in two main consultative bodies: the European Economic and Social
Committee (representing various socio-economic organisations in Member States) and the
Committee of the Regions (made up of representatives of local and regional authorities).111
This, in combination with the fact that the potential impacts of CETA are much larger for
Canada than the EU, have made that public society groupings in Canada have been more
vocal in the CETA debate, and are campaigning actively against the agreement.112
This Out of Equilibrium study thus represents a group of people opposing the trade deal, and
as such indeed counters mainstream economic logic such as comparative advantage. The main
argument is that there are winners (the EU) and losers (Canada) to the liberalization of
international trade. The reasoning behind this argument is simple and sides with the classical
national income function. The national income is a function of Consumption, Investment,
Government spending and the current account balance.113
The CETA will decrease Canada’s
current account balance with the EU resulting in a decrease of Canadian national income.114
The EU’s current account surplus with Canada will increase; hence the EU’s national income
will increase.
Canada’s increasing current account deficit will amplify the imbalances that exist in the
bilateral trade. Canada mainly exports raw materials, and as such adds little value to its
production and already faces low tariff rates, thus Canada will gain little from lowering tariffs
and will add little extra value to its products. The EU mainly exports high value products to
Canada, these have high tariffs and extra exports will add much extra value to the economy.
The study argues that the EU economy exports products with high added value to Canada
because its firms are more efficient, and as such more competitive. Because of this Canadian
national income will not only shrink because of an increasing current account deficit, EU
firms will also grab market share from Canadian firms and relocate production to the more
efficient factories in Europe, which will eventually lead to a loss of Canadian jobs.
111
EC. The European Commission and Civil Society. 112
Trade Justice Network. (2010). Top ten reasons why CETA is Bad For Canada. 113
The traditional simplified national income function: Y=C+I+G+EX-IM, National Income (Y)= Total
Consumption (C) + Total Investmen (I) + Government Spending (G) + Exports - Imports 114
Because National income is directly related to the current account balance
The EU – Canada Comprehensive Economic Trade Agreement.
39
The main example that this study uses is how the Canadian automotive industry will be
negatively influenced by the CETA because it simply is not competitive enough. The SIA
before confirmed that Canada was likely to see decreasing production in the automotive
industry but argued that this will be offset by gains in other sectors, most notably the service
sectors. However, irrespective of the CETA the Canadian automotive sector is expected to
decline in the coming years because of increased international integration and cost
competition.115
The study also criticizes the equilibrium models for a number of their strict assumptions that
ignore the negative effects of FTAs, or implicitly amplify the positive results from the CETA.
The main criticisms of the Out of Equilibrium are related to the following assumptions:
o Full employment; this means that the final outcome ignores the
negative externalities to employment resulting from CETA
o Full income-expenditure equilibrium is maintained; meaning that
the consumer will not change its behaviour and there are no
changes in debt or in aggregate trade balances
o The only limit to national output is the available supply of
productive factors; (factors such as: demand, unemployment,
exchange rates are ignored). However they will play a significant
role in real life public policy and trade flows.
o Overall cost reduction of processed goods is assumed to be 2%
because of decreased NTBs in the Joint Study; Cost reductions
obviously create more profits or are beneficial for consumers,
either way they yield direct positive results to the CETA.
o Services will become extensively traded; the Joint Study even
argues that it might integrate like in the EU. More economic
activity automatically leads to economic growth.
o National savings and investment rates will increase in both
nations; expanding productive capacity and total output. This is in
line with the theory of comparative advantage, something that is
denied by the study.
o There is no capital mobility between countries; meaning that the
gains made by the expansion of trade will invested in Canada in the
models whereas in real life they would flow away to the EU where
they can be used more effectively according to this study.
o Products are differentiated by place of origin; Canadians will
prefer Canadian products, but according to the study many
Canadians will buy EU products which they perceive as having
superior quality. This will increase the trade imbalances.
115
Field, A. M. (2008). Auto parts: Driving a hard bargain. Journal of Commerce (15307557), 9(21), 32A.
Retrieved from EBSCOhost.
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The argument goes that given all these assumptions, it is almost impossible to get negative
results from the CETA. The study argues that the chosen equilibrium model makes that an
increase in trade flows automatically lead to an increase in national income, and that cost
reductions in trade lead to an increase in trade flows, the model is thus a self fulfilling
prophecy.
To confirm its findings the study evaluates several previous Canadian free trade agreements
and finds that they have all amplified the current account balances that existed before the
FTA. For Canada this means that the total current account deficit has deteriorated, and
following the argument that this negatively affects national income, these trade agreements
never did what they were intended to do: increase Canadian welfare.116
Finally, the study argues that there are many external factors that will influence the CETA.
Exchange rates are likely to appreciate the value of the Canadian dollar against that of the
Euro, making Canadian exports more expensive and further attributing to the unbalanced
trade. In fact there exists a relation between exchange rates and trade flows on the short term,
especially for intermediate goods.117
The study predicts that the Canadian dollar will
appreciate; these will put Canadian firms at a further cost disadvantage against their EU
partners and will vastly outweigh the projected gains by the Joint Study.
The main conclusion of the study is that; given the unbalanced trade between Canada and the
EU which resulted from the EU’s technological advantage over Canada, the CETA will
exacerbate Canada’s trade balance which will negatively affect national income. On top of
this, production of value added goods will move to the EU leading to a loss of employment in
Canada which varies between 28.000 and 152.000 jobs, relatively this is about 0.2 – 0.9% of
all employed people in Canada in January 2011. For the worst scenario this translates into a
possible increase in Canadian unemployment rates to about 9.5%.118
The extremity of these
figures might lead one to question the results of this study.
The next section will look at a previous EU FTA with Mexico in order to put into perspective
some of the arguments and projections done by the authors of the studies that have been
evaluated.
116
The NAFTA, and trade with the US is the only exception, however, this is by far Canada’s largest trading
partner. 117
Greenaway, D., Kneller, R., & Xufei, Z. (2010). The Effect of Exchange Rates on Firm Exports: The Role of
Imported Intermediate Inputs. World Economy, 33(8), 961-986. doi:10.1111/j.1467-9701.2010.01308.x 118
Data from statCan January 2011
The EU – Canada Comprehensive Economic Trade Agreement.
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2.4 A Case study of the EU-Mexico FTA
The EU - Mexico Trade Agreement went into force in different stages. All European tariffs
covered by the agreement would be abolished by the 1st of January 2003, whereas the
Mexican tariffs were abolished by the 1st of January 2007. The FTA most notably eliminated
tariffs in a considerable amount of sectors, but also granted the EU significant access to the
Mexican procurement markets and extended the rules for foreign ownership in the financial
service sectors119
similar to that of the members of Mexico’s NAFTA120
agreement. In
respect to trade in services the FTA copied NAFTA provisions on financial services, allowing
for a 100% EU ownership of financial service providers. Although, the FTA included
provisions for products within the Common Agricultural Policy, it was rather limited in its
scope for the agricultural sector.
Historically, culturally, economically and socio-politically there are sufficient indications that
render a closer look of the results of the EU – Mexico FTA useful in the light of the debate on
the potential outcome of the CETA. It offers a precedent to a European FTA with a North
American Country which is like Canada a member of the North American Free Trade
Agreement. Furthermore, the time span after the conclusion of the agreement allows for more
detailed investigation of the effects of a FTA. However, one should also note that there exist
some significant differences between both situations that have the potential to affect bilateral
trade flows such as the nature of trade and the Mexican economy.
Figure 2.1 shows the evolution of values of trade in manufactured goods between the Euro
Area and Mexico in the wake of the FTA. Both the imports from, and, the exports to the Euro
Area (15 Members) increased over this period. Recently, there has been a sharp decline in
reciprocal trade flows, probably due to the global effects of the financial crisis. It is important
to note that the EU’s trade balance with Mexico since the conclusion of the FTA has hardly
improved, the Out of Equilibrium study suggests that this might be the case in Canada.
However, the value of trade flows between the Euro Area, and Mexico does show an upward
trend. This has to be investigated in a context in which globalization and liberalization appear
to be increasing international trade regardless of FTAs. Improved means of communication,
and the emergence of a homogenous business culture, all help in decreasing the ‘psychic
distance’ between countries’ business cultures. Figure 2.2 displays the normalized trade flows
119
From 49 % to 100% 120
North American Free Trade Agreement between Mexico, Canada and the US
The EU – Canada Comprehensive Economic Trade Agreement.
42
between the EU and a number of its trading partners. In 2008, the total value of trade between
Europe and Mexico was 2.4 times bigger than in the pre-FTA year 1999. Canada and the US
experienced only modest increases in traded goods value with Europe between 1999 and 2008
at 60% and 30% increases respectively. Trade patterns between Brazil and the EU seem to
have increased even further than those with Mexico.121
Thus it seems that we cannot simply
attribute the tremendous increase in trade flows between the EU and Mexico to the FTA, as
Brazil witnessed similar increases without the existence of an FTA. There might have been
various other factors that have had more profound effects on trade between the EU and its
trading partners.122
Other Data confirm this statement. Figure 2.3 shows that as a percentage
of total Euro Area trade, the share Mexican trade flows in total EU trade has shifted very
little. Mexico still accounts for the same share of total European exports in 2009, as it did in
1999. Between 1999 and 2008 the Mexican share in European exports shifted up by a mere .2
percentage points. The Mexico-EU FTA thus hardly managed to make Mexico a more
important partner in Europe’s trade in Goods.
Figure 2.4 displays normalized values for the Gross Domestic Product growth in current
prices and PPP of the Euro zone, Korea and Mexico. The graph shows a slowdown of
Mexican economic growth after 2000. Its growth between 2000 and 2004 is roughly
comparable with that of the Euro zone.123
After 2004 Mexican GDP growth accelerates to
levels comparable with South Korea’s,124
considering that the EU opened up to Mexico in
2003, these numbers would support that it helped to accelerate economic growth in Mexico
but not in the EU.
Even though it can clearly be demonstrated by case studies that the conclusion of the FTA has
been satisfactory for private firms in both the EU and Mexico,125
it is harder to correlate this
to hard data. This suggests that the relation between FTAs, bilateral trade flows and national
income is more complicated than suggested by some of the studies. Due to the relatively
modest character of trade flows between the EU and Mexico it is hard to correlate economic
growth to an increase in trade flows. External factors that influence both economic growth
and trade flows make this exercise even more challenging and introduce a lot of white noise
into the evaluation. The influence of, for example, exchange rates on trade flows is hard to
121
Excluding the financial crisis years 122
For example exchange rates, and corporate investments 123
16 Member States 124
Chosen as benchmark, as it like Mexico is transforming into a developed economy, and enjoys comparative
advantages in similar sectors: the car industry and electronic manufacturing 125
Villareal, A. (2010). Mexico’s Free Trade Agreements. Congressional Research service
The EU – Canada Comprehensive Economic Trade Agreement.
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control for, but probably larger than the role of small tariff reductions in FTAs. Slootmaekers,
in her equilibrium model on the trade relation between the EU and Mexico, finds that the
strongest influence on Mexican GDP and indirectly on bilateral trade flows is the growth of
the US economy.126
Conclusively, although the FTA was probably beneficial to both
economies, and satisfied the motivations of both trading partners for signing it, the extent to
which it attributed to economic growth has probably been modest.
For the evaluation of the CETA this confirms a number of points raised in the studies. Firstly,
GDP growth effects directly linked to the CETA will be limited. Secondly, the effects on
trade flows are unclear, hard to measure, and will differ per sector. Thirdly, it is clear that
legal provisions on investment and procurement were the largest component of the increased
trade flows between the EU and Mexico, thus the legal provisions that are included in the
CETA will play a role in determining its final outcome. Fourthly, the average EU or Mexican
citizen will not have seen its welfare affected by this FTA in a direct manner. Finally, the case
study confirms the idea suggested by the SIA, the Joint Study and the Out of Equilibrium
study, that factors exogenous to the agreement play a big part in influencing bilateral trade
flows.
Figure 2.1
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€ 5.000,00
€ 10.000,00
€ 15.000,00
€ 20.000,00
20092008200720062005200420032002200120001999
Euro Area Trade with Mexico
Trade balance in mill ion ECU/EUROImports in mill ion of ECU/EUROExports in mill ion of ECU/EURO
Source: Eurostat
126
Slootmaekers, V. (2004). Trade Effects of the EU-Mexico Free Trade Agreement.
The EU – Canada Comprehensive Economic Trade Agreement.
44
Figure 2.2
Source: OECD Database
Figure 2.3
As a % of total trade
0
0,2
0,4
0,6
0,8
1
1,2
1,4
20092008200720062005200420032002200120001999
Share of imports by partner (%) Share of exports by partner (%)
Source: Eurostat
Figure 2.4
Source: OECD database
The EU – Canada Comprehensive Economic Trade Agreement.
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2.5 Evaluation
This chapter explored some of the predictions, made by different researchers, on the possible
macroeconomic effects of the CETA and reflected these against a past EU-Mexico FTA in
order to better assess the claims made by the various authors. It became apparent that there are
a number of points to be made regarding the projected welfare effects of the CETA.
Firstly, the three different studies clearly displayed the political backgrounds of the authors.
The Joint Study and the SIA were strongly supportive of the Joint Study, and argued that the
EU and Canadian economies would slightly benefit from the CETA. Whereas the Out of
Equilibrium study was much more sceptical about the projected gains for CETA, and
highlighted the negative externalities regarding employment in particular sectors. The Joint
Study was clearly a public policy paper that quantified the rhetorical mechanics of FTA’s and
included the views of private undertakings already involved in bilateral trade; as such it was
strongly supportive of the CETA and made many valuable suggestions to the people at the
negotiation tables. The SIA was more reserved and balanced, it included the social and
environmental externalities that accompany FTA’s, however, its empiric models still showed
overall trade and GDP growth. The Out of Equilibrium study was the most sceptical and used
anti-trade rhetoric, however, it still correctly outlined some important shortcomings of
equilibrium models in predicting macroeconomic outcomes and highlighted the negative
externalities related to employment in the Canadian manufacturing industries.
Secondly, although the possible effects on bilateral trade could be substantial as argued by the
Joint Study, the effects on national income and total exports are predicted to be much smaller
by the SIA and the Joint Study. The case study on the EU-Mexico FTA confirms these
findings, as it displays that it is really difficult to attribute a significant part of the growth rates
of either total exports or GDP directly to the FTA. Given the complicated nature of
international trade it is therefore very likely that the direct static consequences of this FTA
with Mexico have been rather limited indeed. It is thus likely that the gains or losses from the
CETA as they are estimated by all three papers will be rather limited in their direct influence
on the domestic economies.
Thirdly, although they don’t agree on the outcome of the CETA, the studies do seem to agree
on the general determinants of the CETA impact. As displayed by the case study and argued
by the Out of Equilibrium study, it is very likely that a number of factors exogenous to the
The EU – Canada Comprehensive Economic Trade Agreement.
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general equilibrium models used in the other two studies will influence the final
macroeconomic outcomes of the CETA. All studies argue that the large degree of uncertainty
that surrounds a number of these factors causes a limited degree of validity to the empirical
models. Chapter 3 will evaluate a number of these factors in order to provide a clear overview
of how to assess these factors’ influence on the models that predict the effectiveness of the
CETA.
Fourthly, it is likely that a number of factors internal to the agreement, mainly the level of
integration negotiated for the different legal provisions, will attribute to the effectiveness of
the CETA. All studies emphasized their importance, the Joint Study specifically mentioned
the position of the provinces, the SIA and the Out of Equilibrium study mentioned the
importance of provisions related to the ROO. A number of EU firms noted the importance of
specific legal provisions on financial services and public procurement in the FTA as being the
main drivers of their increased presence and investment in Mexico.127
The fact that the extent
to which these legal provisions will apply in the CETA is unknown, renders it much more
difficult to conduct a reliable macroeconomic prediction of the CETA. The SIA study which
conducts its quantitative analyses under different scenarios demonstrates that the results from
the CETA strongly vary depending on the openness of the agreement. Chapter 4 will conduct
a comprehensible analysis on how a number of legal provisions can determine the
effectiveness of the CETA.
Thus, given that most of the endogenous and exogenous factors are unknown to the authors of
the studies, all the reviewed works operate within a considerable margin of error. Even when
the historical data is available the outcomes are difficult to isolate. Therefore this paper
recommends that it might be more useful to look at a number of factors that influence these
outcomes individually, and determine how they could possibly affect the outcome of the
CETA and where they could benefit the economies of the EU and Canada. The remainder of
this paper attempts to provide the reader with a comprehensive overview of these factors and
aims to include small comprehensive analyses of how they will affect the CETA. Chapters 3
and 4 do so by respectively evaluating the external and internal factors influencing the
effectiveness of the CETA.
127
Condon, B.J. (2007). The EU-Mexico FTA
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Chapter 3: External factors
It is important to take note of the many external macroeconomic factors that influence
international trade and investment. Arguably, they are stronger determinants of bilateral trade
and investment flows and of domestic economic growth than the conclusion of the CETA.
The Mexico FTA case study showed that the independent variables that are supposed to
measure the success of the CETA, GDP growth and trade flows, are affected by so many
other factors that isolating the exact effects of the FTA becomes a nearly impossible exercise.
It was unclear whether the FTA caused the Mexican GDP growth. Furthermore, it clearly
demonstrated that Brazil’s trade flows with Europe showed a stronger increase than Mexico’s
even though it did not have any FTA with Europe, thus suggesting that there are more
dynamics at play than just the openness of trade. The quantitative studies had to cope with this
uncertainty and therefore had to use some strict assumptions about the real economy. This, as
the Out of Equilibrium study pointed out, did not always improve the validity of the
quantitative studies. In other words, national income and bilateral trade flows are influenced
by a web of macroeconomic factors that cannot be completely accounted for in economic
models. Therefore, this chapter covers a number of important factors which are external to the
quantitative models and the projected results of the CETA, but that would significantly
determine its effectiveness. These external factors have been identified by the various papers
as being key determinants of bilateral trade flows between the EU and Canada.
3.1 Long term dynamic effects of investment
The effects of investment on the domestic economy are a highly debated topic. It is clear that
investment stimulates economic growth, yet the extent to which it does so is much less clear.
Next to this investment occurs in the absence of CETA, yet its legal provisions can strongly
attribute to the promotion of further investment. Both the Joint Study and the SIA argue that
the CETA will by means of a number of legal provisions and increased competition attribute
to increased foreign and domestic investment. This could provide another significant drive to
further economic growth related to the CETA.128
Yet, there are some difficulties related to the
quantification of the impacts of FTAs on investment flows.129
As a result, most studies only
128
SIA, p.57; Joint Study, p.45 129
Joint Study, p.49
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include some of the static, short term effects of cost reductions on investment as covered in
chapter 4.
Long run, dynamic gains from investment are potentially much larger. This is supported by a
great number of empirical studies.130
The SIA suggests that the long term dynamic effects of
investment could potentially be the largest gains from the CETA. It identifies mode 3
liberalization as defined by the WTO in GATS as establishing commercial presence through
the setting up of subsidiaries as a large component of the potential investment effect of the
CETA. An example of this would be a car dealership: the establishment of commercial
presence of the car manufacturer allows not only for an increase in trade flows because of
higher car sales, but also increases the level of services through for example the car salesmen
or the after-sales services. This way the investment (setting up of the car dealership) starts a
multiplier effect on economic growth (after sales services, advertisements, etc) than just
increased trade flows.
The CETA could, through its legal provisions, facilitate the creation of subsidiaries and as
such stimulate FDI. Direct examples would be the opening up of the Canadian financial and
telecom, and public procurement sectors which would most likely impact EU investments into
Canada. However, the extent to which this will influence the gains from CETA are hard to
predict, even when using quantitative modelling.
Kraft and Kraftova (2010) identify two main drivers behind long term dynamic investment
that do not directly appear to be related to the CETA.131
Firstly, its effectiveness is determined
by technological growth and the domestic sector structure which are not expected to be
hugely influenced by the CETA. Secondly, business cycles and GDP growth are positively
related to the height of investment and they are predicted to only modestly affect investment.
Clearly this entails the identification of a virtues circle of economic growth, increased
investment, economic growth, etc. This relation is not that straightforward GDP. Business
cycles, value chains, and technological growth are becoming increasingly global but at the
same time are experienced quite different locally through, among others, the domestic sector´s
structure and national income levels.
130
Among others; Yang, Z. (2006). Empirical studies on the relationship between public and private investment
and GDP growth. Applied Economics, 38(11), 1259-1270. doi:10.1080/00036840500392649 131
Kraft, J., & Kraftova, I. (2010). DYNAMIC EQUILIBRIUM OF THE GLOBAL ECONOMY - EFFECTS
OF CYCLIC DEVELOPMENT. Economics & Management, 123-129. Retrieved from EBSCOhost.
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Either way it is not very likely that the CETA will strongly influence business cycles,
domestic sectoral structure, or technological development, and as established will only
marginally increase GDP. Therefore, its effects on domestic and foreign investment will be
rather modest and be restricted to a number of sectors. Thus, it is important to realize that the
long run gains of investment are to a large extent dependent on factors exogenous to the
agreement. Investment as a driver of economic growth is determined mainly by the domestic
investment climate and by a great number of factors that go beyond the scope of the CETA.
Conclusively, on the one hand it is clear that there are a number of legal provisions that could
stimulate technological cooperation, or the establishment of foreign subsidiaries132
and as
such provide a strong stimulation for direct investment that spurs economic growth on a
sectoral level. This will be further elaborated upon in chapter 4. On the other hand it is likely
that factors that stimulate investment independent of the CETA such as GDP growth,
technological development, and business cycles will continue to impact the domestic
investment landscapes of Canada and the EU, irrespective of the CETA.
3.2 Effects of Price Movements of Natural Resources on International Markets
As noted in Chapter 1 the Canadian exports to the EU are for 29% of total value composed of
natural resources.133
For EU exports to Canada about 11% of total export value was accounted
for by petroleum and refinery products. These numbers alone show that a change in the price
of any of these natural resources can have significant effects on total trade.
A 2008 Natural Resources Canada report demonstrates that in 2007 mining products made up
almost 20% of total Canadian exports and signalled that upward trending prices led to a
positive trend in the growth of Canadian trade surpluses relating to mining industries.134
Cross
(2008) discusses the role of natural resources in the Canadian economy.135
He finds that over
the past decade the general price increases in natural resources such as the mining sector, but
132
For example restrictions on foreign capital participation in the Canadian financial and telecom sectors 133
Computed from table 6 in chapter 1, therefore this only represents the natural resource exports that show up in
Canada’s top 5 exports. The actual number might be slightly higher. 134
Natural Resources Canada. (2008). Mineral Trade: Canada’s Mineral Trade Surplus soars to $21.5 Billion in
2007. 135
Cross, P. P. (2008). The role of natural resources in Canada's economy. Canadian Economic Observer,
21(11), 3.1-3.10. Retrieved from EBSCOhost.
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more importantly, the energy sectors have mainly driven Canadian export growth and
international trade.136
Moreover, it is important to notice also that the availability of raw materials is root to large
stocks of FDI in Canada. The Netherlands, for example, have been the second foreign
investment partner of Canada for the last couple of years, chiefly because of investments done
by Royal Dutch Shell in the oil sands in Alberta and Saskatchewan. These investments were
validated by global increases in oil prices that have made the expensive extraction from oil
out of the tar sands economically viable.137
The Joint Study does implement significant price changes in its assumptions. In its baseline
scenario the Joint Study assumes that between 2007 and 2014 the real oil prices will increase
by 82% and grain prices by 68%. Unfortunately, the study is relatively outdated. On top of
this, as speculation and price volatility are high in these kinds of commodity markets, these
estimates are not vey reliable. Additionally, the point of measurement is also debatable
because the crude oil and grain price movement would be reflected slightly different in their
prices at the gas station or supermarket.
The CETA, as all studies agree, is unlikely to directly influence the bilateral trade or
investments in natural resources between the EU and Canada. This is because the tariffs on
them are already nearly zero, and there are not many other trade restrictions. As such, large
components of bilateral trade will not be effected by the CETA, yet, they do show upward
trends in prices and as such form a larger value part of Canada`s exports. Moreover, EU
investment in Canada is largely driven by price movements on the international energy
markets. In other words, price movements of natural resources on international markets
extensively influence the EU – Canada trade relation, and as such have the ability to
significantly influence bilateral trade flows and GDP growth exogenous to the CETA.
136
Western Canada has since the commercialization of the oil sands steadily grown to become a large player on
international energy markets, whereas eastern Canada, especially Quebec is a dominant player on the North
Eastern American electricity market because of its many hydropower plants. 137
Murphy, C. (2003). The Big Dig. Fortune, 148(12), 142-147. Retrieved from EBSCOhost.
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3.3 Effects of Exchange Rate Movements
Recent macroeconomic developments following the worldwide financial crisis show that
governments have been trying to spend their way out of the crisis. Monetary policy as such
has become a pivotal tool in the economic recovery.138
The globalization of the economy
exchange rate movements is becoming more important for domestic economic growth and
multilateral trade flows.
The Out of Equilibrium study argued that exchange rate changes can have a profound effect
on bilateral trade. The appreciation of the Canadian Dollar vis-a-vis the Euro would
negatively favour the Canadian economy.139
If the Canadian Dollar appreciates, Canadian
products would maintain the same value in Dollars, however, translated in Euros they would
be more expensive. Now Europe can afford fewer Canadian products for the same amount of
Euros and Canada could afford more European goods for the same amount of Dollars. Hence,
European imports from Canada would decrease and its exports to Canada would increase.
Thus, theoretically, exchange rate movements could influence trade. This applies mainly to
short run fluctuations in exchange rates. If in the long run the new level of the Dollar against
the Euro would persist, then firms would adapt to the new exchange rate: if the increased
value of the Canadian Dollar would persist over time it would create a significant cost
disadvantage for Canadian producers against the EU competitors. The EU firms would then be
more cost efficient as well as be more competitive and profit from this by increasing market
shares, whereas Canadian firms would find it cheaper to invest in the EU, setting up foreign
subsidiaries. In short, the new exchange rates could have all kinds of effects on bilateral trade
and the domestic economies regardless of the CETA.140
There are a number of other important observations that are fundamental to the development
of exchange rate volatility and have to be mentioned in this context. Firstly, exchange rate
movements are subject to heavy speculation; therefore they are measured against other
currencies and commodities such as oil, gold and silver. Secondly, exchange rate movements
are also rated against a number of domestic factors such as national economic performance
138
High government spending sends domestic currency on the international capital markets lowering its value
and making domestic capital investment cheaper whilst at the same time stimulating exports; FORELLE, C., &
FIDLER, S. (2010, March 3). Europe's Original Sin. (cover story). Wall Street Journal - Eastern Edition. pp.
A1-A13. Retrieved from EBSCOhost. 139
Out of Equilibrium, p.17 140
Gylfasona, T. (2000). Fix or flex? Alternative exchange rate regimes in an era of global capital mobility.
North American Journal of Economics & Finance, 11(2), 173. Retrieved from EBSCOhost.
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and fiscal discipline. Thirdly, exchange rate movements appear to becoming more volatile.
Therefore, predicting exchange rate movements is not a straightforward exercise. This makes
predicting their effects on bilateral trade flows and national income much more problematic.
Further reflecting upon possible impacts of exchange rate movements to bilateral trade and
the growth of the EU and Canadian economies is important to realize that two different
scenarios can be considered. On the one hand, many studies more or less confirm the theories
and effects mentioned above and therefore exchange rates remain exogenous to the CETA.141
However, studies like Cheun and Lai (2006) find that the border effect, the difference in price
movements between economies, can for about one third be explained by currency
fluctuations. They argue that if trade increases between economies they will become more
integrated and as such experience more similar price shocks. Following this argument it is
possible that the results of the CETA might be that currency fluctuations become less volatile,
however, such a situation would require a much deeper integration of economies than the
CETA is proposing.142
The EU-Mexico FTA offers an interesting precedent in which to evaluate the possible effects
of currency fluctuations on an FTA. The FTA was accompanied by the ongoing appreciation
of the Euro against the Mexican Pesos between 2002 and 2009. The Mexican Pesos almost
lost 300% percent of its value in 2002 6 Pesos made 1 Euro, whereas in 2009 this was about
18:1. European tariffs on average went down only a number of percentage points. Thus, even
though the costs of European imports went down because of lower import tariffs,143
if the
products maintained the same price in Euros their costs would still have tripled in terms of
Mexican Pesos. The exact effect of such currency changes on the direction of trade may be
ambiguous, but it is clear that fluctuations on the scale measured above probably have a larger
effect on the costs faced by firms involved in bilateral trade than the elimination of small
tariff charges.
In the case of the CETA it is hard to assess the development of future exchange rate between
the Canadian Dollar in the Euro. The Out of Equilibrium suggests that because of increasing
oil, and natural resources prices the Canadian Dollar will appreciate, the Euro on the other
141
Greenaway, D., Kneller, R., & Xufei, Z. (2010). The Effect of Exchange Rates on Firm Exports: The Role of
Imported Intermediate Inputs. World Economy, 33(8), 961-986. doi:10.1111/j.1467-9701.2010.01308.x 142
Yin-Wong, C., & Lai, K. S. (2006). A Reappraisal of the Border Effect on Relative Price Volatility.
International Economic Journal, 20(4), 495-513. doi:10.1080/10168730601027120 143
Possibly even lower NTBs to good and service imports
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hand, will depreciate even further because of the European debt crises. This prediction can be
validated by recent exchange rate movements. However, by the time the CETA is concluded
the Euro debt crises should have been resolved and the Euro would appreciate again. Today
the forward rates seem to support this view as they are trending upwards.144
This is included
in order to demonstrate the many difficulties that surround predicting future exchange rates.
Moreover, as currency fluctuations are for a part driven by speculation even for market
analysts it is tricky to predict how the Canadian Dollar and the Euro will react to the CETA,
yet it is clear that they affect the EU-Canada trade and investment and trade flows.
3.4 The Role of the US Economy
The United States are both Canada’s and the EU’s largest trading partner. Especially the
Canadian and American economies are strongly integrated through the NAFTA. As a result
particular sectors in Canada are strongly dependent upon American demand and supply. The
Canadian energy sectors, the automotive industries, and financial sector are for their sales
hugely dependant on US led demand.
The Mexico FTA supports this view. Mexico, too, has a strongly integrated automotive
industry with the US, and has the US as her main trade partner. Slootmaekers (2004) finds,
using a gravity model to assess the determinants of Mexican economic growth that even after
the Mexico EU FTA the US economy is the most significant determinant of Mexican
economic growth.145
Figure 3.1 displays the share of imports and exports of the EU and the US in total Canadian
trade.146
It clearly shows inclining shares for the EU and declining shares for the US.
Although it shows that Canadian trade is becoming less dependent upon US supply and
demand, it also shows that the dependence is still considerably large; about 55% of Canadian
imports come from the US, and about 80% of its exports go to the US. EU data show (figure
3.2) a similar trend for Europe. Between 2001 and 2009 the dominance of US imports in EU
144
Quoted by the Bank of Canada, the economist and fx.com on 20-02-2011 145
Slootmaekers, V. (2004). Trade Effects of the EU-Mexico Free Trade Agreement. 146
This is a better indicator of trade relations than traded, volume, as the process of international trade
liberalization and integration positively influences the traded values and volumes between most countries, and
therefore an increase in these indicators does not necessarily mean that trade relations are intensifying.
For example, the overall value of Canada – US trade still increased over the period 2001-2009, yet did less so
than Canada – EU trade.
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54
total imports decreased too. However, the US market still accounts for nearly 20% of EU
exports, and nearly 15% of its imports.
For this reason any kind of demand or supply shock on the American markets could hugely
affect the EU and Canadian economies. For example the Canadian automotive industry is an
integral part of the supply chain of the three big US car producers.147
So when the US car
market collapsed as a result of a negative demand shock the US car producers passed on the
lower demand for cars to their Canadian suppliers. Given the size of the automotive industry
in the provinces of Quebec and Ontario148
this negatively affected Canadian economic
growth. The equilibrium models do not consider the effects of US led demand or supply
growth, yet, it clearly strongly impacts EU and Canada economic progress.
Figure 3.1
Source: Industry Canada
Figure 3.2
Source: Eurostat
147
GM, Ford, Chrysler 148
By population and GDP by far the largest provinces in Canada.
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3.5 Other External Demand Shocks
A number of incidents and processes that do not immediately come to mind when assessing
the consequences of economic policy decisions have the potential to hugely upset the
economy, trade, and a large number of other macroeconomic indicators. These factors can for
example be natural disasters, social unrests, and maybe more importantly, financial and
economic shocks.
The 2008 financial and 2010 EU debt crises significantly affected GDP movement of the EU
and Canada. Interestingly, if benchmarked for 2009 levels of GDP the gains CETA projected
in both reports would not lift GDP above 2008 levels. Moreover the crises influenced the
prices of natural resources,149
rise of unemployment, rise of national debt, exchange rates, etc.
The impact on the global economy has been huge and as a result the macroeconomic outlook
today is different from what it was two years ago.
Although it is impossible to factor in such events when evaluating the results of an FTA, they
do nicely demonstrate the number of factors that influence global, domestic, and local
economies and as such how difficult it is to make reliable predictions regarding the
conclusion of FTAs like the CETA
3.6 Evaluation
This chapter demonstrated that, as the CETA is expected to increase bilateral trade and as
such positively influence the domestic economies of the EU and Canada, it is important to
realize that a number of factors other than the elimination of barriers to trade impact the
bilateral trade relation and thereby determine the eventual effectiveness of the CETA.
Firstly, investment is a significant driver of trade flows and economic growth worldwide.
Therefore, the quantitative models have looked to include the effects of investment in their
evaluation of the results of the CETA, but as the dynamics of investment are rather complex
they lack strong validity in their assessments. Moreover, many of the drivers of investment
such as GDP and business cycles are exogenous to the models that the CETA is not expected
to significantly influence. Therefore, investment will be pivotal to the effectiveness of the
149
Drop in demand caused a drop of price
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CETA, but despite the importance of certain investment facilitating legal provisions, will
continue to be largely determined by factors external to the agreement.
Secondly, international financial and commodity markets set prices of domestic currencies
and of natural resources independent of a CETA agreement. These prices do significantly
impact bilateral trade flows. The second section of this chapter demonstrated how world
commodity prices have driven Canadian trade and European investments in Canada in the
past and argued that there is no reason why the CETA would change this. The third section of
this chapter explored the dynamics between CETA and exchange rate movements and argued
that currency rates could potentially upset bilateral trade, yet, the extent to which they will
remains unclear.
Thirdly, although the CETA is expected to positively affect bilateral trade flows and the
economies of Canada and Europe, it is likely that consequently the economic dynamics with
third countries will be influenced. The fourth section of this chapter reflected upon the
importance of the US economy in a CETA context and demonstrated that negative demand
shocks could significantly impact the economic climate in both Canada and the EU. The fifth
section listed a number of miscellaneous events that whether they are national or international
can present strong demand shocks and as such influence the effectiveness of the CETA.
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Chapter 4: Internal factors
Although there are many factors exogenous to the CETA negotiations that eventually will
influence its outcomes, this does not disqualify the importance that the agreement could have
on bilateral trade relations. Neither should it disqualify the predictions of the studies that were
evaluated in chapter 2. It just demonstrated that the outcomes of the CETA predicted by them
are by no means certain, and the validity of these studies is rather low. This would be
impossible given the large amounts of determinants of economic growth and bilateral trade,
many of which are exogenous to the agreement. Therefore, one should always remain
sceptical when interpreting the results of such studies. Nonetheless, policy makers do need to
make reasonable assumptions about the effects of the CETA and for that purpose the studies
prove rather useful.
However, even if the future development of the exchange rates, international commodity
prices, investment climates, the US economy, the trade effects of CETA, and other unforeseen
events would be available to the authors of these studies in predicting the final effectiveness
of the CETA they would still face a large amount of uncertainty about the actual contents of
the agreement. This is something which is eventually determined by the policy makers who
are sitting at the negotiation tables.
To date the negotiations towards the CETA are still in progress and are only expected to
finish by the end of 2011 or even 2012. So far 22 areas of negotiations have been established
that will discuss a number of legal provisions that are to be included in the CETA. The wish-
lists of negotiation partners regarding these provisions have to a certain extent already been
announced via official or unofficial communications to media sources.150
Yet, the extent to
which they will be legally binding and implemented within the CETA structure remains on
the negotiation tables.
Therefore, the studies on the effectiveness of the CETA had to make many assumptions
regarding the final contents of the agreement. The Joint Study investigated all the possible
gains of the CETA and made realistic assumptions on the level of tariff and NTB reductions
and how they would decrease costs of trade and increase competition on domestic markets.
Yet, it conceded and neatly described that the final outcomes of CETA would depend on a
150
A.O. Ivison, J. (15-12-2010). Trade-offs required in Canada-EU free trade agreement; Campbell, C. (15-12-
2010). Europeans put spotlight on Ottawa`s investment restrictions.
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number of factors that were less quantifiable. The SIA took a comparable approach, yet, they
extended it by calculating different scenarios which varied in relative openness and
furthermore added a multiplier gravity model assessing the dynamic gains from investment.
The Out of Equilibrium did not really evaluate the separate legal provisions in the CETA,
however, it did take note of the provisions on public procurement and argued that this would
bring further negative externalities to the agreement.
All three studies thus admit that there are a number of legal provisions that are important to
the effectiveness of the CETA that are not really quantifiable. Nonetheless, these provisions
do to a large extent determine the shape and openness of the final agreement. This chapter sets
out to summarize these provisions and assess their potential effects on the outcome of the
CETA.
4.1 Canada’s Provinces
As described in chapter 1, due to the legal division of the political mandate between the
provincial and the federal government, internal trade barriers prevail in Canada through for
example professional qualifications, corporate regulations,151
health and safety standards,152
and value added taxes.153
Moreover, the political economy differs across provinces in terms
of income, production, social security, government procurement and all kinds of other
significant policy issues. In the past this has been root to international trade frictions.154
This internal division of the political mandate in many of the issues relevant to the CETA and
other international trade agreements root in the fact that the federal Canadian government
cannot amend provincial legislation or pass new statutes of law in the provinces. Thus, if an
international agreement includes provisions that require changes to provincial law it will
require intervention on the part of the provinces.155
Therefore, the EU delegation has
demanded that the Canadian provinces are a part to the negotiations and will be subject to the
151
Parkinson, D. (2011). Miner moves to Yukon to be truly Russian. 152
Caroline Wyatt (2004). Internal Trade Barriers: Experiences in the EU and Canada. 153
Macmillan, K.., Grady, P. (2007). Interprovincial Barriers to Internal Trade in Goods, Services and Flows of
Capital: Policy, Knowledge Gaps and Research Issues. 154
An example of this is the WTO case started by Japan against the Canadian federal government concerning
the green energy policy of Ontario that included domestic content provisions, illegal under WTO law, but since
only the federal government of Canada is subject to this within its own legislative mandate it is unlikely that
Japan will succeed in its complaint. 155
Dupras, D. (1993). NAFTA: The Implementation and the Participation of the Provinces.
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CETA. This is important in regard to a number of the legal provisions that are discussed in
this chapter. For example the mandates on the provision of education and healthcare lie with
the provinces, but their costs are highly dependent upon IPR provisions in the CETA
agreement.156
Furthermore, the EU is looking to include provisions regarding public
procurement beyond the federal government into the CETA. This will require municipalities
and provinces to change their rules regarding the procurement processes.
Even though currently all the provinces are cooperating in the negotiations, they might be
reluctant to accept certain areas in the agreement that could potentially impact their public
finances. Furthermore, it is very likely that these provisions will also decrease the policy
space for all levels of government. Therefore, local politics certainly have a role to play in the
final form and acceptance of the agreement.
Because of the large differences between each province’s political economy, their interests at
the negotiation tables will differ significantly. Ontario and Quebec have large manufacturing
industries that are closely integrated with the automotive industries in the North Eastern US
and will for that reason push for loose ROO. The Atlantic Provinces that get more of their
imports from the EU than from the US will be generally in favour of an open agreement, and
the economic importance of their fishery sectors will make that they would like improved
market access into the EU for those industries. The Western Provinces are more dependent on
the natural resources and agriculture trade. As such they would be interested in the market
access for their wheat, pork, and beef.
Thus, in order to really get to the positive gains that are being predicted, the CETA will in its
legal provisions have to go beyond the standard FTA, the GATT provisions and the NAFTA
in order to include the Canadian provinces under the same legal responsibilities as the federal
government, the EU, and its member states. This would be the first FTA that Canada would
sign jointly with the provinces. Previous trade agreements such as the GATT employed the
principle of the ‘federal clause’ which limits the federal governments’ liabilities should the
provinces refuse to pass or amend their legislation.157
The NAFTA agreement does not
156
More stringent IPR provisions on the patent protection of branded drugs would replace the prescriptions of
generic drugs. This will increase the average price of drugs. Since all provinces fund a system of public health
care this would increase the costs of the health care system. Likewise more stringent copyright regulations might
influence the price of the distribution of educational literature. 157
Dupras, D. (1993). NAFTA: The Implementation and the Participation of the Provinces.
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include this clause and appears to be strictly mentioning the responsibilities of the provinces,
yet, legally the document specifying their responsibilities was never concluded.158
4.2 Government Procurement
Extending the current commitments to government procurement under international
legislation to cover sub-central and other procuring entities is one of the main elements of the
EU motivation to enter the CETA negotiations. This is predicted to be one of the fields in
which both Canada and the EU can achieve significant economic gains.159
Legally, open tendering mechanisms are exempted from GATT and GATS.160
The WTO
agreement on government procurement (GPA) provides a framework for international
procurement and is signed by both the EU and Canada. It covers certain threshold values,
non-discrimination, an independent bid challenge system, and open tendering and
transparency are the norm. The GPA’s scope is covered by a number of appendices regarding
procurement entities other than the central government which are not signed by Canada,
however, the EU is aiming for access to these procurement markets.161
In the EU, government procurement falls under the European Commission directives and is
required to be published in the EU`s Official Journal. Procurement advertised in this journal
represented around 2,9% of GDP in 2005.162
For Canada the Treasury Board of Canada has
estimated that the value of procurement by the federal government was around 1,1% of
GDP.163
These figures demonstrate that there exists a large market for government
procurement in the EU and Canada.
The procurement of public expenditures creates competitive pressure, and as such decreases
the costs of the government. The EU procurement directives are assumed to have led to
procurement cost reductions of almost 30%.164
These directives on procurement have thus
already assured a highly competitive bidding process in the EU. The CETA is therefore not
158
McIlroy, James P. (1997). NAFTA and the Canadian Provinces: Two Ships Passing in the Night?
Canada-U.S. Law Journal, 23, 43 159
SIA, p.48 160
GATT article III:8(a), GATS Article XIII:1 161
WTO website. The plurilateral Agreement on Government Procurement (GPA). 162
Europa.eu Summaries of EU legislation: public procurement. 163
Joint Study, p.74 164
EC. A report on the functioning of public procurement markets in the EU: Benefits from the application of the
EU directives and challenges for the Future.
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expected to lower procurement costs for public entities in the EU. However, for the EU’s
private sector the procurement provisions are of interest as they increase market access into
Canada. It has been suggested that they have a competitive edge in a number of sectors open
for procurement such as the provision of electricity and drinking water. Thus, even though the
EU will likely not benefit from efficiency gains from a more competitive bidding
environment, its firms are likely to see increases in market share in the Canadian procurement
markets.165
For Canada the extension of the international procurement mechanism could probably lead to
efficiency gains from a more competitive tendering mechanism which would to an extent be
comparable to that in the EU. Moreover, the sub-central governments will have a more
diverse choice of potential service suppliers. This could lead to quality improvements of the
public services. However, the sub-central governments might oppose more stringent rules on
procurement as they would further restrict their policy space. Furthermore, concerns have
been voiced that large EU multinationals would outcompete local firms for the contracts and
as such local jobs would get lost.166
These losses would be limited because certain threshold
values on procurement would mean that most local contracts would probably not qualify for
procurement. Thus, overall the Canadian economy is likely to profit from efficiency gains
because of increased competition.
4.3 Intellectual Property Rights
With the globalization of the world economy in which both the EU and Canada have
established themselves as knowledge intensive economies and world leaders in various
technology intensive industries, IPR protection is taking up an increasingly important role.
IPR protection is a vital instrument in the promotion of investment, technological progress
and creativity, and thereby vital in the creation of competitive advantage. In this sense it is
important that the IPR regime strikes a delicate balance between its enforcement function and
its function as a catalyst to innovation. In other words, it should on the one hand provide
sufficient protection to ensure that holders of the IPR are rewarded for their innovative efforts
and as such are stimulated to continue innovating, while on the other hand allow for sufficient
165
Reppert-Bismarck, J. (26-07-2010). EU eyes Canada`s lucrative public works contracts. 166
Trade Justice Network. (2010). Top ten reasons why CETA is Bad For Canada.
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leniency in the IPR enforcement so that innovation and creation can continue on the basis of
today’s IP.
Although both the EU and Canada are signatories to the WTO TRIPS agreement and the UN
WIPO treaty that set international standards regarding IPR protection, they each have
different legal systems that deal with IPR protection. This creates many different standards
and procedures for registering IP that constitute a significant collection of all kinds of NTB’s.
If the CETA would succeed in harmonizing standards and the mutual recognition and
transparency of both IPR regimes, this would present knowledge intensive and creative
industries with decreasing costs regarding the registration of IP. Moreover, better protection
regimes could stimulate further innovation and as such support further long-term economic
growth.
A number of issues related to IPR protection are on the negotiating tables:
1. For the EU geographical indications form an important part of the CETA negotiations.
Although the TRIPS agreement allows for the protection of GI producers it also
applies exceptions to products where a GI has become a generic term. Furthermore the
EU and Canada provide a different approach to GI protection. The EU uses a ‘sui
generis’ approach which includes products of cultural heritage and national identity,
whereas Canada employs a system of registration in which it is the responsibility of
the owner to register the GI as a trademark. This has led to a number of trade conflicts
where the name of, for example, ‘Parma ham’ is in Canada owned by a private entity
as a trademark, whereas in the EU it is a GI. This has led to frustrations on both sides
as the Canadian firms cannot use their trademarks in the EU as they are regionally
bound products, whereas EU producers face competition which in their opinion
unfairly uses their GI for products of lesser quality.167
2. With regard to patents a similar case emerges. Two different regimes allow for
different protection periods of pharmaceuticals. Canada’s protection of the patent is
shorter than Europe’s. The positive side of this is that cheap generic drugs become
widely available sooner and thus decreasing the costs of healthcare. The negative side
is that foreign manufacturers wait with requesting patents for the Canadian markets
167
Ivison, J. (15-12-2010). Trade-offs required in Canada-EU free trade agreement
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until the patent period matches that of their domestic industry. Moreover, foreign
manufacturers are unwilling to invest in research facilities in Canada.168
3. In the light of the changing issues regarding the copyright protection of digital works,
Canada is undergoing a much needed process of legal reform. However, progress has
been stagnant over recent years.169
This could hamper further economic development
as certain software or productions are not sufficiently protected against digital
distribution under Canadian law. Foreign producers might hesitate to introduce them
on the Canadian markets.170
The CETA agreement could force Canada to change.171
Europe indicated in the 2009 IPR enforcement report that Canada was one of the priority
countries mainly because of the weak copyright protection, pharmaceutical patent protection,
and the geographical indications. In order to shield its domestic industries from losses through
the lack of sufficient Canadian IPR protection, it would require Canada to adapt to the EU
standards. However, as Canada is only a minor trading partner in these sectors, the economic
gains for the EU as a result of stricter Canadian IPR protection regime through the CETA are
relatively minor.
Canada will not directly benefit from stricter IPR protection, certain companies would lose
their trademarks on European GIs and cheap generic drugs would only be introduced into the
markets later, increasing the average price of pharmaceuticals. However, the stricter IPR
protection as a result of the CETA could strongly motivate EU investment flows and
technology spills into Canada, and as such accrue indirect profits on the long run.
168
The Globe and Mail. Canada needs tougher drug Patent Protection 169
The SIA, p.51 170
Schmidt, S. (22-11-2010). Copyright bill back before MPs 171
McKenna, B. (05-12-2010). Don’t care about copyright? You should
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4.4 Investment Facilitation
Chapter 3 introduced investment flows as a factor that was exogenous to the CETA
agreement, yet could strongly influence economic growth and bilateral trade between Canada
and the EU. However, at the same time there remain many policy areas that fall under the
scope of the CETA which could positively influence bilateral investment flows. This chapter
covers a number of provisions that indirectly promote investment such as IPR protection and
labour mobility. Additionally there are number of measures related to the facilitation of
bilateral investment that will directly influence bilateral investment in the short run.
Capital investment is rapidly gaining importance in the global free trade debate. Canadian
firms already sell more in the EU than they export to the EU. Limits to capital investment can
thus act as serious impediments to domestic economic development as they prevent foreign
firms of setting up local subsidiaries or acquire foreign businesses. For example Canada has
recently made major headlines regarding a proposed foreign takeover of a Canadian firm on
the basis that it would damage a national strategic resource.172
The BHP – Potash case where Canadian government’s prevented Australian mining company
BHP biliton to take over the Canadian company Potash Corp. The reasons for this, as put
forward by the Canadian federal government have been defined as vague and could not be
quantitatively or legally backed up made it appear to be rather restrictive to the influx of FDI.
In reaction, the Canadian government announced that it would create clear guidelines on
foreign investment rules by the end of 2011.173
This only strengthened the EU’s beliefs that
Canada should undertake more action in opening up its markets to FDI.174
Chapter 1 already mentioned the relative high restrictiveness of Canada to foreign investment.
The OECD produces yearly FDI restrictiveness updates which can be used as a ‘summary’
measure on Member States’ investment positions, and evaluate national regulations
restrictiveness to FDI.175
It finds that EU members have very low restrictiveness to FDI.176
Canada finds itself among the lower ranked countries, and does not score much higher than
172
BBC news. (15-11-2010). BHP Billiton abandons takeover bid for Canada’s Potash 173
Bloomberg News. (16-12-2010). Clement delays new guidelines on foreign-investment rules until next year. 174
Campbell, C. (15-12-2010). Europeans put spotlight on Ottawa`s investment restrictions 175
Kalinova, B. Palerm, A., Thomsen, S. (2010). OECD’s FDI RESTRICTIVENESS INDEX: 2010 Update. Oecd
working papers on international investment No. 2010/3. OECD Invesment Division,
www.oecd.org/daf/investment 176
the Netherlands, Portugal and Romania score the lowest FDI restrictiveness of all OECD members
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the average of non-OECD members. However, it is signalled that Canada has made
significant progress since the 2006 measurement. The report also indicates that Canada’s high
restiveness to FDI lays mainly in equity restrictions and in screening. The most restrictive
sectors are the media, fishing, telecom, transport, and mining sectors. However, within the EU
there are also a number of sectors that still face high restrictiveness to FDI: in business
services (Belgium), Transport (Germany), Fishing (the UK) Telecommunication (Austria) and
Media (France).
Most important to the EU would in particular be the loosening of some of the foreign
ownership restrictions in the telecom and financial sectors. Its telecom and financial firms
could then expand to the Canadian markets. For Canada, EU restrictions on fishing and
business services could be interesting.
It is generally assumed that the removal of several of these barriers to investment in Canada
and the EU would markedly increase bilateral investments. Furthermore, investors in both
nations will find significant benefits in more clarity and transparency in investment rules. This
would facilitate the overall movement of production factors to where they are most effectively
used and generate the largest benefits.
However, the facilitation of investment would impact a number of interprovincial investment
issues. For example in Canada the Alcohol Board System regulates the sale of alcohol on a
provincial level. Whereas private enterprises controlled by governments operate a monopoly
in some provinces, other provinces operate a competitive retail markets. When such
restrictions were lifted the large provincial monopolies would outcompete the small retailers.
Another example is that different rules on foreign ownership can have some perverse
consequences in which foreign investments require firms to move their headquarters to
provinces or territories that have more lenient foreign ownership rules.177
Additionally, some other concerns regarding foreign investment arise in Canada that are
strongly related to the experiences under the NAFTA investment provisions under chapter 11.
This chapter allows private investors to take the government to court whenever it limits their
investment opportunities. The first concern is the potential monetary costs for the Canadian
government that will accrue because of this. The second concern is that such provisions would
177 Parkinson, D. (2011). Miner moves to Yukon to be truly Russian
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create a regulatory chill and, as such, erode health and environmental protection legislation.
Moreover, such provisions would limit Canadian and EU policy space.
4.5 Labour Mobility
Certain provisions on labour mobility could strongly influence the provision of bilateral
services and investment. For example when an EU architectural firm is designing a building
in Canada, the architects would at the moment require a working visa to be able to investigate
the progress on the Canadian construction site. A number of issues regarding labour mobility
arise in this situation. Firstly the architect would require a working permit to actually engage
in professional activities within Canada. Secondly, he requires certification accepted by the
Canadian authorities proving that he is in fact a certified architect.178
Thus in addressing
labour mobility the EU and Canada should loosen the provisions regarding the entrance of
foreign professionals and cooperate in facilitating the mutual recognition of qualifications.
A number of problems would have to be dealt with in the CETA regarding the entrance of
businesspersons and professionals into both nations. The Schengen Acquis regulates the entry
of all persons into most of the EU member states, however, it does not include the UK and
Ireland, and therefore a separate clause would have to be included regarding these countries.
Furthermore, recently Canada and EU member state the Czech Republic were engaged in a
diplomatic crisis regarding Canada`s decision to require Czech citizens to register for a tourist
Visa whereas for other EU nationals there lay no such requirements.179
Both the EU and Canada are already pushing towards an easing of the temporary entry of
professionals and business people and the mutual recognition of qualifications and degrees.
Improved labour mobility as a result of the CETA will most likely positively affect FDI as
well as bilateral trade in services such as private firms will find it easier to send their experts
across the ocean for a closer inspection of the potential investments. Moreover it could
stimulate the exchange and diffusion of technological knowledge through improved
cooperation between companies in this area.
178
The same difficulties would apply were the architectural site in the EU and the architect a Canadian citizen. 179
Citizenship and immigration Canada (13-07-2009). Canada imposes a visa on the Czech Republic.
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4.6 Competition policy
It is clear that competition policy has a delicate role to play in promoting the competitiveness
of domestic markets. On the one hand it should promote optimal competition and by this
decrease cost and benefit consumers, yet, on the other hand, it should not restrict innovation
and business creation. The forces of globalization have created more complex business
relationships through mergers, strategic alliances and vertical integration. The CETA might,
through increased bilateral trade and investment, influence the internal markets of the EU and
Canada.
On the European internal markets there is strict competition regulation regarding the
formation of cartels and the abuse and creation of a dominant position. In recent years, many
efforts have been undertaken to increase competition in markets that used to be the unique
terrain of government-backed monopolies, such as the telecom and energy sectors.
Canada was in 1889 the first country to pass competition legislation. However, at the time, the
aim of competition policy was to keep foreign competition out, and to regulate the internal
oligopolies in wheat in order to keep prices low for the consumers. Today, the legislative tool
safeguarding competition is the 1987 Competition Act which regulates competition and bans
criminal conspiracies (price fixing).180
However some national and provincial regulated
monopolies still exist in Canada. The most noteworthy are the Liquor Board Systems that
exist in alcohol wholesaling and retailing in different provinces, and the Wheat Board System
that has the exclusive rights over the exports of wheat from Canada and thereby giving it a
competitive advantage. Another state monopoly is held by Canada Post, and in particular the
EU firms TNT and DHL would be interesting in sharing the Canadian market for international
mail delivery, markets that have already been deregulated in the EU
Sizable demand for alcoholic beverages on Canadian markets and increased competition on
wholesale and retail markets from EU firms would likely reduce market prices in Canada.
Given the experience of the Canadian alcohol producers on the American markets it is
expected they would be able to compete with the EU firms. However, this would undermine
the government’s policy space, which keeps the sale of alcohol regulated because of the risks
it poses to public health and safety.181
Moreover, significant economic interest is held by the
180
Apec (2010). Competition Policy in Canada Past and Future. 181
Trade Justice Network. (2010). Top ten reasons why CETA is Bad For Canada.
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stakeholders of the Canadian liquor and wheat boards who would see their incomes
decreasing. However, despite these fears, the governments could retain a large amount of
policy space, for example through the price setting on alcohol. These could be maintained by
levies as happens in many European countries. This would be in the competition law under
the health exemptions.
4.7 Rules of Origin (ROO)
The globalization of world trade and international integration of supply chains is cause to an
increasing importance of Rules of Origin (ROO) in international trade agreements. ROO are
the criteria used to define where a product was made and are globally administered by the
WTO Rules of Origin Agreement. This allows for the distinction between non-preferential
ROO and preferential ROO to be determined in FTAs. Augier (2005) shows that ROO have a
strong influence on bilateral trade as more stringent rules can significantly decrease the
amounts and types of products that are traded.182
Chase (2008) finds in an econometric
analysis of the NAFTA ROO, that the toughness of ROO is positively related to the returns of
scale and the level of protection from foreign supplies the product faces. He argues that
therefore the industry’s preferences towards Rules of Origin will have implications towards
the FTA politics.183
Canada prefers looser Rules of Origin because of the integrated nature of many of its
manufacturing industries with the US. It is afraid that many of the gains these industries could
make from the CETA would be lost if, trough strict ROOs, their products would not qualify as
being Canadian, and as such would still face EU import tariffs and NTBs. The EU prefers
more strict ROO as it is afraid that otherwise it might open up its markets to a great deal of
goods that, although they actually qualify as Canadian goods, are more likely to be of US or
Mexican origin.
The SIA found that although the level of ROO in general did not make significant differences
to the macroeconomic results of the CETA in its models, for particular sectors such as the
182
Augier, P., Gasiorek, M., & Lai Tong, C. (2005). The impact of rules of origin on trade flows. Economic
Policy, 20(43), 567-624. doi:10.1111/j.1468-0327.2005.00146.x 183
Chase, K. A. (2008). Protecting Free Trade: The Political Economy of Rules of Origin. International
Organization, 62(3), 507-530. Retrieved from EBSCOhost.
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automotive industries, the effects of the level of ROO did matter. Its results clearly
demonstrated that more stringent rules of origin would exacerbate the negative impacts that
the CETA was already expected to have on the Canadian automotive industries, thus
confirming the Canadian demands for loose ROO.184
4.8 Reflection
Where Chapter 3 demonstrated that there are a number of external factors which will
eventually influence the effectiveness of the CETA that are independent of the results of the
negotiation process, this chapter argued that a number of internal legal provisions to the
agreement are far from certain either. This is something that should be considered by the
policy makers. Eventually they are going to create a package deal that will affect both
economies. The SIA demonstrated that the degree openness of the CETA could strongly
influence its projected results.
A number of the points that are being negotiated offer valuable opportunities for trade
between Canada and the EU. Chapter 1 demonstrated that provisions on tariff and NTBs
could significantly open up trade between the trading partners. This chapter elaborated on this
by highlighting some of the legal opportunities that the CETA offers. For this reason it has
been essential to conduct an interdisciplinary analysis of these negotiation points. This chapter
demonstrated that there are legal opportunities for CETA to improve: Canadian inter-
provincial trade and cooperation, bilateral government procurement, IPR legislation,
investment facilitation, labour mobility, competition policy, and Rules of Origin. Moreover, it
showed that it is important to realize that these legal provisions offer strong economic
opportunities for the further expansion of EU-Canada trade.
Even though plenty of legal provisions are already included in international trade treaties
mostly administered by the WTO, the degree to which they are legally binding have been
limited so far. The CETA offers the possibility to correct this on a bilateral level. Thus, if both
negotiation partners succeed in successfully implementing these provisions in a binding
manner in a way that opens up trade between them, than the positive economic effects of the
agreement are potentially strong.
184
SIA, p.37
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General conclusion
This paper has set out to investigate how to interpret the projections made by a number of
academic studies with regard to the FTA that the EU and Canada are currently negotiating. In
other words: can we rely on the results of empiric studies in our beliefs that the FTA will
increase welfare in the EU and Canada?
This paper established that the belief of a direct one-to-one relationship between the
conclusion of an FTA and domestic economic growth is often grossly overestimated. Yet,
defenders of the agreement keep on repeating its benefits for the domestic economies of
Canada and the EU. On the other side of the political spectrum, opponents of FTAs like to
overestimate the negative externalities of these agreements, such as unemployment or
environmental damages.
The roots to interpreting this political debate probably lie in the unification of the different
approaches chosen by the opponents and the proponents of preferential trade. Where the
supporters often base their opinions on economic theory and quantitative models which
support this, the opponents often rely on case studies and qualitative research.
This paper adopted the unconventional method of literature research in order to interpret the
potential effect of the Canada-Europe Comprehensive Economic Trade Agreement (CETA) as
predicted by a number of studies. This method was chosen because of the possibilities it
offers to unify qualitative and quantitative research and because it allows for an inter-
disciplinary approach of the various issues related to the CETA that relate to legal provisions,
macroeconomic assumptions and political interpretations.
The EU and Canada share strong bonds. Historically, these were formed firstly because of the
colonization of Canada by a number of European nations, and secondly because of the
Canadian forces’ involvement in the liberation of Europe during the two subsequent World
Wars. Politically, Canada became the EU’s first formal bilateral agreement partner in 1959.
Since then the formal ties have strongly developed between both partners. Highlights are the
1976 Framework Agreement and the failure to negotiate a Free Trade deal in 2004. Canada
and the EU have a strong economic connection too: with the EU being Canada’s second
largest trading partner and investor, and Canada being the EU’s eleventh largest trading
partner and fourth largest investor.
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On May 5th
2009 the EU and Canada announced that they would engage in renewed
negotiations with the aim of creating a Preferential Trade Agreement: the CETA. This was a
result of the failure to reach a conclusion at the Doha rounds, as now PTAs were seen as the
next best tool to promote domestic commercial interests. The newly drafted Canadian and
European international commerce strategies confirmed these views by suggesting that the
conclusion of FTAs was an important policy tool in the promotion of domestic commercial
interests abroad. Finally, a research that was commissioned by the government of Canada and
the EU commission clearly demonstrated that both partners could significantly benefit from a
further liberalization of bilateral trade.
However, there are a number of reasons to question the positive results of the CETA as
predicted by the research commissioned by the EU and Canada, known as the Joint Study.
Most importantly, the study was conducted in 2007 – 2008. It made predictions based on the
prevalent macroeconomic facts and figures at the time. However, the financial crisis that hit
the Canadian and European economies in 2008 – 2009 left an economic situation in 2010 –
2011 quite different from the one in which the Joint Study was conducted. Moreover, it has
been suggested that the study was not completely objective as it included the views and
suggestions of possible benefactors, but failed to include the views of the agents that would
bear the costs of such an agreement. A number of studies that predict different results of the
CETA have been published since the Joint Study.
The Sustainable Impact Assessment (SIA), commissioned by the EU, was much more
balanced and independent in its views. Like the Joint Study it used a quantitative equilibrium
model to generate projections on the impact of the CETA. Furthermore, both studies
suggested that the trade relation could potentially benefit from reductions in tariff barriers,
yet, probably the biggest potential of an FTA would be reduction of non-tariff-barriers
(NTBs) and the promotion of service trade and bilateral investments. However, the SIA,
differed from the Joint Study on a couple of important points: it included impact analyses for
the negative externalities of the CETA, it included a model predicting the long term dynamic
effects of investment as the result of the CETA, and it regarded the possible trade effects of
the CETA with regard to third countries.
The Out of Equilibrium study was the third work that was evaluated in the context of this
paper. This study was conducted by Canadian civil society groupings. Where the SIA and the
Joint Study were based from a liberal point of view, the Out of Equilibrium study was
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conducted from a more conservative point of view. It argued that the complex equilibrium
models used by the SIA and the Joint Study used assumptions that were too restrictive and
therefore had a low validity. Instead, it used simple calculus and qualitative research. The
results emphasized the negative externalities that come with FTAs, unemployment in
particular, and highlighted that the results of the CETA would lead to an unbalanced trading
relationship between the EU and Canada. This could be particularly harmful for the Canadian
economy.
The results from the CETA as predicted in the above mentioned studies differed significantly.
This difference could for a large extent be explained by the economic and political
motivations of the authors, and the time periods in which they were written. In order to assess
the reliability of these studies this paper included a case study of a previous FTA of the EU to
which the projections could be compared. The EU FTA with Mexico was chosen because it
resembles the CETA on a number of levels. Most importantly, like Canada, Mexico is largely
dependent on trade with the US, it has a large automotive industry that is strongly integrated
with the US, and the size of the Mexican economy is, like the Canadian economy,
asymmetrically small compared to the EU’s economy. Furthermore, like the CETA is
projected to have, the Mexico FTA also included provisions on procurement and provided for
a number of facilitations of bilateral investment.
This paper identified three key points in the comparison between the three studies into CETA
and the case study of the EU-Mexico FTA. 1. Although the Joint Study predicts that the
effects of the CETA on bilateral trade can be quite substantial, the results on the domestic
economies (GDP) and total trade are by all studies predicted to be quite modest. The Mexico
case study confirmed that the FTA did hardly anything to influence the prevalent trends in
these macroeconomic indicators for Mexico. 2. Irrespective of the final contents of the CETA
all studies agree that there are a number of independent variables that will influence the
effectiveness of the CETA. 3. The set-up of the quantitative models in the SIA and the Joint
Study used some restrictive assumptions that did not allow for a correct interpretation of the
impact of a number of legal provisions internal to the agreement, which nonetheless, could
potentially influence the effectiveness of the CETA.
For these reasons the paper concluded that the reliability of all studies was rather limited, this
was not because they were conducted poorly, but simply because there are too many factors
that will determine the eventual effectiveness of the CETA which are unknown today. Even if
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they would have been known, some simply cannot be integrated into a quantitative economic
model. Thus, in order to better interpret the final effectiveness of the CETA, this paper then
evaluated the different determinants separately.
The Mexican case study confirmed that GDP growth and trade flows are affected by so many
other factors, that isolating the exact effects of the FTA becomes a nearly impossible exercise.
It was unclear whether the FTA caused the Mexican GDP growth, and it was clearly
demonstrated that Brazil’s trade flows with Europe showed a stronger increase than Mexico’s
even though Brazil did not have any FTA with Europe. It therefore suggests that there are
more dynamics at play than just the openness of trade. A number of these dynamics,
exogenous to the CETA models were therefore evaluated.
It was clear that, although investment can be strongly promoted by the legal provisions in the
CETA and is predicted to be one of the largest gains to the agreement, it is more dependent on
the prevalent economic climate or business cycles and therefore exogenous to the CETA
models. The paper also demonstrated that international financial and commodity markets
strongly influence the prices of currencies and natural resources, both of which are strong
determinants of bilateral trade between the Canada and the EU. The depreciation of the Euro
against the Canadian Dollar has attributed to the growth of the current account surplus of the
EU against Canada, whereas increasing world prices counteracted this trend as Canada is a
major exporter of natural resources. Finally, the paper demonstrated the economic conditions
in the United States that could strongly influence the EU, but in particular the Canadian
economy. As a result of this, it hugely influences bilateral trade and the economic results that
follow after the conclusion of the CETA. Moreover, there are a number of other,
miscellaneous events that could present the European and Canadian economies with negative
demand shocks and as such influence the effectiveness of the CETA.
Looking at all these factors that cannot be controlled for by the CETA negotiations but will
nonetheless influence its effectiveness, one might question the reasons why Canada and the
EU entered into negotiations in the first place. This is because Preferential Trade Agreements
like the CETA offer the possibilities to go beyond the legal provisions in international trade
agreements such as the GATT and GATS. However, it is clear that this makes the contents of
these legal provisions and the way in which they will be legally binding pivotal to the CETA.
The EU – Canada Comprehensive Economic Trade Agreement.
74
Therefore, in its fourth chapter, this paper attempted to make a comprehensive analysis of a
number of the legal provisions that are expected to strongly, and positively influence the
results of the CETA. Firstly, the political structure in Canada was proven to not only create
internal but also international trade frictions. Therefore it would be important that the CETA
solves these issues in order the free up trade. Secondly, the CETA offers significant
opportunities for the opening up of especially the Canadian government procurement
mechanisms. This would decrease the costs and increase the quality of government
procurement to Canada. Thirdly, extensive international provisions on IPR protection could
strongly promote innovation and investment and as such be key to the development of
competitive advantage within both economies. Fourthly, investment facilitation could provide
for a number of opportunities to improve bilateral market access to a number of sectors that
were previously shielded from international competition. This would stimulate investment in
the short run, decrease costs because of increased competition, and increase market access.
Fifthly, Labour mobility could strongly encourage business activities between both markets
and eliminate some of the costs associated with operating on foreign markets, and therefore
attribute to increased bilateral investments and service provisions. Sixthly, shared competition
policy could lead to more effective domestic markets, creating market opportunities for
undertakings from the partner economy and protecting consumers from the negative effects of
monopolies. Finally, the effectiveness of the CETA agreement is to a certain extent also
dependent on the interpretation of the Rules of Origin. Its effects on the CETA effectiveness
will depend on the restrictiveness of the rules and the different economic sectors, the studies
predict that Canada, because of its strong integration with the US economy, will benefit most
from lose Rules of Origin.
Both the Joint Study and the SIA have argued that the more open the CETA agreement will
be, the larger its effectiveness will be. Other empiric works on FTAs or on the specific legal
agreements seem to confirm that the EU and Canada should strive for the most open
agreement possible. This would optimize the effectiveness of the agreement and in particular
lead to increases in services trade and investment, which are expected to be the largest gains
of the agreement. Therefore the perspective that the CETA agreement will go beyond the
standard provisions of FTAs should be taken as positive.
However, there are still a number of issues at the negotiation tables that could significantly
impede the eventual openness of the agreement. 1. The different levels of government,
especially in Canada, will have to deal with a significant loss of policy space as a number of
The EU – Canada Comprehensive Economic Trade Agreement.
75
legal provisions, such as government procurement will limit their abilities to continue
independent policy. 2. Particular levels of government and publicly backed enterprises might
suffer economic damages because of the elimination of tariffs, the increased costs of public
services, or the loss of dominant positions in particular markets. 3. Particular domestic sectors
will suffer from a loss of income; this could potentially increase temporary unemployment.
4. The legal mechanism that will ensure that all levels of government comply with the legal
provisions is still unclear. This will to a large extent determine the effectiveness of the above
mentioned provisions.
To date, the negotiations are expected to be completed by the end of 2011, or even 2012. So
far 22 areas of negotiations have been established that will discuss a number of legal
provisions as well as the market access packages regarding to tariff barriers that are to be
included in the CETA. The wish-lists of negotiation partners regarding these provisions have
to a certain extent already been announced via either official or unofficial communications to
media sources and the progress appears to be smooth. However, the extent to which the
provisions in the eventual CETA will be legally binding and implemented within the CETA
structure remains on the negotiation tables. Moreover, a number of factors that are external to
the negotiations can significantly influence the effectiveness of the CETA. Therefore, the
predictions on the CETA that have been made so far, are rather limited in their validity and
should mainly be seen as public policy tools assisting the negotiators in their jobs.
However, it should be clear that if negotiations eventually succeed in establishing a CETA in
which many of the provisions described in this paper will be integrated, and will be
sufficiently binding, then the effects of the CETA might very well be positive for both
economies.
The EU – Canada Comprehensive Economic Trade Agreement.
76
``People respond to incentives, although not necessarily in ways that are predictable or
manifest. Therefore, one of the most powerful laws in the universe is the law of unintended
consequences.``185
185
Levitt, S.D., Dubner, S.J. (2009). Super Freakonomics. p.xii
The EU – Canada Comprehensive Economic Trade Agreement.
77
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The EU – Canada Comprehensive Economic Trade Agreement.
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APPENDIX 1: List of Abbreviations
Abbreviation Meaning
CETA Comprehensive Economic Trade Agreement
CARIFORUM Caribbean Forum of African, Caribbean and
Pacific States
DG Directorate General
EPA Economic Partnership Agreement
EU European Union
Euratom EURopean ATOMic Energy community
FTA Free Trade Agreement
FDI Foreign Direct Investment
G8 Great 8, eight largest economies in the world
G20 Great 2o, twenty largest economies in the
world
GATT (WTO) General Agreement on Trade and Tariffs
GATS (WTO) General Agreement on Trade in Services
GI Geographical Indications
IMF International Monetary Fund
IPR Intellectual Property Rights
MFN Most Favoured Nation
NAFTA North American Free Trade Association
NATO North Atlantic Treaty Organization
NTB Non-Tariff Barriet
OECD Organisation for Economic Co-operation and
Development
PTA Preferential Trade Agreement
ROO Rules of Origin
SIA Sustainable Impact Assessment
TIEA Trade and Investment Enhancement
Agreement
TRIPS (WTO) Agreement on Trade Related Aspects of
Intellectual Property Rights
UN United Nations
UN WIPO United Nations’ World Interllectual Property
Organization
WTO World Trade Organization
The EU – Canada Comprehensive Economic Trade Agreement.
85
APPENDIX 2: Table 7
Table 7:
Results of
studies
Study
Joint Study Sustainable Impact
Assessment
Out of Equilibrium
Factor EU Canada EU Canada EU Canada
Real GDP + 0.08% + 0.77% 0.07 – 0.15% 0.72 – 1.72% expansion contraction
Trade in
manufactured
goods
+ 21.2%
(attributing
0.05% to GDP
increase)
EU CAN
+ 18.1%
(attributing
0.42% to GDP
increase)
EU CAN
0.16% - 0.33%
In total exports
1.16% -3.08%
In total exports
Increase Increase,
Trade in
services
+ 13.1%
+0.04 % to
GDP
+14.2%
+0.35% to GDP
Primary source of
gains
Primary source
of gains
Increase Increase, along
the lines of
goods.
FDI Static gains: Not
projected,
Dynamic gains:
very likely
Static gains: Not
projected,
Dynamic gains:
very likely
Already low level
of investment
restrictiveness,
thus minor gains
only.
Markedly
increased
investment from
the EU. +
NAFTA (MFN)
Not projected Not projected
Employment
effects
Not considered Not considered Limited social
impact. Wages
expected to
increase by (0.08
– 0.19%)
Displacement of
workers, may
lead to lower
wages. Long
term positive
social impacts.
Wages expected
to increase by
(1.54 – 3.62%)
Not projected,
but most likely
increase
Potential loss of
jobs ranging
from 28.000 to
152.000 This
would be
between 0.2 and
0.9% of current
employment
rates
Sectors Processed foods
chemicals,
machinery and
equipment, and
transportation
services
Processed
foods, primary
agriculture,
metals,
transportation
services
Mainly service
sectors
Decrease in
goods exporting
sectors, offset
by increase in
services
Not projected,
but mention of
car industry
Winners:
Agriculte,
Minerals,
Metals.
Loosers:
Chemicals,
Machinery, Cars,
Oil & gas
Methodology CGE CGE CGE, 3M CGE, 3M Calculus Calculus
Third
countries
Not projected Not projected Positive for
Mexico, negative
for US
Positive for
Mexico,
negative for US
Not projected Not projected