It’s no surprise that the business community strongly supports—and is pretty excited about—the conclusion, in principle, of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. The deal promises Canadian exporters preferred access to a market of 500 million consumers and the world’s largest economy. Indeed, Canadian companies are in the sweet spot now, having secured preferred trade and investment access to both the EU and U.S. markets.
Whether you’re a service provider, manufacturer, processor or distributor considering exporting goods and/or services to the EU or investing in EU operations, there’s likely going to be something for you in this deal. (A summary of the deal can be found here Canada and the European Union Agree to Historic Trade and Investment Deal.)
In addition to opportunities, however, CETA may also create challenges that, should you be unaware of them, could trip you up.
Three areas to watch carefully
At the moment, official information on CETA is long on promises and short on details. While awaiting word on further developments, here are three areas that Canadian SMEs should be keeping a close eye on:
1. Make sure you really do qualify for preferential access to EU markets
According to the federal government, 98% of EU tariff lines will be duty-free as soon as CETA comes into force, with much of the balance phased out over a period of up to seven years.
But just because your product is sourced from, or made in, Canada doesn’t necessarily mean that it will qualify for duty-free treatment when you export to the EU. This depends on satisfying the “rules of origin,” which differ depending on the product. Those rules are relatively straightforward for goods that are grown or extracted in Canada, such as wheat or crude oil. But for processed or manufactured items, wading through those rules can be a very complicated task.
If your supply chain is integrated with our NAFTA partners in the United States and Mexico and/or suppliers in Asia, your product may contain significant non-Canadian content. If the CETA rules of origin are similar to those under NAFTA, the foreign components may be subject to a tariff shift requirement, and/or you may be required to meet a minimum level of Canadian content in order to access the EU duty-free. For example, unofficial reports indicate that, in order to qualify for preferential access to the EU automotive market (i.e., zero tariffs on cars and parts, which are currently 5% and 10% respectively), Canadian content will have to be in excess of 50%.
2. Beware: technical regulations can impede market access
The elimination of tariffs is only one part of a trade agreement’s benefits. Over the past several decades, Canada and other countries, including EU members and the United States, have been steadily reducing customs duties applicable to a broad range of imported goods. But while tariffs have been scaled back, governments have found other ways to impede market access by using what are often referred to as non-tariff barriers or NTBs.
Technical regulations such as product, performance and safety standards as well as marking, packaging and labelling requirements can all be used as NTBs. A case in point is the ongoing dispute between Canada and the EU involving the latter’s Fuel Quality Directive, which assigns a higher emissions rating to fuel derived from oil extracted from the Alberta oil sands compared to fuel from other sources.
The Canadian government claims that CETA will address this concern so that exporters need only meet one set of requirements for goods sold in both markets. It is also anticipated that businesses will be subjected to a single testing and certification procedure that will be acceptable to Canada and the EU.
3. Will SMEs have access to EU government purchasing contracts?
Governments are among the largest purchasers of goods and services and often favour domestic suppliers to the detriment or exclusion of foreign businesses.
Under CETA, EU suppliers will have equal access to procurement by the Canadian federal government as well as provincial and local governments. This is estimated to amount to well over $100 billion per year.
In exchange, Canadian companies will be getting access to the EU’s $2.7 trillion government purchasing market, including contracts with large EU institutions, the 28-member state governments, and the many regional and local governments within the EU countries as well as their utilities.
Keep in mind, though, that these commitments will not apply to government contracts below certain dollar values, which are expected to range from about $200,000 to $8 million depending on the sector. We can also expect that some sectors will be excluded, namely defence and other institutions related to national security operations, cultural industries, social services, health, education, financial services, and Aboriginal businesses.
More to come
Officials are still working through the fine print, and CETA has yet to be approved by the provinces and EU members, as well as subjected to a thorough legal scrub. This could take two years—or longer.
Let’s hope the United States doesn’t land a deal first. Last June, the U.S. began negotiations with the EU on the Transatlantic Trade and Investment Partnership, touted as the biggest trade deal in the world. Canadian exporters be warned: it is not inconceivable that the U.S.-EU deal could come into force before ours does.
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John Boscariol is a partner and Leader of the International Trade and Investment Law Group at McCarthy TÃ©trault LLP and advises on enforcement and compliance matters related to cross-border trade and investment regulation, including international trade and investment agreements, anti-corruption, export and technology transfer controls and economic sanctions measures. He is Chair of the American Bar Association Section of International Law’s Public Law Division and CoChair of the Canadian Association of Importers and Exporters’ Export Committee.