How soon until we get cheaper cheese? Managing expectations for the CETA

There is no doubt that completion of negotiations for the Comprehensive Economic Trade Agreement (CETA), announced in October, is a major economic milestone for Canada. Gains of up to $12 billion a year are impressive and duty-free access for 98 per cent of Canadian goods to a market of 500 million people is a big deal.

There are strategic benefits as well. By completing an agreement with the EU before the United States, Canada has first-mover advantage. It is likely that the U.S.–EU agreement will utilize the Canadian agreement as a template so Canada can have some assurance that the U.S.-EU negotiations will not stray too far from our interests.

The challenge for the Harper government is both how to sell the benefits of the agreement without setting expectations too high and provoking a backlash including potential delays due to the negotiation of a little-talked-about side agreement called a Strategic Partnership Agreement (SPA). The political nature of SPA may be difficult for Canadians to swallow and could delay the final agreement while it is worked out.

CETA yields a number of big wins, especially for beef and pork producers.  It was important to get a big enough market access commitment (i.e. how much meat the EU will accept duty-free from Canada) to justify establishing separate herds that will be able to meet the EU’s more stringent regulations for hormones and antibiotics.

EU market access for autos is another important gain. It was uncertain during the negotiations how Canada was going to get export access it could use because there is no such thing as a purely Canadian car. All vehicles produced here have a significant percentage of foreign (mostly American or Mexican) content. CETA appears to provide a liberal enough interpretation of origin rules that some 100,000 of Canada’s NAFTA-mobiles will be accepted duty-free every year.

Access to the EU’s $2.7 trillion government procurement market is a huge plus for Canada. (Think of buses, trains, engineering and construction services.) Yes, Canada, will have to give up some of its local preferences in exchange but many European companies are already considered “locals” in government procurement terms because they have a Canadian branch office. Canada’s smaller companies tend not to have the capacity to locate overseas and must compete from afar. Access to the EU procurement market will open a new universe of opportunities for our companies.

The research-based pharmaceutical companies seem to be getting about half of what they sought in the negotiations. The major gain is Canada’s willingness to grant two-year patent term restoration, meaning that if government regulatory delays prevent a drug from reaching the market in a timely manner, the company can apply to have their patent term extended to compensate for the time taken up by the delays. Opponents charge that anything that favors big pharma is necessarily bad for consumers and raise drug prices. In this case, however, the CETA concession seems to be more a matter of ensuring that a company can use a benefit (20-year patent protection) that it has already been given.

The deal also provides benefits in the form of lower consumer prices. By granting the EU a greater share of Canada’s quota for duty free cheese imports, Canadian consumers should see some downward pressure on prices – both on European imports and their domestically produced competitors. But, the effect on prices will not be large or quick. Canada’s incumbent cheese producers still retain some 96 per cent of the domestic market.

Do not expect to see any of the CETA changes take effect any time soon. Once the agreement is fully ratified by governments on all sides (Canadian provinces and all EU member states), it then will go through a legal scrub and translation into 20 languages. Two years is a conservative estimate for this process.

Despite the cheering from the PMO, the most politically sensitive element of CETA has not been concluded. The EU insists that all trade agreements must include the Strategic Partnership Agreement. SPA includes commitments on peace and security, protecting human rights and sustainable development that have never been included in any of our trade agreements with other countries.

Canada’s existing free trade agreements include side agreements on labour, the environment and even human rights, but these commitments are the sorts of things that Canada does as a matter of course. The SPA is quite different. In an effort to add heft to its foreign policy influence around the world, the EU requires that all trading partners sign the SPA and that failure to comply will result in a suspension of CETA benefits.

While the Canadian government may agree with the principles of the SPA, the scope and implications of the agreement and its restrictions on Canadian sovereignty may be more than this government is willing to swallow.

SPA spats aside, with the major hurdles of the trade negotiations behind us, the benefits of the CETA should begin to trickle in. Nevertheless, it would not be wise to postpone pizza night while waiting for that cheap European cheese. There’s always Costco.