This article is from BDC’s Monthly Economic Letter.
While uncertainty hangs over the future of trade relations between Canada and the United States after Donald Trump’s election as President of the United States (see box), Canada and the European Union (E.U.) recently signed the Comprehensive Economic and Trade Agreement (CETA) after negotiations that lasted seven years.
CETA is an agreement that offers great opportunities to Canadian small and medium-sized businesses. Like other free trade agreements that Canada has entered into in the past, CETA will facilitate trade in goods between the two parties by abolishing—or significantly reducing—tariff and non-tariff barriers. CETA also includes measures covering many other aspects of trade. Many of these measures will stimulate trade in services between the two parties.
Currently, approximately 25% of the European Union’s tariff lines1 that apply to Canadian products are duty-free. Customs duties can be as high as 25% on certain products. Once the agreement comes into force, 98% of the tariff lines will be duty-free. This means that many Canadian products will become more competitive in the European market, overnight. This is a definite advantage for businesses that are already active in Europe; they could gain larger market share. For other businesses, this could provide an opportunity to penetrate a market in which their products will henceforth be competitive enough to make the effort worthwhile.2
CETA will promote exports of many Canadian manufactured goods (such as aerospace products, machinery, and computer, electronic and electrical hardware) that are currently subject to hefty customs duties. For Canadian automakers, the most important gain is the quantity of vehicles that will be exempted from E.U. customs duties, i.e. 100,000 per year—which is twelve times the number of vehicles that are currently exported.
The agreement will also open the door to gains in the agricultural sector, particularly in the beef and pork industry. The quantities of beef and pork that Canada will be able to export to the E.U., duty-free, will be increased considerably. Many other agricultural producers will also benefit from CETA through the elimination of customs duties on their products; these include producers of wheat and grains, fruits and vegetables, oil and maple syrup.
The potential gains for the commodities sector (particularly metals and minerals) and the industrial products sector will be comparatively smaller, since most of these goods are already exempt from customs duties when they enter the E.U.
The European Union constitutes a large market. It represents approximately 17% of the global economy in terms of gross domestic product (GDP) and has a population of 510.1 million. Today, exports to this region amount to around $38 billion, representing just 7.2% of Canada’s total merchandise exports. Thanks to CETA, that share could expand, which would help diversify Canada’s export markets. We should keep in mind that three quarters of our merchandise exports are bound for the United States, which makes the Canadian economy very vulnerable to economic conditions in that country.
At the same time, the abolition of the customs duties that Canada imposes on products from the E.U. member countries will benefit Canadian firms that import goods from that region. They will thus be able to lower their costs and/or increase their profit margin, making them more competitive and/or more profitable.
Exports of services from Canadian businesses to the E.U. amounted to $16.5 billion in 2015, i.e. nearly half of the value of merchandise exports to that region.
Trade in services, including telecommunications, architecture, engineering and transportation, should be stimulated by CETA. The agreement stipulates, among other things, that each party shall treat the other party’s service providers as favourably as it does its own service providers.3 Other measures, particularly those that facilitate the recognition of professional qualifications and temporary stays by business people for business purposes, should also help stimulate trade in services between Canada and Europe.
“Access to government procurement” refers to the possibility of one party’s firms responding to calls for tenders issued by various levels of government of the other party. Canadian firms can already respond to calls for tenders issued by the European Union and by national and subnational governments of its member countries under the World Trade Organization’s Agreement on Government Procurement. CETA will expand the access to regional and municipal government procurement in the E.U.
For Canadian businesses, this presents many business opportunities in sectors such as architecture, construction, environmental services, marketing consulting, research and development, information technologies and transportation.
In order for CETA to come into full force, all the member countries of the E.U. must ratify the text of the agreement, which could take several more years. However, once it is approved by the Canadian and European parliaments—which could be done early in 2017—it will be possible to apply it provisionally. This is because the portions deemed to be within European jurisdiction, which comprise up to 90% of the agreement, only require the assent of the European parliament. Nearly all the components relating to trade, particularly those pertaining to tariff reductions, could therefore come into force as early as the beginning of next year.
CETA will give Canadian businesses an edge over their competitors in the European market. But that competitive advantage will not last forever: the European Union will no doubt sign other trade agreements, equally advantageous, with other countries in the future. It goes without saying that Canadian businesses should seize this opportunity as soon as possible.