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Canada-EU trade negotiations: Structural and power imbalances in the way of a fair deal

Canada and the European Union are more than a year into an ambitious but unlikely trade liberalization experiment called the Comprehensive Economic and Trade Agreement (CETA). It is ambitious because it includes Canadian provinces and territories, which have constitutional jurisdiction in several of the negotiating areas important to the EU, notably public procurement. But the deal is controversial, and possibly unlikely, for the same reason. The structural and power imbalances running counter to public interests are too numerous to make CETA worth the effort.

With wildly different offensive and defensive provincial-territorial trade interests, a truly comprehensive agreement with the EU – one that can satisfy the export interests of Alberta and the west (beef, pork, grain), Ontario and Quebec (business services, manufacturing), and the Atlantic region (fish and fish products) – will require a generous procurement and services offer from Canada in return. This offer, which has been delayed once and is now expected to go to the EU at the end of March, is almost guaranteed to be too generous for the Canadian public, for municipal governments, and possibly for some provinces to accept.

There are roadblocks in the EU also. Before provincial-territorial procurement, services and investment offers can be tabled, EU member states must agree on a Canadian request to use a negative list for services commitments. These states are accustomed to a positive list approach, meaning only those services listed are subject to trade disciplines, and will not switch casually to a process where everything is committed unless otherwise stated. Germany, Finland and others have said they will expect Canada to give a little more for any concession on services. The Council of the EU must also approve a new mandate on investment for the EU that will allow the EU Commission to pursue a commercial arbitration system within CETA. These and other delays may take the wind out of CETA’s sails, according to Canada’s lead CETA negotiator.

Federal, provincial and territorial negotiators outnumber their EU counterparts by at least five to one. But there remains both a structural and an obvious power imbalance in the negotiations that will hurt Canadian workers, farmers, artists and municipalities when, or if, CETA is signed in late 2011. A final draft sustainability impact assessment proves the far greater gains are to European companies, with a substantial amount of pain to the Canadian economy. A final hurdle for the provinces is that while they may seek rational market access gains in the EU, the more ideological Conservative government will sign a deal at any cost. Once that happens, it will still be possible for the provinces to pull back from their CETA commitments. Whether this comes at a high political cost will depend on public antipathy and opposition to the deal.

The provincial gambit

The CETA negotiations hinge on the ambition of the provinces. They also began with the provinces in 2007, with Quebec playing a leading role. It was late that year that Premier Jean Charest, at the urging of well-connected corporate elites, decided to ask EU business leaders and political officials back to the negotiating table. Discussions toward a Canada-EU Trade and Investment Enhancement Agreement had ended in failure in 2006. The EU blames provincial intransigence but with European eyes on the WTO ministerial in Hong Kong that year, it is not fair to put all the blame on Canada. Still, Charest, and later the Ontario and Manitoba premiers and trade ministers, had to convince the EU that the provinces meant business this time. To help in this lobbying project, they had the Canada-Europe Roundtable for Business (CERT) – the major business association sponsoring the CETA negotiations – at their backs.

The EU agreed to a new round of negotiations, this time on a more ambitious free trade agreement. At the EU’s request, Canadian provincial and territorial governments were included at the negotiating tables. Despite its attachment to the term “free trade”,  Canada agreed to call this an “economic partnership agreement,” or CEPA, before settling on the even more benign sounding CETA during the May 2009 Canada-EU Summit in Prague, Czech Republic. More out of a sense of intrigue, or not wanting to be left out, the other provinces and territories agreed to take part. And at their Council of the Federation meeting that year in Regina, they also agreed to be bound by the resulting agreement. It was a leap of faith for sub-national governments, which are by no means unified on trade policy.

Since talks began in October 2009, there have been six rounds of negotiations. (The next will take place in Ottawa, April 11-15.) The provinces and territories have the option to participate in about six of the dozen or so tables. These include the areas affecting their jurisdiction: government procurement, investment and services, technical barriers to trade, labour, environment, monopolies and state enterprises, and regulatory cooperation. Though “participation” may be stretching the term – it is apparently a spectator sport summed up in the position of Newfoundland and Labrador: we are observing but not negotiating the CETA. For obvious reasons, some provinces have a greater capacity to participate than others. Ontario had five trade officials at the last round of talks in Brussels (January 11-15) compared with two from Manitoba, though these numbers were lower than in previous rounds. During the fifth round, for example, there were more than 60 provincial and territorial officials present in Ottawa.

Until now, the goal of the EU and Canada was to sort out the architecture of the agreement. This was a matter of bridging the NAFTA and EU trade models – a semantic exercise in part, but with legal consequences that will need to be studied once a more complete agreement is made public. Two versions (January and October 2010) of the bracketed CETA text have been made public by the Trade Justice Network, with the procurement and intellectual property chapters eliciting considerable controversy in Canada. From these texts, and from post-negotiating round briefings from the Department of Foreign Affairs and International Trade, it is clear to many observers the EU requests of Canada are far more substantive, and the gains to EU companies far more impressive, than what Canada is asking.
 
The trade-offs are also counter-intuitive in that they are cross-sectional. For committing Canadian municipalities, utilities, provincial energy and transit departments, among other sub-federal sectors, to imposing procurement restrictions, Canada is asking that the EU adopt a negative list approach on services. There is no expectation that a reciprocal procurement offer can be met. There are potential gains here for Canadian business services firms (architecture, engineering, etc.) if a negative list is adopted for Mode 4 services (temporary access for professionals) but this is controversial in the UK and among other big players. If EU member states at the Council of the EU accept this proposal they will expect something in return to make it worth their while.
 
On paper what does this mean? According to the latest draft “sustainability impact assessment” of CETA, which is being conducted by a private firm on behalf of the EU, it means Canadian firms, including small- and medium-sized enterprises and Aboriginal firms, would lose more contracts to large EU-based competitors:

It is unlikely that Canadians will significantly increase their market share in the EU [government procurement] market and may lose some of their own GP market share to EU subsidiaries in Canada as a result of CETA. Any gains Canada would make in the EU GP market would likely be comparatively less. Still, Canada may increase the number of GP contracts it wins from the EU, particularly if they become more competitive with US suppliers, and depending on the size of the contracts this could provide potentially noteworthy benefits for the Canadian companies winning such contracts. [1]

The same trade-off is expected in other important economic sectors in Canada. Comprehensive agricultural commitments, for example, are predicted by the SIA document to lead to greater levels of urbanization in Canada and the EU as farmers leave the land to take service sector jobs. In fact CETA is expected to increase concentration across farming sectors with the aim of increasing exports and reducing consumer costs (not increasing Canada’s food sovereignty or encouraging localization). Removing restrictions on sensitive products, such as dairy, will “significantly benefit EU producers while resulting in decreases in output and domestic market share for Canadian producers," says the report. In the fisheries negotiations, a high level of ambition would reduce high EU tariffs on Canadian imports but only in exchange for the elimination of foreign ownership restrictions on processing and port rights. Increasing Canada’s access to the EU market for beverages, notably spirits and beer, would require dismantling or at least undermining the role of provincial liquor boards that support local growers, distillers and vineyards in provinces such as Quebec and Ontario.

The Canadian government is not conducting any form of sustainability assessment for the impact of CETA on jobs as well as the environment. The federal government did undertake an environmental assessment of CETA, which is still being finalized. Once an initial assessment is complete it will go to the provinces and territories for input prior to public release. With the exception of this one environmental study, Canadian officials have relied on EU studies, based on research by European economists, to assess the risks and benefits of CETA. The federal government’s adherence to the $12-billion projection for GDP gains from CETA is curious (to say the least) considering recent economic analyses debunking both the results and the methodology of the EU-produced joint report in 2008.

As mentioned earlier, the market access requests in CETA vary from province to province. Quebec and Ontario are singled out in media reports for not showing enough ambition on procurement, supply management and liquor boards. Western provinces on the other hand have liberalized procurement at thresholds far below what the EU is asking. This happened through the New West Partnership Agreement, an extension of the 2007 Trade, Investment and Labour Mobility Agreement that also includes Saskatchewan. But these much more “pro-trade” provinces are asking the moon of the EU in the form of reductions to technical barriers to trade on food exports. In other words, market access for genetically modified crops (GMOs) and hormone-treated beef. The EU has so far refused to include wording on GMOs.

Provincial negotiators say there is no animosity as a result of this imbalance in provincial trade positions. But there has clearly been pressure from the federal government, in media articles and behind the scenes, for the provinces and territories to pull together a satisfying offer on procurement, services and investment for EU negotiators. Interprovincial rivalry is also being stoked by CERT, the transatlantic business lobby representing many non-Canadian and non-European multinationals such as Monsanto and Vale, which would gain from a deregulated environment on both continents.

Structural barriers in the EU

While it has taken some time for the provinces and territories to come up with their offers in all areas, not just on procurement and services, the current delays in the CETA negotiations are due to EU political processes. In December, the EU Commission sent a letter to member states requesting permission to change the negotiating mandate to allow the EU to include an investor-to-state dispute mechanism in CETA. The template would be Chapter 11 of the North American Free Trade Agreement (NAFTA). There is also a request with the Council of the EU’s trade policy committee to use a negative list approach to services commitments in CETA. Debate on these two important changes continues among member states.

Many European countries have existing bilateral investment deals with each other and with international trading partners. The Lisbon Treaty, which came into effect in late 2009, put these agreements in limbo as it handed the Commission sole competence over investment. A new continent-wide investment policy is expected to be voted on by the EU parliament in March or April. European civil society is widely opposed to allowing the EU to negotiate an investor-state mechanism in its free trade agreements for several reasons: it is not transparent; it grants foreign companies more rights than European residents to challenge government policy before trade panels, and; it poses a threat to environmental and public health policy while putting a chill on other public interest measures. These same groups, as well as most EU political parties, will insist that investment policy be sorted out democratically in parliament before the Commission can move ahead with a broad investment chapter in the Canadian and Indian trade negotiations.

The Council of the EU, on the other hand, appears happy to grant the Commission its investment chapter and its negative services list as long as the Commission can answer all member state questions. In fact, Germany and several other countries feel the NAFTA model for protecting investment does not go far enough. These countries could block Canadian requests for an investor-to-state process but for reasons very different than European and Canadian civil society groups are raising. On services, the Council of the EU has agreed to use a negative list on Mode 3 (cross-border trade in services) but not yet for Modes 1 and 2. There may be no commitments at all on the movement of business professionals (Mode 4).

The Council of the EU is expected to agree to a negative list on services in March, paving the way for an exchange of offers with the federal, provincial and territorial governments at the end of that month. These offers would allow CETA negotiations to continue as planned during the April round of negotiations in Ottawa, which is expected to drag on past April 15.

A deal at any cost

According to Canada’s lead negotiator, it is expected that enough signalling would happen prior to the end of March that no party would be surprised by the other’s offers. There is the option of removing provincial procurement or services offers from the table after this point if the EU counter-offer is insubstantial. In meetings over the past six months with provincial negotiating teams, Canadian civil society groups were told the provinces needed to gauge the quality of market access before moving ahead on procurement in particular.

It is dishonest to claim there are anything but concessions on procurement for Canada. Committed government entities will lose the right to put local goods or hiring preferences on public purchases over the defined threshold. While the federal government and supporters of CETA claim 80 per cent of public tenders fall under these thresholds, in Ontario at least 80 per cent of the total value of government procurement is locked in that 20 per cent of covered tenders. That is a lot of money to transfer into the profit margins of European multinationals, and on the large projects where local preferences make the most difference in terms of job creation.

Whether or not the CETA package seems fair or not to the provinces and territories, it will be difficult, though not impossible, for them to pull out of the negotiations. This was likely the goal of the EU when it insisted they be at the table. Engagement leads to consent. Consequently, this may explain the regular briefings with Canadian civil society and academics following each negotiating round. The government cannot legitimately claim it has consulted with Canadians about the scope of this European agreement, but it has already tried to do so by subtly changing the description of its briefing after the fifth round of negotiations to a “consultation.”  (The Trade Justice Network wrote to federal Trade Minister Peter Van Loan early in the process to state it has not been consulted, despite the briefings.)

Still, as CETA will require legislative and regulatory changes at the sub-federal level to bring policy in line with new trade commitments, there is the possibility that some existing governments, and new governments following important provincial elections this year, will reverse course. Despite efforts from the Bloc Québécois and the NDP, trade policy at the federal level rarely gets the sober second thought it deserves. Not only the Conservative minority government but also, for the most part, the Liberals and the federal government bureaucracy are devout free-traders. In the words of Minister Van Loan:

Philosophically, we believe that Canada as a country is based on trade. The more free-trade agreements we can have in place, the better off we are… We don’t necessarily look at (only) what we want to get in a marketplace but rather at the notion that freer trade is better on all fronts. [2]

The provincial gambit is that ideology aside there may still be rational economic gains worth the considerable pain that an ambitious, comprehensive agreement with the EU promises. As we get nearer to the deal’s expected completion date of late 2011, it becomes obvious the political and structural imbalances in CETA are working against the provinces and territories on almost all fronts. A recent report showing the CETA intellectual property chapter could add as much as $2.8 billion to the cost of drugs, burdening already troubled provincial health systems, will certainly increase public distrust of the negotiations. The very real danger for the public, farmers, workers and municipalities is that in reaching for the moon, Canada’s federal, provincial and territorial governments will lose sight of the ground on which we must but continually lose the ability to build strong, sustainable communities and economies.

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[1]  A Trade SIA relating to the Negotiation of a Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, Final Interim Report, December 2010, Pg. 157
[2]  Quoted in Jacobs, Donna. “Canada-Europe: Peter Van Loan on the next big prize,” Diplomat & International Canada, Fall 10 (Oct-Dec), Pg. 25