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Two Important Developments Regarding Canadian International Trade, or Sleeping between Two Elephants

2017-10-03

Summer 2017 saw two important developments for Canadian businesses that have commercial relations with the United States and the European Union (“EU”), invest in those markets or are contemplating investing in them.  While the United States kicked off renegotiations of the North American Free Trade Agreement (“NAFTA”), Canada and the European Union announced that the Comprehensive Economic and Trade Agreement (“CETA”) would apply provisionally as of 21 September 2017.

These developments will have profound repercussions for all Canadian companies and investors, a situation which recalls Prime Minister Pierre Elliott Trudeau’s well-known phrase to describe Canada’s relations with its neighbour to the South in 1969: “Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt”.[1]

The image still resonates in 2017, but in light of recent developments we would be tempted to update the metaphor to say that Canada now lives beside several elephants, including the US and the European Union, whose twitches and grunts have been keenly felt this summer regarding the NAFTA and the CETA.

The NAFTA renegotiations begin

Having come into force in 1994, the NAFTA is a revolutionary agreement which allies the United States, Canada and Mexico in a vast free-trade zone. In May 2017, the US government formally initiated the process to renegotiate the agreement, which President Trump had denounced during his electoral campaign in 2016 as the worst agreement ever signed by his country.

In July 2017, the US followed up this announcement with the publication of a 16-page document listing its objectives for the negotiations. The principal objectives sought by the US include the reduction of trade deficits with its free-trade partners (the term “trade deficit” means that the US imports more products from Mexico and Canada than it exports to these countries) and the modernisation of the agreement, notably regarding the digital economy, which did not exist when the agreement was signed. The US’ wish list is long, and even contains contradictions. For instance, it indicates an intention to eliminate non-tariff barriers for American agricultural products, including quotas, as well as improving market access generally for US goods and services by eliminating unfair subsidies, while at the same time maintaining its own “Buy American” rules. The US also calls for the abolition of Chapter 19 of NAFTA, which lays down rules for the investigation of national decisions regarding antidumping and countervailing duties by a special binational group.

In contrast to the US, Canada has not published an official list of priorities concerning the NAFTA renegotiations. In mid-August, the Foreign Affairs Minister however outlined the core objectives of the upcoming negotiations in a series of speeches.  Importantly, Minister Freeland confirmed that the elimination of Chapter 19 is not negotiable for Canada.  This chapter is indeed particularly important for Canada. It is thanks to its provisions that Canada prevailed in a number of disputes in the softwood lumber conflict. Chapter 19 was also a crucial element for the country during the negotiations leading to the signature of the NAFTA.  Minister Freeland has also indicated that Canada would seek to reform the investor-State dispute settlement provisions found in Chapter 11 of the treaty.

The NAFTA renegotiations therefore promise to be long and hard. After a first round of negotiations which took place in Washington D.C. in mid-August, President Trump repeated his threat to terminate the agreement altogether. A second round of negotiations took place in Mexico in early September, during which the US is reported to have circulated a plan to make the dispute settlement mechanism of Chapter 11 opt-in, despite the fact that Chapter 11 is not listed on the US' list of priorities for the negotiations. There will be additional rounds of negotiations in Canada at the end of September, and in the US in October.

The CETA will apply provisionally as of 21 September 2017

On 8 July 2017, Prime Minister Justin Trudeau and the President of the European Commission, Jean-Claude Juncker, announced that the CETA will be applied provisionally as of 21 September 2017.

CETA is a free-trade agreement that was struck between Canada and the EU after many long and difficult years of negotiations, which began in 2009. It is a historical and progressive agreement, having an ambitious scope that exceeds even that of NAFTA. The chief advantages of the agreement for Canadian businesses include:

•          the elimination of 98% of EU tariff lines, which will be dutyfree for Canadian merchandise (a further 1% will also be progressively eliminated);

•          the liberalisation of trade for services, which will receive nondiscriminatory treatment and benefit from rules for access to markets, including financial markets;

•          the creation of additional safeguards relating to intellectual property;

•          the creation of rules permitting temporary admission into the EU for businesspeople;

•          additional protection for Canadian investments in the EU.

Much like NAFTA, CETA includes several provisions regarding the protection of Canadian investments in Europe (and vice versa), as well as what has become a controversial dispute resolution mechanism which allows investors to assert their rights directly against the state in which they invest. In February 2016, the international arbitration system that was initially provided in the treaty was replaced by a permanent multilateral tribunal in hopes of assuaging detractors who criticized the treaty’s private justice apparatus. The proposed modification to the dispute resolution mechanism nevertheless remains the object of public debate.  Belgium has in fact just called on the Court of Justice of the EU to decide if the new investment court system is consistent with EU law.

The provisional application of CETA means that the vast majority of its provisions – approximately 95% – will come into force this fall, which will allow Canadian businesses to take full advantage of the new trade possibilities that the agreement offers. Certain provisions are however excluded from the provisional application of CETA, notably the majority of the provisions regarding investment set out in Chapter 8 of the treaty (including the dispute resolution mechanism mentioned above) as well as certain other provisions of Chapter 13 regarding financial services insofar as they relate to investment protection and investor-state dispute resolution.

The provisional application of the CETA represents an important step for transatlantic trade, but the road ahead is cobbled with obstacles and uncertainty. Notably, the treaty must yet be ratified by all individual Member States of the European Union, and the ratification process, much like the NAFTA renegotiations, is likely to be long and hard.

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[1] Pierre Elliott Trudeau, at the time Prime Minister of Canada, coined this phrase during an impassioned speech before the Nation Press Club in Washington DC, on 25 March 1969. An excerpt of Mr. Trudeau’s well-known speech as well as the reaction from his American hosts can be seen on the CBC website: http://www.cbc.ca/player/play/1797537698.