Strategy

Free trade: Why Canada needs Europe

Yes, Europe is in shambles. But a new trade deal with the EU holds promise that China and other emerging markets just can’t match.

An employees passes finished wind turbine blades at the Siemens AG plant in Aalborg, Denmark (Photo: Timothy Fadek/Bloomberg/Getty)

The West is so last century. The future, everybody knows, belongs to the emerging economies. Nothing can stop the global exchange of power. The smartest trade policy, therefore, seeks to exploit growth in the fast-rising BRIC countries: Brazil, Russia, India and, most important, China. A trade agreement with Europe? That’s old-world thinking.

This may be the consensus about where we’re heading, but the reality today is less stark. The changes afoot are more akin to a continental drift than a seismic convulsion, and Europe, despite its ongoing existential crisis, still very much matters. With a $17-trillion economy and some 500 million of the world’s wealthiest consumers, the European Union is the largest single common market, foreign investor and trader, according to the Department of Foreign Affairs and International Trade. “It’s not a fast-growing market, but it’s an enormous market that imports mountains of goods and services,” says Milos Barutciski, co-chair of the international trade and investment practice at law firm Bennett Jones. “That’s not going to stop overnight even if Europe collapses.”

The landmark Comprehensive Economic and Trade Agreement (CETA), now in the late stages of negotiation between Canada and the EU, promises to advance the commercial links between the two regions in ways that go beyond most of Canada’s free-trade deals. For starters, CETA would reduce Canada’s dependence on its resource sector for exports and instead promote its service expertise in lucrative areas such as finance and technology. It could also give Canadian companies access to sophisticated global supply chains forged by European multinationals, as well as lift this country’s international profile.

Like NAFTA before it, CETA is in part intended to improve trade flow by reducing traditional barriers like tariffs. Nova Scotia’s Clearwater Seafoods, which earns almost 40% of its revenues from exports to Europe, faces tariffs as high as 20% on its lobster, sea scallops and shrimp, which limit its profitability and competitiveness overseas. “Europe has got one of the highest consumption rates of seafood globally,” says Clearwater spokeswoman Christine Penney, but she adds, “it’s not a level playing field.”

It’s synchronizing and updating regulations that guide intellectual property, labour mobility and technical standards, however, that would be the most significant breakthroughs for the two trade partners. “The rules that govern investment and participation in the European market are far more important than getting tariff elimination,” says Jason Langrish, executive director of the Canada Europe Roundtable for Business. He points out that 75% of the current $100-billion trading relationship between the EU and Canada is in services such as finance, engineering and technology. Differences in regulations for professional qualifications, public procurement and foreign investment all serve as de facto barriers to trade in services—a component increasingly central to western economies.

Montreal-based IT services giant CGI Group has much riding on CETA’s completion after its recent $2.8-billion acquisition of British rival Logica. The pact’s intellectual property measures will protect CGI’s proprietary technology, says company spokesman Lorne Gorber, while the enhanced mobility of skilled labour would allow it to more easily move workers across the Atlantic. For CGI, the takeover amounts to a major bet on the European market, which will now account for almost 60% of its sales. “Longer term, it’d be hard to argue that Europe’s just going to sink into the ocean and not spend any money on technology,” says Gorber.

Closer links with the EU could also help Canadian companies tap world-class supply chains created by European giants. “There are some very significant trade linkages inside of Europe one would be foolish not to think about,” says Peter Hall, chief economist at Export Development Canada. A company like Siemens, the German electronics conglomerate, for example, has operations in more than 190 countries. With CETA, Canadian companies could more easily win contracts with major European multinationals, contributing to supply chains that extend all over the world, and ultimately reaching emerging markets.

The focus on Europe, at a time when the region is mired in financial crisis, marks a change in direction for Canadian trade policy. Over the past decade, as Ottawa realized the need to diversify the country’s exports away from the United States, all eyes at first looked to the developing world. “There [was] some concern that we did not jump on to China’s potential at the right time, and so there’s a lot of desire to make up for lost time,” Hall says. Besides, Canada’s abundance of natural wealth positioned it well to capitalize on the resource-intensive early stages of development in emerging economies.

Prime Minister Stephen Harper’s free-trade campaign produced deals with Colombia and Peru, and he successfully lobbied for a place among Trans-Pacific Partnership negotiating countries, which many believe will one day include China. Yet for all the focus on China, its $7-trillion economy is much less than half the size of the European Union’s. “If we get 2% of Europe, we’re better off than if we get 5% of China,” Langrish says. And while emerging markets have driven global growth since the financial crisis, China now faces a slowdown, and confidence in India’s economy is on the wane.

Europe also promises relief from the persistent challenges Canadian companies face in the developing world. “Just because the growth rates are high in East Asian countries doesn’t mean you can strike a meaningful deal with them,” Langrish says. “And it doesn’t necessarily mean you can participate in their economy in a way you might expect.” China, for example, still imposes many restrictions on foreign capital, and its currency regime restricts companies from trading in the yuan. The World Bank’s ranking of countries based on the ease of doing business puts China 91st, Russia 120th, Brazil 126th and India 132nd. By contrast, 12 European nations place in the top 25. “Emerging markets have one thing in common,” Barutciski says: “instability.”

The same, of course, can be said for much of Europe these days. And even CETA may not persuade some Canadian businesses to take the risk. “I’ve heard stories of companies hedging their bets with some of the eurozone economies,” Langrish says, explaining that some have set up accounts to pay their employees in euros should their home country exit the eurozone and reintroduce its old currency. Still, most analysts don’t believe that the greatest fears—a currency collapse, a major sovereign default, a banking meltdown or the dissolution of the eurozone monetary bloc—will come to pass.

A faction of Canadians opposing CETA argues the real risks of the trade agreement lie within Canada’s borders. Maude Barlow, national chairwoman of the Council of Canadians, has called the deal a “resource grab” by a faltering EU that’s resisting its own economic downfall. She warns of the proposed changes to Canada’s intellectual-property protection regime and a resulting rise in Canadian pharmaceutical prices as a result. Others worry about the deal’s threat to Canada’s supply-management system for dairy and poultry farmers.

But there hasn’t been a groundswell of opposition on the level that greeted NAFTA in the late 1980s. Then, the prevailing worries concerned a loss of sovereignty to the United States, fears Canadians don’t harbour about Europe. Three years after CETA negotiations began, Harper hopes to see the talks conclude this year. After that, the ratification process will likely take until the end of 2014.

Beyond the agreement’s immediate commercial advantages, getting it signed now will offer Canada a long-term geopolitical advantage, Langrish argues—one that could make CETA a “once-in-a-generation” pact. As the centre of economic power continues eastward, the West will likely need to shore up its alliances to stay competitive. “If there’s not a NAFTA-EU free-trade area within the next 20 years, [the West] is in trouble,” Langrish says. “Then China could very well set the terms of trade.” Having engaged the EU first, Canada has ensured its influence over the terms of any larger future deal. “If we wait for the EU and the U.S. to negotiate an agreement,” says Langrish, “they’re not going to consult with us.”

This is part 9 of the Business Without Borders series. It’s an ongoing project chronicling the challenges, the opportunities, the strategies and the models for Canada as it transforms from resource giant to global trading powerhouse. For more information, research and stories on Business without Borders, please visit www.bwob.ca and join the community working to create a new future for Canadian business.