Reports suggest free trade deal with European Union may be over-hyped

OTTAWA – Two new independent reports are playing down the benefits of the recently concluded free trade deal with Europe, casting doubts on the Harper government’s contention that it is key to Canada’s economic prosperity.

The reports from Capital Economics and, most recently, the Royal Bank, predict the agreement, called CETA, will be a net benefit for Canada but that the gains are still too early to determine, or will be modest.

“It’s political so there’s lots of hype around the deal,” said David Madani, chief economist with the private-sector research firm Capital Economics in Toronto.

“Most people understand that Canada’s trade with the EU (European Union) is small so it’s not going to have a huge benefit. Assuming it is ratified, it’ll benefit Canada but the benefit will be very small.”

The government continues to quote a joint study on the impact, conducted five years ago, projecting a possible $12 billion boost to economic activity in Canada — $16 billion for the EU — and the creation of about 80,000 jobs.

In a response, a spokesman for Trade Minister Ed Fast said that, if anything, the joint study underestimated the gains.

“We believe that it’s the current numbers that are modest, and that the benefits of expanding the export opportunities for Canadian businesses with this preferential access to the lucrative European Union market will be even more widespread,” said Rudy Husny, Fast’s press secretary.

RBC economist Laura Cooper says it is difficult to verify the claims, given the lack of details in what has been announced.

She concludes, in a five-page analysis issued to clients on Wednesday, that while there are potential benefits for the economy down the road, “there will be little noticeable economic impact for Canada over the short-term.”

A big reason for tempering expectations, say the reports, is that current trade volumes between Canada and the EU are modest. In 2012, Canadian exports totalled about $463 billion, but only $41 billion went to the EU, so even a 20 per cent boost to the volume will be a modest increase in the overall economies of both.

As well, several key sectors may not be able to realize large gains from the deal, the reports say.

For instance, RBC points out that 45 per cent of Canadian exports to the European Union last year were related to resources. As most raw materials are already tariff free, the deal will make minimal difference, it concludes.

Madani says another mismatch is the auto sector, where Canada obtained preferential treatment to ship 100,000 vehicles across the Atlantic — more than tenfold current shipments — in exchange for dropping a 6.2 per cent tariff on EU cars.

The deal will neither lead to a Canadian auto bonanza nor disaster for domestic producers, he says, although consumers here might eventually save on imported Audis, BMWs and Mercedes Benzes.

“Most passenger vehicles imported from Europe are for the luxury segment of the market (and won’t compete directly with) Canada’s domestically produced vehicles such as the Chevrolet Impala, Dodge Charger, Honda Civic or Toyota Corolla,” Madani argues. “In addition, the various minivans and light trucks assembled in Canada are designed and built specifically for North America.”

Some sectors will benefit, the reports state. European tariffs on agricultural products average 13.9 per cent, and 11 per cent on seafood products — so expect higher shipments of meat, pork, grains, shrimp and lobster as Canadian exporters take advantage of a large and rich market.

But these exports represent a slice of an already small total, and the reports note that Canadian cheese and wine producers will face stiffer competition.

Other economists, including Jim Stanford, with Unifor, and Erin Weir, with the United Steelworkers, have also challenged the claims of big gains, particularly the 80,000 job creation estimate often cited by government ministers.

Weir points out that the five-year-old study did not estimate a number for additional jobs. Given that Canada has a trade deficit with Europe, CETA has the potential to displace more jobs than it creates, he said.

Industry groups have generally backed the government in describing CETA as a win for Canada. Jayson Myers of the Canadian Manufacturers and Exporters has said the benefits could trump the deficits, but only if Canadian firms take advantage of the additional access in Europe.

The deal, if ratified, is unlikely to come into effect until at least 2015 and will take another seven years to fully phase in, although most of the tariff barriers are designed to fall upon implementation.