One of the main features of the Canada-Europe trade agreement or “CETA”, announced in October, will be incorporation of the Most-Favoured-Nation (MFN) treatment rule. MFN is a pillar of the international trading system under the WTO Agreement. It means you can’t discriminate among WTO member countries in your trading arrangements. You have to give exporters from every country equal treatment – so that the best or “most favoured” level granted to one applies to all.
The question is – what does this mean for Canada’s other free trade agreements, like the NAFTA? Does the MFN rule mean that exporters or investors from other countries automatically get the benefit of the preferences – the most-favoured treatment – Canada has granted to the Europeans.
The answer is no. But it’s a qualified “no”.
While MFN is a universal rules, the WTO Agreement also sanctions bilateral and regional free trade agreements between members. By definition, these are preferential. They give better treatment to imports of goods and services from treaty partners than the treatment that applies for the rest of the world
The North American Free Trade Agreement (NAFTA) is a good example of this. Imports from the US and Mexico pay zero duties while imports from elsewhere are dutiable.
These preferential trade agreements or “PTAs” side-step the MFN rule. There’s a twist to this, however, and it’s an important one in the context of the Canada-EU Agreement.
While preferential trade agreements do an end-run around the MFN rule, countries can still agree in those PTAs that the MFN rule will continue to apply. It’s up to them.
And that is exactly what Canada has done in the case of investments.
Article 1103 in Chapter 11 of the NAFTA illustrates the point. Even though Canada, the US and Mexico have excluded the MFN rule generally, so that better tariff treatment applies to imports among the NAFTA countries, under Article 1103, the MFN rule specifically applies to NAFTA investors and their investments.
This is of major significance. It means that preferential treatment for investors or investments under any of Canada’s other bilateral free trade agreements extends equally to NAFTA investors and investments. It means American and Mexican investors must be treated on an equal footing with and given the same preferences as EU investors or investments under the CETA.
This has important implications for Canada’s investment review regime under the Investment Canada Act.
While we await the final text of the CETA, we know from the explanatory material that EU investors will get special treatment for investments in the uranium sector. As well, there will be a freezing of the regulatory status quo in respect of foreign investments in particular sectors.
Among the most important benefits for EU investors will be the raising of the threshold for investment review from the current level of $1.0 billion to $1.5 billion.
Because of NAFTA Article 1103, NAFTA investors benefit from the MFN rule. Investors from the US and Mexico will thus be entitled to the same preferential benefits as EU investors get under the CETA. That means that the increased threshold of review of $1.5 billion will apply equally to them as it does to investors from the European Union.
Other Canadian trade agreements – such as the PTAs with Chile, Peru and Colombia – also apply the MFN rule to investors and their investments. It means these investors will also benefit from any new or additional advantages given to EU investors under the CETA.
This point is actually noted in Ottawa’s Technical Summary of the CETA, where the fine print says that in respect of the $1.5 billion investment review threshold, “other FTA partners will benefit as a result of the MFN commitment in those FTAs.” This point hasn’t been widely commented but it is of extraordinary importance.
Whether there are other benefits granted to EU investors in the CETA that will also extend automatically to investors from other countries will have to be analyzed when we have the complete text of the document.
Trade agreements are two-way streets. While this note discusses the MFN rule on inbound investment, Canadian investors in the EU will also profit under the MFN rule from EU investment treaties with third parties. Without wishing to overstate things, this illustrates the “pervasive character” of the MFN rule, to borrow from a decision of the WTO Appellate Body regarding Canada’s tariffs on imported automobiles.