6 important and underrated pieces about Canada's recent free trade agreements

June 10, 2014

Free trade agreements are shaping our economic future. Chamber Policy Analyst Jaspreet Singh is taking a look at some of the underreported aspects of free trade. Are you passionate about policy? You might be interested in joining one of our committees and you can always join the conversation on Twitter at @Calgarychamber.

Canada loves free trade agreements (FTAs). With Canada negotiating and concluding a number of bilateral and multilateral FTAs of late, it is important the business community have a firm understanding of what these agreements really entail. Although the FTAs generate political hype, there are many important details that get lost in all the “FTA-talk”. Below is a list of the most important and underrated details about FTAs in Canada.

A background on FTAs and international trade in Canada

Over the course of a year, the Harper government announced a number of major bilateral FTAs, most notably the Comprehensive Economic Trade Agreement (CETA) with the EU and the Canadian-Korean FTA. Meanwhile, there are ongoing negotiations with countries including Singapore, India, and Japan, as well as the multilateral Trans-Pacific Partnership (TPP).

The importance of FTAs and facilitating international trade for the economy and business community cannot be overstated. Bank of Canada Governor Stephen Poloz maintains Canada’s continued economic recovery depends on a shift from domestic consumer spending to exports and investment. According to the World Bank, the export of goods and services made up 30% of Canada’s GDP in 2012. Despite positive signs since the beginning of2014, exports are still 5% below the pre-recession peak and Canadian companies continue to struggle with finding foreign customers. But the business community is not ignorant to the importance of free trade. A survey commissioned by shipping giant UPS and conducted by Leger in May found that 80% of Canadian businesses surveyed see global trade as critical to driving private sector competitiveness, with 84% saying market diversification is necessary.

One of the main aims of Comprehensive Economic Trade Agreement is to eliminate trade barriers and it removes 98% of EU import tariffs.

Learning about FTAs: Expert insights

Given the proliferation of FTAs and importance of international trade, the Calgary Chamber hosted two experts in the field to help us learn about these agreements and consider impacts on our members.

First, the Chamber’s Tax and Economic Affairs Committee (TEAC) hosted Daniel L. Kiselbach, a partner with Deloitte Tax Law specializing in customs, international trade, and tax. Daniel discussed the outcomes of the CETA and TPP negotiations for Canadian businesses.Second, Ambassador David Chatterson, the Canadian Ambassador to Korea held a private presentation for Chamber members. Based on his experiences in Korea, he discussed the Canada-Korea FTA and opportunities for Calgary-based businesses.

FTAs are lengthy and complex. Although there is significant conversation around FTAs by government departments and in the media, the information is general and broad. We hear about expected increases in GDP, but the little details hidden in these agreements that have large impacts on the operation of the FTAs are overlooked. Our experts highlighted these lesser known features and based on what we learned we have compiled a list of what we think are the most important FTA details.

1. CETA does not yet exist and it may take time before it is implemented

In fall 2013, Canada and the EU signed an agreement in principle, but the two sides still need to agree on the final text of CETA. Thus, there is no final document with agreed and approved text to implement and enforce. Ongoing negotiations over the final text have hit stumbling blocks which continue to hold CETA back from being brought into existence. Issues of contention include intellectual property rights, financial services, tariff rates, and investment protection. Until these issues are resolved, there will be no CETA document to implement and enforce.

The failure to seal the deal is disappointing because the agreement was expected to be completed by the first quarter of 2014. Instead it is dragging on. If negotiations continue to stall, there may be disillusionment and possible breakdown, similar to the Doha talks. This is especially threatening now that EU negotiators are more focused on their FTA with the US. Even with an agreement over text sometime soon, there is still a lengthy approval process that the EU Parliament must undergo before implementation.

2. The breadth of CETA: Not just exporting goods

Part of the excitement around CETA is that the agreement is more than just free trade. The CETA’s features expand beyond trading goods to address various international commerce issues. For instance, CETA includes provisions for services and investment, government procurement, intellectual property, dispute settlement, sustainable development, the environment, and immigration and labour. This broad scope means greater opportunities for a larger range of business sectors, allows business to forge various relationships with international partners, and enhances investment in new markets. It may also offer some relief for labour shortages in Canada (another issue of interest for the Chamber), by improving labour mobility and harmonizing professional qualifications.

3. Limits on our exports to the EU: Access Quotas

One of the main aims of CETA is to eliminate trade barriers and it removes 98% of EU import tariffs. However, despite the removal of duties and tariffs in some sectors, there are access quotas that will apply.

For instance, Canada’s auto industry will be able to sell up to 100 000 passenger vehicles tariff-free to EU customers every year. While this cap is above current export levels, it is still a restriction on trade. Any vehicles exported above this quota will be subject to tariff levels that are higher than the current tariffs and duties applied. Such access quotas stipulating duty-free quantities will also be applied in the Canadian beef and pork industries.

4. Canada’s diminished status in TPP negotiations

Canada was not an original partner of the TPP negotiations, and is often characterized as a late arriver. During negotiations, it is ideal to have a strong bargaining position. But because of a late arrival, Canada agreed to be bound by the terms that had already been discussed by the partners. Furthermore, Canada was given “second-tier” status, removing veto authority during future rounds of negotiations. This diminishes the effectiveness of Canada’s negotiators in achieving ideal outcomes for Canadian businesses.

Furthermore, while there are no definite benefits from participation in the TPP, the partnership is too strategically valuable for Canada not to participate. Exclusion could cause losses in market share to other member states, while inclusion allows Canada to safeguard existing trade relationships. Thus, while there may be no definitive gains, refusing to participate is an option with risks that Canada cannot afford to take.

5. TPP seeks to facilitate SME participation in trade

Canada’s economy relies heavily on the success of small and medium sized enterprises (SMEs). In TPP negotiations, the needs of SMEs in partner states have been expressly identified as a common area of interest and talks on incorporating a SME Chapter in the agreement were concluded in 2012. Canadian negotiators focused on ensuring the chapter addresses the challenges to SMEs of expanding to international markets.

Although the contents of the chapter are still unknown, it will address the difficulty SMEs have in understanding, interpreting, and abiding by FTAs. It will also likely provide better access to tariff schedules and regulations. Essentially, the chapter commits to provisions that will make FTAs more accessible and useful for SMEs through information and knowledge. Specific to Canada, there is an interest in developing trade through public-private partnerships. Such partnerships are argued to provide mass information sharing and market knowledge for Canadian businesses interested in opportunities in Asia, a key challenge for SMEs.

6. Regaining competitive advantage for Canadian exports to Korea: A slow process

Signing a FTA with Korea is another area where Canada dragged its feet. Both the US, and Australia signed FTAs with Korea before Canada. This resulted in competitive disadvantage for Canada and losing market share, especially in agriculture and food exports. The FTA will put Canadian companies on a level playing field against competitors who already enjoy preferential access to South Korea, enabling Canada to regain competitive advantage. But the US and Australia’s head start impacts how soon Canadian exporters will begin to benefit from regained competitive advantage.

The FTA eliminates tariffs on many Korean exports to Canada and Canadian exports to Korea. In agriculture, Canada got the same bargain offered to the US and Australia. Korean tariffs on Canadian beef and pork will be gradually eliminated at the same rate as American and Australian competitors. But the tariffs against Canadian exports will decrease later in time compared to the tariffs against competitor products. Tariffs on US products have already begun decreasing since the Korean-US FTA came into force over two years ago and tariffs on Australian products will begin to decrease shortly. Canada’s lag time means Canadian exports to Korea will still be facing an uneven playing field. Yet, it is best to have an agreement in place to address the current competitive disadvantage, even if it will take time for a fair marketplace to emerge.

Not all that glitters is gold

There certainly is value to pursuing FTAs with a range of global trading partners. But, to make FTAs work for the Calgary business community means that we have to be knowledgeable and well-versed on the little details that dictate the functioning of the FTA. When it comes to FTAs, it really is all in the details.

Jaspreet Singh is a Policy Analyst for the Calgary Chamber.