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Canada’s Intent to Create the World’s Largest Trading Bloc

Canada’s signing of the Comprehensive Economic Trade Agreement (CETA) offers a competitive advantage to companies choosing a Canadian location.

Directory 2017
Prime Minister Justin Trudeau participates in the EU-Canada Leaders’ Summit and CETA signing ceremony in Brussels, Belgium, in October 2016.
Prime Minister Justin Trudeau participates in the EU-Canada Leaders’ Summit and CETA signing ceremony in Brussels, Belgium, in October 2016.
Signed in Brussels in October by Canada and the EU after seven years of negotiations, the Comprehensive Economic Trade Agreement (CETA) comes into force after being ratified by Canadian and European national parliaments. Combined with NAFTA, CETA provides companies located in Canada with preferential access to the world’s two largest economies — the U.S. and the EU — that together with Canada represent half of the world’s GDP. Canadian bilateral free-trade agreements (FTAs) with countries like Korea, Chile, and Peru embrace another 5 percent of global GDP, and the Canadian government is actively engaging on FTAs with China (another 15 percent) and India (3 percent).

In light of populist electoral victories on both sides of the Atlantic, CETA is also seen as a workable template for more bilateral trade deals.2 According to Canada’s Financial Post newspaper, Canadian exports to the UK would increase by 15 percent as a result of CETA, while British exports to Canada would increase by 2 percent — well worth it for both. Some 42 percent of Canadian exports to the EU are to the UK.

The bottom line is that CETA symbolizes a trade-ready Canada that is open to investment from companies eager to take advantage of the federal government’s desire to be part of the world’s largest trading bloc. Already Canada is first among G7 members with the greatest share of global GDP covered by FTAs.

As the CanadaWest Foundation has noted, in a fractious world, CETA proves that Canada “can negotiate with a unified and coherent position internationally” and forges “a Canadian reputation as a dynamic, pragmatic, and responsive trading partner.

For international companies considering new investments in Canada, CETA makes strides in three important areas: elimination of tariffs, ease of access concerning the free-flow of people in services-based businesses, and common regulations.

David Ross is CEO of Ross Video, an Ottawa-based international exporter of video production products and services to more than 100 countries. He states that before CETA, “even with the opening of offices and hiring sales and support staff in Europe, we still can’t complete that feeling of being local if we have to add all manner of import duties and complex administrative processes to sell there.” He now notes, “With this deal, we get cleaner access to 28 countries.” In light of populist electoral victories on both sides of the Atlantic, CETA is seen as a workable template for more bilateral trade deals.

Tariff Elimination
Specifically on tariffs, the patterns and levels of protection between the EU and Canada today are similar to those that existed between the U.S. and Canada prior to the FTA between Canada and the U.S. in 1989. The evolution of trade between the U.S. and Canada since the FTA offers a good illustration of how trade might increase after CETA. In the five years following the Canada-U.S. FTA, trade doubled for goods where there was a greater than 5 percent reduction in tariffs, while trade in goods that were already tariff-free increased by 40 percent.

Currently, only about 25 percent of EU “tariff lines” on which Canadian-made goods are exported enter the EU duty-free. On day one of CETA’s entry into force, 98 percent of EU “tariff lines” will be duty-free for goods that originate in Canada. Another 1 percent will be eliminated over a period of up to seven years. For companies that locate in Canada to take advantage of CETA, that means tangible and significant opportunities in the EU market by avoiding EU tariffs. Those companies can quickly expand or create new markets for their goods in the EU.

Atlantic Canada offers a quick study on the dollars and sense of CETA-related tariff elimination:
  • The EU is Atlantic Canada’s second-largest trading partner after the U.S. The EU is already the largest market for seafood in the world and Atlantic Canada is a major supplier. CETA will eliminate export tariffs on cooked and peeled shrimp (20 percent), live lobster (8 percent), frozen lobster (6 percent to 16 percent), and frozen scallops (8 percent).
  • The EU accounts for almost 40 percent of Atlantic Canada’s frozen blueberry exports, and rising incomes in central and Eastern Europe have the potential to increase demand.
  • Atlantic Canada’s aerospace exports to the EU were worth over $46 million in 2014. The European passenger fleet is expected to grow 71 percent by 2033, another sizeable opportunity.
  • EU healthcare is modern and sophisticated with growing needs related to an aging population. EU members account for 47 percent of Atlantic Canada’s exports of pharmaceutical and diagnostic products. Reduced tariffs and other CETA benefits will only serve to increase this pharma trade.
Services and Labor Mobility
The EU is the world’s largest importer of architectural, engineering, and other technical services. In 2015 alone, the EU imported $936 billion in services. It imported $16.5 billion from Canada. On Day One of CETa’s entry into force, 98 percent of EU “tariff lines” will be duty-free for goods that originate in Canada.

Management, financial, and ICT services are among the EU’s top services imports, and are also among Canada’s top services exports to the EU. Already France’s Ubisoft operates one of the largest gaming studios in the world in Montreal with 2,700 employees. Engineering and architectural services and R&D have been other major Canadian exports to the EU. Once CETA enters into force, Canadian services exporters will be treated the same way as those from the EU (with the exception of certain reservations for existing and future policy measures). Canadian services exporters will enjoy better predictability and transparency in a large number of service sectors of interest to Canada, including architectural, engineering, and R&D services.

Any future regulatory or legal changes that make it easier for Canadian service suppliers to access the EU market will automatically be locked in under CETA, and therefore cannot subsequently be made more restrictive. The EU will also treat Canadian service suppliers no less favorably than it treats service suppliers from its existing or future free-trade agreement partners.

In a world where increasingly technology-enabled and services-based businesses proliferate, labor mobility is paramount, and CETA also covers this important aspect of international trade. CETA’s chapter on temporary entry addresses administrative requirements at the border, such as labor market tests or other numerical limitations that can impose time delays and administrative costs on prospective business entrants to Canada or the EU. CETA provisions will increase transparency and predictability for key personnel, including intracompany transferees and investors, contract service suppliers, and independent professionals (including a broad coverage of professionals and limited coverage of technologists), as well as visitors doing business in the EU.

CETA also establishes a streamlined process for the recognition of foreign qualifications in certain sectors, and a detailed framework through which regulators or professional organizations may negotiate mutual-recognition agreements for other professions. With CETA in place, an investment in Canada will double the market access of American companies already taking advantage of NAFTA.

Common Regulations
CETA is the first Canadian bilateral trade agreement with a stand-alone chapter on regulatory cooperation. CETA will establish a Regulatory Cooperation Forum to discuss regulatory policy issues of mutual interest and develop bilateral cooperation activities.

By fostering cooperation earlier in the regulatory process, the forum is expected to enhance information sharing between Canadian and EU regulators, facilitate the development of more compatible regulatory measures, resulting in fewer barriers to trade, and make it easier for Canadians to do business in the EU.

For example, a Canadian company, working through the Regulatory Cooperation Forum, will be able to request information at an early stage regarding new EU regulations in development, and provide comments and recommendations on how such regulations should be developed in order to prevent and eliminate unnecessary barriers to trade.

Another unique feature of CETA is the Protocol on Conformity Assessment, which is designed to allow Canadian producers in a number of sectors to have their products tested and certified for the EU market in Canada. This protocol is expected to reduce testing and certification costs and associated delays for manufacturers. Canada and the EU are also committed to continuing discussions with a view to adding new products in the future.

In Sum
Canada is already the number-one trading partner for 35 of the 50 U.S. states, and number two in six more. With CETA in place, an investment in Canada will double the market access of American companies already taking advantage of NAFTA.

Asian companies are also increasingly looking to new markets for growth. As a diversification strategy, investing in Canada opens access to the developed markets in both the U.S. and the Europe to those outward-looking Asian companies. Canada’s signing of CETA, therefore, offers a valuable competitive advantage in a country committed to creating the world’s largest trading bloc.
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