The Canada-EU Comprehensive Economic and Trade Agreement and the ACP EPA: A Common Fate?
After more than five years of negotiations, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU was concluded on the 5th August and signed on the 26th September 2014. The agreement will now go for legal scrubbing and is expected to be implemented by both parties in 2016. CETA is expected to boost the Canadian economy by 20% in bilateral trade and a C$12-bn (about €8.5 bn) increase in annual GDP, whereas from the EU perspective the agreement will increase total exports to Canada to an estimated 24.3% or €17 bn.
EPA as precursor
The impact of CETA on the Economic Partnership Agreement (EPA) negotiations, conclusion and implementation will certainly be felt in different ways. Canada, though a G8 country, is richly endowed in natural resources like many African countries. From 2009 to 2013 the share of commodities in Canada’s exports was consistently over 60% with energy products topping the list followed by metals and minerals, forestry and wood pulps. Canada is also a big producer and exporter of agricultural products such as meat, oilseed, farm products and wheat/flour. Currently around 73% of Canadian goods exports go to the US; it is expected that some exports will now be diverted to the EU as a result of CETA. It remains to be seen how CETA market access will affect EPA countries as Canada produces or exports either the same or directly substitutable/competitive products but, more importantly, the impact of CETA will mainly be felt on the rules side.
The coverage of CETA makes it one of the most complete agreements ever signed by the parties. Indeed, it goes beyond the classical free trade area on trade in goods and services as it captures issues related to investment protection, environment, government procurement, labour and many “dialogues” on different issues like technology, raw materials or forestry. In all there are more than 40 items that are covered in the agreement. To a great extent the EPA negotiations between the African, Caribbean and Pacific (ACP) and the EU, as provided in the Cotonou Partnership Agreement (June 2000) and formally started in 2002, have inspired and shaped many aspects of trade and economic negotiations that we can see in CETA today, i.e. an all-encompassing economic and trade agreement that goes beyond market access and includes rules, domestic taxes, intellectual property rights (IPR) or competition. However, as compared to CETA, the EPA did not proceed to its full completion, except for the Caribbean Forum (CARIFORUM), and is still considered to be an Interim EPA limited to trade and some trade related aspects in goods. Based on the outcome of CETA in terms of coverage and rules, the burning question is: have the ACP lost the advantage of first movers, i.e. setting the rules and are now “cornered” by a sort of “rule of precedence” set up by CETA?
A most contentious rule: Exports restrictions
One of the most contentious points in the EPA negotiations has been the application of export restrictions thus taxes. In short, export taxes are usually applied to commodities in an attempt to divert supply of goods away from the export market and into the domestic market, thus driving the price up internationally and down locally while also favouring local transformation. In all its free trade agreements (FTAs) the EU systematically asks for the removal of export taxes as it sees it as an impediment to the competitiveness of its industries and access to raw materials. In CETA the issue of export restrictions became contentious to the point that there were uncertainties with regard to the effective implementation of the agreement.
Under the Canadian federal system, the federal government negotiates and ratifies all international treaties. However, as provided in article 92 of the Constitutional law of 1867, Provinces retain regulatory powers for a number of issues including those related to trade such as provincial state owned enterprise, government procurement or investments regulations. In a system of co-sovereignty, a large part of the implementation of CETA would fall under provincial jurisdiction. Newfoundland and Labrador and Quebec have put in place regulations, known as minimum processing requirements (MPR), that favour domestic processing by barring the export of unprocessed fish and seafood without approval. Exemptions can be granted to unprocessed export products when they can fetch a higher price than those that are processed locally.
This type of provisions may be in conflict with certain provisions included in Canada’s trade agreements, such as provisions requiring parties to treat foreign nationals and locals equally as well as provisions prohibiting the restriction of imports and exports except if they have been excluded.
In the CETA negotiations, the EU has made it clear that it would not accept any export restrictions but if it has to agree to such provisions, it would review its market access offer. The federal government had to convince the province of Newfoundland and Labrador to abandon its MPR absent of which the EU would have withdrawn its market access offer on seafood products. Finally, after intense negotiations, the federal government agreed to a C$400 million (about €284 million) package for the province of Newfoundland and Labrador and, in addition, Canadian negotiators were able to get a phase out period for the MPR, i.e. an exception to the application of the import and export restrictions in the national treatment and market access chapter of CETA.
Are there any lessons from the Canadian experience for the ACP on EPA concerning export taxes/restrictions?
Lesson 1: Consistent EU approach on export restrictions
The application of export restrictions in trade and economic agreements in CETA shows a level of consistency in the EU’s approach to the question. Canada’s dilemma was to weigh the impact of maintaining export restrictions or gaining further market access to the EU. Ultimately, based on balance of interest, Canada decided to deal with MPR internally and negotiated an arrangement with the EU on this issue. It can be safely assumed that in any of its future trade and economic dealings with any partner the EU will ask for the inclusion of export restrictions articles in any agreements. The EU stance adopted in the EPA negotiations with the ACP is thus no exception. The Canadian experience gives us clues on how to mitigate some of its aspects while having a balanced approach.
Lesson 2: There is room for manoeuvre
CETA has the merit of showing that the EU has adjusted its export restrictions articles in different FTAs over time. A look at the FTAs applied by the EU over the years shows how this issue has evolved from being one of the clauses that must be in an agreement to an article that has become almost a redline in EU trade negotiations. In the EU-Mexico FTA (2000) there is scant reference to quantitative restrictions on imports and exports and measures having equivalent effect, in the EU South Korea (2011) and EU-Colombia (2013) FTAs it went a step further with the transposition of article XI of the General Agreement on Tariffs and Trade (GATT) 1994 in the agreements.
In the CARIFORUM EPA (2008), article 26 on prohibition of quantitative restrictions prohibits import and export restrictions and also limits fees and duties applicable to the approximate cost of services rendered and cannot impose taxation on imports or exports for fiscal purposes. The CARIFORUM provision seems to be a GATT plus commitment as article XI GATT 1994 allows the application duties and other charges for import and export restrictions. CETA shows another facet of export restrictions. It combines the application of article XI GATT 1994 and a carve-out period of three years for MPR. This shows that there is room for manoeuvre. Options range from application of article XI GATT 1994 plus specific exclusion, time bound exclusion or situational exclusion. The lesson here is that export restrictions, clumsily, presented both by the EU and ACP as a total prohibition of policy space with regards to the subject are more flexible than they seem to be.
Lesson 3: Need from a restructuring fund
As CETA negotiations proceeded, Canada knew that it had to deal with the MPR as it was deemed to be an export restriction and decided to compensate the province of Newfoundland and Labrador for giving up its MPR legislation. It is reasonable to think that developing countries with limited resources who are giving up a policy tool should be supported appropriately to deal with a situation which from a trade and economic perspective does not affect the EU but would negatively impact resource based economies in the ACP. For giving up export restrictions as a policy tool in the context of an EPA, ACP countries should seek the creation of a restructuring fund from the EU as the province of Newfoundland and Labrador sought from the Canadian federal government. This fund should be over and above the current amount of the 11th European Development Fund as it is for a specific purpose that results from the application of a precise provision of trade and economic agreement that will benefit only one party i.e. the EU; indeed, it is difficult to see how such a provision would benefit ACP EPA countries.
What other lessons to extract?
Valuable other lessons are to be learned from CETA negotiations for the ACP EPA negotiations. Beyond the issue of export restrictions, it also sheds some light on the direction trade and economic negotiations are heading. If ACP countries, when negotiating a more comprehensive EPA, can take advantage of innovative rules and technical issues that were discussed in CETA, there are subjects where the ACP countries have lost the advantage of being the first movers, i.e. sensitive subjects that are either not on the table or are in a rendez-vous clause, among which there are very controversial subjects such as investment/investor state dispute settlement (ISDS), access to government procurement, state owned enterprise etc.
Finally, from a trade perspective, the effect of CETA on ACP-EU trade relations (margin of preference) will be moderate; on the other hand the impact of the EU-US negotiations for the Transatlantic Trade and Investment Partnership (TTIP), by itself, will be minor as the respective trade patterns differ quite significantly. With the combination of CETA and TTIP, and the EU-Mexico FTA already in place, the EU would have economic and trade agreements with all North American Free Trade Agreement (NAFTA) countries. Collectively, Canada, the US and Mexico would present greater competition for the ACP countries in the EU. When the three FTAs are implemented there will be a beginning of harmonisation rules, the most noteworthy being rules of origin. CETA contains a provision on diagonal cumulation, the same is expected in TTIP and there is an understanding that it will also be applied in the EU-Mexico FTA. The fact that the three NAFTA countries will be able to cumulate between themselves export to EU while retaining originating status would open competition on the sourcing and supply side. In addition, Canada, the US and Mexico, as well as the EU, have FTAs with respectively Chile and Peru (Trans-Pacific Partnership – TPP - countries) thus creating a network of diagonal cumulation (at least for the NAFTA countries) hence more originating sourcing and supply opportunities that will have an impact on ACP countries.
Laurent Law represented Mauritius and the Eastern and Southern African (ESA) region in EPA negotiations and now works in the trade policy division of the Government of the Province of Nova Scotia, Canada.
The opinions expressed in this article are the author’s own and do not necessarily reflect the views and, should not be attributed to the Government of the Province of Nova Scotia.
An account on how the situation unfolded can be found on the Government of Newfoundland and Labrador website http://www.assembly.nl.ca/business/electronicdocuments/Canada-EUComprehensiveEconomicTradeAgreement-CETA.pdf
This article was published in GREAT insights Volume 3, Issue 9 (October/November 2014).