Spotlight: Canada-European Union Comprehensive Economic and Trade Agreement (CETA)

The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) eliminates 98 percent of European Union (EU) tariffs and many non-tariff trade barriers, and paves the way for a new era of increased trade between Canada and Europe. 

Background

CETA is the comprehensive free trade agreement between Canada and the EU that eliminates or reduces trade barriers and enhances Canadian-EU market access. The EU is Canada's second largest trading partner after the United States (U.S.) and the world's second largest importing market for goods, and CETA will substantively increase the flow of goods, services, and investments between Canada and the EU.

How Canadian businesses can benefit from CETA

CETA offers opportunities and advantages for Canadian business for everything from harmonizing trade procedures and policies, improving access to public contracts and facilitating greater labour mobility, to promoting and protecting foreign investment and increasing M&A activity. As well, CETA helps streamline and improve trade and investment flow between Canada and the EU, and opens both regions to new markets and greater competitive advantage.

Here are some of CETA's key impacts in greater detail.

Eliminating most tariffs:

The ambitious tariff reduction is one of CETA's most notable aspects. Prior to April 1, only 25 percent of EU tariff lines on Canadian goods were duty-free; with the implementation of CETA, 98 percent are duty-free. This number will rise to 99 percent as CETA gradually eliminates tariffs on some seafood products, grains, and passenger vehicles.

The reduced tariffs CETA provides make Canadian producers, manufacturers and exporters more competitive in the EU market with their products, and reduce costs for Canadian exporters, giving them an advantage over other exporters still facing EU tariffs. They will also allow Canadian businesses to expand or create new markets for their goods in the EU.

Enhancing procedures:

Under CETA, Canada and the EU now apply simplified, modern and, where possible, automated procedures for quickly and efficiently processing and releasing goods at customs. The two regions can issue advanced rulings on the tariff classification of goods and written advance rulings relating to rules of origin, and have an impartial and transparent system for addressing complaints about customs rulings and decisions.

In general, CETA should make the movement of goods at the border faster and more efficient, decreasing costs and increasing predictability for Canadian companies importing and exporting to and from the EU.

Reducing non-tariff barriers:

Increased coordination between Canadian and EU regulators under CETA will reduce the trade distorting impact of non-tariff barriers, allowing Canadian companies to access the EU market more quickly and efficiently.

For example, CETA helps Canadian and EU regulators cooperate on regulatory issues and share information, helping reduce non-tariff barriers, and regulators can strengthen links between their standard-setting, testing, certification and accreditation organizations, helping them recognize equivalencies in technical regulations.

As well, both large Canadian companies and small- to medium-sized enterprises will benefit by testing and certifying their products for the EU market in Canada, thanks to a separate conformity assessment protocol. This will considerably reduce testing costs and delays (in particular by avoiding double-testing in both Canada and the EU), and enable faster access to market.

Expanding access to public contracts:

CETA creates new business opportunities for Canadian companies through new and increased access to various levels and types of EU government procurement.

In particular, CETA now allows Canadian companies to bid on EU government procurement projects by local contracting authorities, bodies governed by international law, public utilities including gas, electricity, heat and water distributors, and urban transit and railway operators, along with projects above specified value thresholds for professional services, such as architecture and engineering, most goods and all construction services.

For EU companies bidding on Canadian projects, CETA applies only to higher value procurement contracts so governments can continue to use smaller procurements to support local and small businesses.

Facilitating services trade growth:

The EU is the largest importer of services in the world and in 2015 alone the region imported $936 billion in services, $16.5 billion of which were from Canada. Under CETA, all Canadian services providers will receive the same treatment and market access as services providers from the EU, except those in expressly excluded sectors including health care, public education, and other social services.

As well, CETA automatically locks in any future regulatory or legal changes that make it easier for Canadian or EU services suppliers to access the Canadian or EU markets and prevents governments from subsequently making them more restrictive. In addition, CETA treats services suppliers no less favourably than service suppliers under existing or future free trade agreements.

Because of these provisions on trade in services, CETA helps Canadian service providers enjoy better predictability and transparency when exporting services to the EU.

Enhancing labour mobility:

CETA provides more freedom for business people to work temporarily across Canada-EU borders, particularly for short-term business visitors, investors, intra-company transferees, and professionals and technologists, and includes a framework for recognizing foreign professional qualifications.

As a result, Canadian businesses will now have greater certainty when establishing branches in the EU, bidding on EU service contracts and providing for installation and maintenance services for goods sold in the EU, with fewer time delays and administrative costs.

Promoting and protecting investment:

CETA sets out how host countries must treat investors and investments, and both Canadian and EU investors expect to benefit from the predicable and stable investment climate this provides.

For example, under CETA, investors cannot be treated less advantageously than domestic or other foreign investors and receive protection including an investor-state dispute settlement mechanism.

As well, CETA still allows Canada to review large foreign investments, but the review threshold under the Investment Canada Act increased from a $600 million to a $1.5 billion enterprise value when EU parties are looking to buy or sell a Canadian business.

How CETA creates new market opportunities

Zero tariffs on most goods traded between Canada and the EU is the biggest and most immediate impact CETA has on Canadian companies. In general, eliminating duties under CETA will add approximately $1.4 billion to Canada's exports to the EU by 2022.

Canadian producers, manufacturers and exporters of goods in traditionally high-tariff sectors, such as food, beverages and tobacco (9 percent), motor vehicles and parts (6.5 percent), agriculture (5 percent) and chemicals, rubber, and plastics (5 percent) will immediately realize material cost savings as a direct result of CETA's tariff elimination and have significant advantage over competing exporters from countries such as the US and China.

Beyond eliminating tariffs, CETA can also create new market opportunities for Canadian companies. For example, management, financial, and information and communications technology services are among the EU's top services imports, and are also among Canada's foremost services exports to the EU. Trade in these sectors should continue to climb given the increased ease of labour mobility, recognition of professional qualifications, and opportunities to participate in more government procurement.

Canadian manufactures and producers of goods that export to Europe have found it difficult to adapt to EU regulations and product specifications in the past. Because CETA reduces regulatory hurdles, decreases processing times at the border and facilitates the movement of services providers, however, Canadian companies can now sell to Europe more easily, particularly small to medium size enterprises, for whom the costs to market entry can be a constant challenge.

How CETA will increase M&A activity

The important business opportunities CETA presents for both Canadian and EU companies, especially given CETA's focus on increasing trade in goods and services, labour mobility, and government procurement, will likely translate into increased cross-border investment activity, including mergers and acquisitions:

  • EU companies with significant global operations may look to accelerate growth in Canada by way of acquisition
  • Industries where tariffs have traditionally be high and are now eliminated will likely see more M&A activity, as market leaders in these sectors look to gain early mover advantage and market access through acquisition
  • Non-EU businesses may purchase Canadian manufacturing firms to create Canadian-origin products entitled to duty-free entry into the EU
  • Given the increased ease of labour mobility under CETA, the services sector may see heightened M&A activity
  • Because Canadian and EU companies can bid on more public infrastructure contracts, we may see increased acquisition of infrastructure, construction, and consulting firms

Under CETA, Canadian firms have preferential access to both the EU and the U.S., two of the world's largest markets. For this reason, inbound investment will likely focus on acquiring Canadian companies that are not only market leaders in Canada, but also give EU businesses a chance to access the U.S. market on a duty-free basis under NAFTA.

Additionally, non-EU companies may invest in Canada to take advantage of Canada's preferential access to both the EU and the U.S. markets. Over time, increased M&A activity will not only flow between the EU and Canada, but also between the U.S. and Canada, as American companies look for greater access to the EU.

In this way, CETA positions Canada effectively as a "gateway" for EU and U.S. companies looking to access their respective markets, and Canadian M&A activity will likely increase as a result.

As well, lifting the threshold for government review of foreign investments by EU countries coming into Canada from $600 million to $1.5 billion removes over 200 Canadian-based, publicly-traded companies from the government's automatic review list, making it easier for EU investors who are prepared to make a significant financial investment to acquire Canadian companies, further boosting M&A activity.

Conclusion

CETA is a significant milestone for advancing Canadian-EU economic integration and facilitating trade and investment flows. Under CETA, Canadian and European businesses gain significant advantages over competitors in countries that are not entitled to CETA's benefits, specifically in the trade in goods and services, labour mobility, investment protection, and government procurement, and create immediate benefits for certain industries, new market opportunities, and the potential for increased M&A activity.

To take advantage of CETA, manufactures, suppliers, wholesalers, distributors, retailers, importers and exporters should consider opportunities to buy and sell goods at a lower cost by claiming CETA preferential tariff treatment; evaluate their supply chain to determine whether or not to take advantage of duty savings under CETA; and identify new market opportunities for selling goods, providing services and business investment activity.

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