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Understanding CETA

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11 November 2019

An introduction to the EU-Canada Comprehensive Economic and Trade Agreement (CETA).

Introduction

The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada that provisionally entered into force on 21 September 2017 extends to thirty chapters, three protocols and over 1,000 pages of annexes. It is often portrayed as the most suitable model for a future post-Brexit EU-UK Free Trade Agreement (FTA).

The EU and the UK will need to go far beyond CETA if they are to arrive at a deep and comprehensive trade agreement that avoids significant trade distortions going forward (the so-called “CETA +++” deal).

Even if both parties are starting from a common base, negotiating such a complex and wide-ranging agreement is likely to be challenging and take many years to conclude.

CETA Timetable
May 2009 Start of negotiations
September 2014 Negotiations concluded
February 2016 Publication of final text
October 2016 Signature of agreement
February 2017 EU Parliament approval
September 2017 Provisional application
2018-2019 National ratification

Canada's ratification of CETA is complete

Key elements of CETA

Goods

CETA removes practically all tariffs on traded goods (approximately 99% of all EU and Canadian tariff lines). Only a few highly sensitive goods – in the agricultural area – are excluded (eg poultry and eggs) or are subject to on-going protection in form of tariff rate quotas (TRQs1) (eg dairy). Most of the tariffs were removed from the date of provisional application of CETA (1 September 2017).  A few tariff lines will remain in place for up to seven years.

Services and investment

Under CETA, the opening up of the markets to cross-border trade in services and investment liberalisation is achieved
principally through the granting of Market Access and National Treatment as well as the granting of Most Favoured Nation (MFN) status.2

Under CETA, the EU and Canada commit to remove discriminatory measures and quantitative restrictions across service and investment sectors. Only a few specific sectors or activities are subject to blanket exclusion.3

CETA applies a ‘negative list’ approach to determine the extent of liberalisation (ie coverage) under the agreement. Only those measures and sectors where the EU and Canada have made express reservations are outside the scope of the services and investment liberalisation under the FTA.4

CETA also facilitates the temporary transfer of key corporate personnel, short-term business visitors, contractual services suppliers and independent professionals between the two territories. It also enables workers that are transferred by their companies to be accompanied by their spouses/partners and families.

Rules of Origin (RoO)

There are detailed rules in place to ensure that only goods of EU and Canadian origin can benefit from the preferential tariffs. These are set out in the Protocol on rules of origin and origin procedures. The rules are often product specific. In many cases where the product includes components from other countries, the origin will depend on whether the goods were sufficiently processed in the EU/Canada or otherwise meet an origin threshold.

Investment protection and investment court system

The investment chapter contains measures to protect investment, but reaffirms the EU’s (and EU Member States’) and Canada’s right to regulate and “achieve legitimate policy objectives”. It makes clear that public policy measures that have a negative impact on investors’ expectations, including in terms of profitability, do not constitute a breach of investment protection. Measures that are taken for prudential reasons are also subject to a carve-out. CETA also introduces an Investment Court System (ICS), a first in a comprehensive trade agreement between two major economies rather than using the existing Investor-State Dispute Settlement (ISDS) model. The Court of Justice of the EU ruled in April 2019 that the ICS was compatible with EU law.5

Investment Court System (ICS)

Court-like system in the form of a permanent Investment Tribunal and an Appellate Tribunal (in contrast to an arbitration system with arbitrators nominated by the parties and ad hoc committees for annulment of awards).

Other areas

Signature and ratification

CETA fell within the shared competence of the EU and EU Member States (“a mixed agreement”)6 and required EU Member State signature and ratification alongside the usual EU level approvals (Council and European Parliament). Shortly before signature, the Walloon region of Belgium (whose Parliament needed to approve the agreement) threatened to veto the agreement. This was only resolved shortly prior to the formal signing of the agreement by all the parties involved adopting a non-binding declaration that confirmed, amongst other things, EU Member States’ rights to regulate in the public interest.

Most of CETA is provisionally in force and the whole agreement will only become effective once the all the EU Member State have completed the ratification process.7

It is expected than any EU-UK FTA would be a mixed agreement and, as such, would follow the same ratification process as CETA. This increases the risk that the process of agreeing, signing and ratifying an FTA could be derailed by vested national interests.

 

Footnotes

  1. Goods up to a set quota can be imported into a WTO member at a lower tariff.  Once the TRQ is exceeded, the higher tariff applies.
  2. Market Access is a commitment to grant the other party’s service providers access in specified sectors. It may be made subject to various types of limitations such as on the number of service suppliers. A commitment to  National Treatment implies that the party concerned does not operate discriminatory measures benefiting domestic services or service suppliers. Most Favoured Nation status ensures that a service provider or an investor from the partner country is treated no less favourably in a like situation than a service provider or investor from a third country.
  3. The following areas are outside the scope of CETA’s services liberalisation: (i) services supplied in the exercise of governmental authority, ie public services provided they are not supplied on a commercial basis or in competition with one or more service suppliers; (ii) audiovisual services (EU) and cultural industries (Canada); (iii) some air transport services and related sectors; and (iv) subsidies or other forms of governmental support relating to cross-border trade in services.
  4. The EU and Canada have set out hundreds of pages of reservations in the two annexes. In the more sensitive service sectors, the EU’s commitments do not go significantly beyond those that the EU had already committed to under the General Agreement on Trade in Services (GATS).
  5. Request for an Opinion submitted by Belgium (Opinion 1/17). The Court of Justice of the EU delivered its Opinion on 30 April 2019.
  6. The EU also felt that for political reasons it was important to have the EU Member States also ratify CETA.
  7. The current Italian government has indicated that it is not prepared to ratify CETA as it considers the protection afforded to Italian products in terms of Geographical Indication protection is inadequate.