Approaching the eleventh hour - Canada EU free trade negotiations update 

publication 

November 2011

International Trade Bulletin

Canada and the European Union entered into negotiations for a Comprehensive Economic and Trade Agreement ("CETA") in the spring of 2009.

In 2010, the EU was Canada's second most important trading market with an estimated 10.5% of total external trade. Trade in goods and services between Canada and the EU was in the range of 100 billion dollars per year, and investment flows between Canada and the EU exceeded 40 billion dollars in 2009.

These trade negotiations are clearly significant in their own right. But their importance is enhanced by their role as a precedent in further bilateral and multilateral negotiations by either party with other countries or trading blocks.

In the nine rounds of negotiations that have taken place so far, there has been substantial progress. It has been estimated that more than 95% of goods traded have been identified for immediate tariff removal. At the same time, when the talks were initiated, 2011 was the projected completion date. It now appears that the target date has been moved into 2012.

With all of the low hanging fruit having been picked by both parties, what remains to be resolved before CETA can go into force? The major points of on-going negotiation that remain include:

automotive trade

The main stumbling block in automotive trade continues to be rules of origin for Canadian produced automobiles. The Canadian industry relies on very much on a North American supply model, with both steel and parts provided by suppliers throughout North America. The EU continues to maintain that it cannot accept a duty free Canadian automobile without some process to assure (in some detail) the Canadian provenance of the majority of the value of the automobile.

With the high degree of integration in the North American automotive market, the assurances being sought by EU negotiators will be difficult if not impossible to meet. While the European market might provide some interesting possibilities for Canadian exports, the North American market is the foremost concern of Canadian automotive production, and any concessions that would impair the benefits of North American integration are likely to be unacceptable to those Canadian producers. While the EU continues to push for strict rules of origin, it may be the Europeans who have most to lose from a failure to reach an agreement in this sector. The duty rate on European autos is currently 6.1% which can provide a significant disincentive to a purchase, particularly in the high end of the market occupied by premium European manufacturers. While the EU has a concern about American sourced automobiles obtaining duty free status as Canadian goods, the end result of duty removal on vehicles produced in the trade area would seem to favour the Europeans.

geographical indications

Geographical indications are names for products (primarily foods) that relate to the region in which they are produced. Some good examples are Burgundy, Bordeaux and Champagne wines. Indeed, these products were a not insignificant trade irritant between France and Canada for many years until protection for those particular geographical indications (or "GIs") was agreed to in previous bilateral negotiations.

The EU has an extensive list of over 1,000 geographical indications relating to a wide range of food products. Canada has been provided with a shorter list of some 180 possible GIs on which the EU continues to seek concessions. An insider perspective suggests that the bottom line EU position may accept a significantly reduced number of agreed GIs, and something less than 50 of these remain sufficiently politically sensitive as to derail or delay the conclusion of the trade agreement.

A significant problem from the Canadian side is the existence of registered trademarks by Canadian companies with respect to certain names for which the EU is seeking protected GI status.

The problem for Canadian negotiators extends beyond Canada. The provisions of Chapter 11 of the North American Free Trade Agreement ("NAFTA") could mean that American or Mexican investors with an interest in a company holding any one of these trademarks could have an open ended right to compensation in the event that the Canadian government were to attempt to strip (or "expropriate") these intellectual property rights in the interests of concluding the CETA.

The ultimate resolution of GI concerns may come down to some arrangement to buy out the intellectual property interests in those products which represent a significant barrier to a final agreement.

farm products

Marketing boards continue to be a politically sensitive issue in Canada; particularly, the dairy industry. Quebec currently holds 75% of Canada's industrial milk quota and remains strongly opposed to threats to its dairy production.

Europe has been very gentle on the issue of supply management and on dairy production, perhaps because they to have a number of "sacred cows" in their own farming sectors. At the same time, the EU is pushing for market access for specific dairy products, such as cheeses and butter, which are currently subject to import tariffs of between 200% and 300%. For those who want to buy a piece of Cambozola cheese for one-third of its current Canadian price, the EU position is good news; for Quebec dairy farmers, not so much.

Another outstanding issue relates to access of Canadian beef and pork to the European market. A series of WTO dispute resolution body decisions has required that Europe provide access to Canadian beef and pork products from livestock that have been treated with hormones. In a complicated series of decisions, the WTO found that the European ban on livestock products treated with hormones was not scientifically justified. Nevertheless, Canadian access, while now possible, does remain restricted. An offer by Canadian producers to ship only products certified as hormone free may assist in resolving this issue. If the EU does not agree to improve access for hormone-free beef and pork products, CETA will face political challenges in Western Canada.

investment

One of the key issues for negotiators is the matter of protection of investments. Discussions have focused on leaving governments free to act, while insuring compensation for expropriated assets of investors from the other party. Both sides have recently exchanged offers on this issue. One may expect that they may consider a process somewhat similar to Chapter 11 of NAFTA as the way to go, though the form and substance of adjudication and the scope of liability may be different.

While investment issues may not be a major concern between Canada and the EU, both parties must be cautious, since the outcome of these negotiations will likely form a base line for future bilateral negotiations with the BRIC countries (Brazil, Russia, India and China), and perhaps in multilateral negotiations.

services

While there remain some areas of disagreement between the parties, a lot of the ground work has been already accomplished. There has been some agreement on labour mobility including temporary entry for business purposes for investors. The issue of temporary entry for product technicians (particularly in the case of information technology and engineered products) remains on the table. A stumbling block remains the issue of EU member state jurisdiction to control their borders in respect of workers coming from outside the EU.

government procurement

There are still some contentious issues relating to government procurement. Canadian aerospace and defence contractors have been pushing for removal of bidding restrictions on non-military government procurement that is being sheltered by European countries under so-called national security exclusions. The EU has expressed concerns about policing local content requirements, with Ontario's green energy subsidies being a particular sore point.

Canadian offers have already moved beyond the scope of previous trade agreements. At the federal level, Canada is prepared to negotiate access to procurement by federal crown corporations. Further, and likely of greater significance, the Provinces have offered to extend the coverage of CETA to provincial government procurement as well. This position is a substantial move beyond the position in NAFTA, where the potential for extension to Provincial and State procurement was never realized.

pharmaceuticals

The EU continues to press Canada for concessions on pharmaceuticals, with the principal concerns being the length of and judicial remedies associated with patent protection. The EU's view is that Canadian rules currently permit quicker access of generic producers to formally patented products, since the effective length of protection offered under Canadian legislation is less than available in Europe. Second, the EU is pressing for a more formal appeal process relating to patents and patent expiry. Part of the problem lies in fundamentally different processes for obtaining approvals and enforcing patents for pharmaceutical products. Currently, such decisions are made internally at Health Canada, whereas in Europe, there is a more formal judicial process to appeal government decisions. Part of the dispute may arise from a misunderstanding of judicial oversight in Canada. While the decisions themselves may be made internally at Health Canada, they remain subject to judicial review in the Federal Court.

conclusions

While it may seem that there is still a great deal to accomplish in the negotiations, internal sources on both sides confidently state that more than 90% of the CETA has been resolved, and the agreement is online for completion in the first half of 2012. It may be that resolution of certain contentious issues will require a degree of political intervention, but that is often the case in trade negotiations.

by Geoffrey C. Kubrick


a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011