CETA, NEAR AND FAR

"Maybe you've had your eye on Manitobah Mukluks, a Canadian, Indigenous-founded company whose products are currently subject to a 17 percent tariff in Europe. 

"Well, with the ratification of CETA, those tariffs are removed, and you, as a consumer, are paying less at the check out."

Justin Trudeau

Last Wednesday, the European Parliament approved the EU's big trade deal with Canada, the Comprehensive Economic and Trade Agreement or CETA. The vote was 408 to 254 in favor of implementing the agreement, with 33 abstentions. So the deal is done - sort of, and provisional implementation could begin as early as April. The next day, February 16, Prime Minster Justin Trudeau of Canada addressed the EU Parliament in Strasbourg. His remarks were rich in praise and gratitude. Today's featured quote is from that speech. 

Admittedly, we might just as well have led off with his formal statement of what had been done: 

"Yesterday-in addition to ratifying the Strategic Partnership Agreement-this Parliament voted to ratify the Comprehensive Economic and Trade Agreement."
 

"The European Union is a truly remarkable achievement, and an unprecedented model for peaceful cooperation. ... The whole world benefits from a strong EU." 

So too were his more general comments on CETA, which he called "a blueprint for future trade deals," and described this way:

"CETA is a framework for trade that works for everyone. This agreement will result in the creation of good, well-paying jobs for middle class workers. It will put food on the table for families, and help grow and strengthen our communities." 

 
But we are nothing if not practical, and so we chose to lead with a concrete example of potential commercial benefit.

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So where do things stand? The formal negotiating process that has produced this agreement was launched at the Canada-EU Summit in Prague in May 2009. In terms of the EU per se, as distinct from the Member States, the final two-step ratification process is complete. Step one was done in Brussels on October 30, 2016, when the agreement was signed by Prime Minister Trudeau for Canada and for the EU by Jean-Claude Juncker, President of the EU Commission; Donald Tusk, President of the EU Council; and (we believe) Prime Minister Robert Fico of Slovakia, whose country currently holds the presidency of the Council. 

 
In Canada, it is almost done. The Canadian House of Commons ratified the agreement on February 14, 2017, and Canada's Senate is expected to follow suit very soon. If they do, the stage will be set for provisional implementation, which could begin in less than two months. 

Why provisional? And what does that mean? In practical terms, provisional application should not be very limiting. Most of the agreement will be covered by the provisional implementation. But some provisions will have to wait, namely those relating to investor-state disputes, that is, those between companies and governments. Things like tariff reductions, however-the effect on those Mukluk exports-will come into force right away. 

As for why the implementation of the agreement will be "provisional," our preference would have been to avoid those complexities altogether. But we can't. They could prove quite important. The basic issue is legal "competence." That is which authorities-Brussels, Members States, or, in some countries, even more local authorities-have the competence to make a final decision on the agreement?  Our understanding is that the EU authorities in Brussels believe that the EU and the EU alone is competent to approve the entire agreement, but that there was push-back on that point from the Member States. And so, rather than insist upon their view of EU competence, Brussels agreed to regard CETA as an agreement of mixed competence. 

 
Certain elements of it, tariffs for example, are unquestionably in the hands of the EU alone, and those elements will be implemented quickly. Other elements-notably the provisions dealing with investor-state disputes-will not go into effect until the agreement has been ratified by all of the relevant parliaments, including those of the Member States as well as some sub-national authorities. That could take years.

We have only one observation, and it is quite simply stated: CETA is a big deal. It is a big deal not just for Canada and the European Union but for the United States and for the world trading system writ large. Doubtless we will be returning to this topic frequently in the months ahead. For now, we will just list a couple of questions. They are real questions in the sense that we don't know the answers to them, and they cover quite different elements. 

What about Brexit? Clearly the British Government joined the other 27 Members States in approving the deal at the EU level. But what will the British Parliament do? One would think that Parliament would simply follow the Government's lead and say okay. The problem is that they will first need to debate the issue and consider, among other things, what CETA's implications are for Brexit and vice versa. That could get messy. 

What if one national parliament or another rejects the agreement, what would that mean? Would it affect those provisions then being applied on a provisional basis? We assume not, but we don't know. 

What will it mean for the pending re-opening of NAFTA? We are admittedly in uncharted territory, but are there provisions in CETA which might cause heartburn for some U.S. producers. Consider for example this observation from the EU's own explanation of CETA: 

"[CETA] bans sale in Canada of imitations of 140 European delicacies." 

 
We assume that is a reference to geographical indications. The question is, are there U.S. firms currently exporting such "imitations" to Canada? Will those firms be harmed by the new rules? If so, they will probably want to get their two cents in before U.S. negotiators sit down with their Canadian counterparts to talk about NAFTA. 

How will CETA influence firms in the U.S. that trade with the EU? Notwithstanding the strong and credible push by the Trump Administration to keep - and grow - manufacturing in the U.S., could CETA provide a strong incentive for some firms to produce and export from Canada rather than the U.S.? The logic says it could.

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Maybe it is time for someone, someone like the Chairman of the Senate Finance or the Chairman of the House Ways and Means Committee to ask the International Trade Commission for a new report. The ITC routinely does reports on the likely effects of U.S. trade agreements on the U.S. economy. Perhaps it is time for them to analyze the effects of other agreements on the U.S. economy. We might discover that the U.S. should be more worried about the agreements to which it is not a party than those to which it is (or could have been).