the eu-canada comprehensive economic trade...

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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2

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


3

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


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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.


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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.


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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.


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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


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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.


9

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.


10

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


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.


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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


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

http://www.international.gc.ca/

http://www.allbusiness.com/management/4015181-1.html


14

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


15

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


16

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)

http://www40.statcan.ca/l01/cst01/econ50-eng.htm





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.


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)


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

http://europa.eu/abc/history/index_en.htm

http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_singleact_en.htm

http://trade.ec.europa.eu/doclib/docs/2006/december/tradoc_111588.pdf


20

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.


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


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)


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


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.


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


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


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


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


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.


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


31

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


32

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


33

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.


34

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.


35

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


36

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


37

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


38

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


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.



40

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


41

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


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


43

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

€ -

€ 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.


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


45

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


46

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


47

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


48

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.


49

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.


50

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.


51

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.


52

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


53

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.


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.


55

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


56

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.


57

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.


58

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.


59

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



60

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.


61

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.


62

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


63

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

http://www.nationalpost.com/Clement+delays+guidelines+foreign+investment+rules+until+next+year/3984639/story.html#ixzz18Hv1m4JD

http://www.theglobeandmail.com/news/politics/europeans-put-spotlight-on-ottawas-investment-restrictions/article1839873/


65

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


66

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.


67

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



68

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.


69

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


70

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.


71

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


72

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


73

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.


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


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.


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


77

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84

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


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


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the eu-canada comprehensive economic trade...

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