Author Archives: Lawrence Herman

This past year saw dramatic developments for Canada on the trade front, by far the most prominent being the conclusion of negotiations with the European Union on a Comprehensive Economic and Trade Agreement (CETA).

Lots of fanfare last October in Brussels as the PM and EU President Barroso announced this milestone deal.

This was followed by intense rounds of PR by the Harper government, with cabinet ministers criss-crossing the country to tout the potential gains for Canada. Clearly, the CETA is vast in scope, much larger and intrusive (if that’s the right word) than the North American Free Trade Agreement.

What is likely to happen in 2014?

But even though the CETA’s general principles and an outline of its terms were announced, we still don’t have the actual text. Lawyers and other officials are still haggling over the legal wording. So a lot of the media discussion has been a bit on the theoretical side.

The public relations flurry mounted by the PMO masks the fact that we don’t have the details, wherein devils lurk.

We won’t get those details for several months. When we do, it’s going to unleash a lot of polemics about the pros and cons of the deal. The usual opponents, largely in the ranks of unionized labour, are gathering steam. There will be tugging for the hearts and minds of Canadians. However, even though Canadians appear largely supportive of CETA, this battle will clearly be something to watch in 2014.

Implementing the Deal

Another thing to watch is how the CETA will actually be implemented. There hasn’t been much discussion about this aspect but it’s an important and potentially vexing issue. That’s because both Canada and the EU have to bring the agreement into legal force throughout their respective territories. It’s one thing to sign a trade deal. Getting it into legally-binding effect is quite another operation.

In Brussels, the EU Commission has overriding authority to implement international trade agreements through regulation. Politically, however, the EU will have to ensure general consensus in all twenty-eight capitals. And the text will have to be translated into fifteen of the EU’s official languages. Will all of this happen in 2014.

In Canada, the Harper government will table the final text in the House of Commons and, while not constitutionally required, will ask for Parliamentary approval. A federal implementing bill will also be needed – for example, to reduce duties on European goods. The package will be referred to the House Foreign Affairs and Trade Committee, something that will produce interesting fireworks in 2014, particularly from the NDP and Ms. May of the Greens.

What will the provinces and territories have to do? Much of the CETA concerns their areas of jurisdiction. So one question is whether actual provincial or territorial legislation will be needed, something that would be a minefield. To avoid that – and because it is not legally necessary – provincial implementing legislation is not being sought.

Rather, the Feds will still seek provincial approval as a political matter. This will likely be by some sort of resolution or endorsement by all legislatures. The lay of the land in all ten provinces and three territories is that this will be forthcoming. All have been at the CETA negotiating table and all are seemingly on-side.

In the case of Ontario and Quebec, where there could be elections in 2014, the opposition parties have endorsed the deal. So the betting is that there won’t be the drama encountered with the Meech Lake accord in 1989.

A point of note here. When Canada and the EU ratify the CETA, possibly in the coming year, they will then be legally committed as treaty partners. In other words, Canada as a whole will be bound by the CETA. Should one or another of the provinces or territories fail to comply Canada’s obligations (or if one of the EU member states does), the other side will be able to invoke binding arbitration to enforce the deal.

The practical effect of this is that the provinces and territories will have to meet the terms of CETA or face enforcement litigation by the European Union. Of course, Canada will have the same rights if any of the EU member countries fail to adhere to the agreement.

So in as nutshell, while the flurry of attention has subsided recently, the CETA story should produce some interesting and potentially dramatic episodes in 2014 as we move on to the next chapter in this ground-breaking story.

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.

The information material the Feds have been issuing on the benefits of CETA is pretty good and quite informative, particularly on things like CETA’s tariff rate reductions in key industrial and agri-food sectors. There are clear gains in the manufactured goods – including in advanced manufacturing – and processed foods sectors.

In some other areas, as has been noted by other commentators, the information still remains pretty vague. This is the case for the trade in services provision under the CETA. While the government talks about “a transparent approach”, providing Canadian service providers with “better, more predictable and secure access” to the EU market and ensuring that Canadian companies operate on a level playing field in terms of licensing and qualification requirements, there is an absence of detail so far as to how this will be done.

 What precise commitments and guarantees will there be to ensure that Canadian service providers are actually treated by EU government regulators in a non-discriminatory fashion?

Trade in services is a vital part of this deal. More and more international business involves services as major parts of a transaction. According to the Feds, Canada exported an average of $14.5 billion in services over the 2010-2012 period and this is growing. For several years, the WTO has reported on the tremendous expansion in international services trade.

So far, nothing in Ottawa’s material speaks about EU guarantees of national treatment for Canadian service providers. National treatment means that you give foreign companies in specified fields – with some special exceptions – the same treatment as accorded to your own service providers.

It’s great to be assured that qualifications and regulatory matters will be clear, open and transparent, but if there is no guaranty of non-discriminatory treatment, that could be a roadblock for Canadian companies.

Hopefully, as more detail unfolds this will become clear.

The other element that needs more explanation is in the institutional mechanisms that oversee the proper implementation of the CETA and ensures both sides live up to the bargain. I’m talking about the need for a more robust system  – better than the arrangements in the NAFTA.

This is where dispute settlement provisions become critical. The last thing a Canadian service provider needs if it isn’t treated fairly is to get bogged down in years of complex and costly litigation.

Commerce is highly dynamic and business moves quickly. Disputes have to be resolved impartially but efficiently. We hope that when the detailed text of the CETA is finally provided, there will be effective and efficient dispute settlement provisions so that a Canadian service provider with a complaint can get the matter effectively and rapidly resolved by an impartial arbitrator in a cost-effective fashion.

 We need these points clarified in the final treaty text.

While it’s too early to really know how each side (Ottawa and Brussels) will move toward implementing and ratifying the CETA – after all, we don’t even have the text of the treaty yet – there are some interesting scenarios that can be discussed.

One scenario concers provisional implementation of the CETA. Can this be done before the whole thing is ratified and in force?

Absolutely.

Once the treaty-drafting is finished and the full CETA document is available, it will be signed by the PM and the President of the EU. It then will proceed to the internal approval proceeses on both sides of the Atlantic. 

Over here, the CETA will be tabled in Parliament. An implementing bill will then be introduced and the necessary laws and regulations enacted. Once that is done here and in the EU, the treaty will be formally ratified and will enter into force.

But ahead of all of this being completed – it could take a year or more – there’s nothing to prevent each side agreeing on provisional implementation of certain CETA provisions. For example, tariff reduction – most duties are to be eliminated completely – could be done provisionally. This is an area under exclusion juridiction of Ottawa and Brussels and doesn’t require any agreement by the Provinces or the EU member states. It would be pretty easy.

There are other areas as well that could easily be put into effect pending full ratification. Rules of origin, easing of temporary entry and movement of personel, investment provisions and a range of other areas under exclusive jurisidction of Brussels and Ottawa could be implemented by means of a protocol of provisional application.

There are many precedents for this approach. The more than can be done in this regard after formal Parliamentary approval and pending full ratification the better. Why be held hostage to technical and procedural delays if there’s a better way?

Now that we have an agreement in principle for the CETA, announced with great fanfare on 18 October 2013, but no actual agreement, the question is: what are the next steps?

Here is a primer on how it will work.

FIRST, we DO need to have the actual text, a process that will take several months. As far as we know, all of the elements of the agreement have been agreed to by the Canadian and EU negotiators and accepted at the political levels on both sides. That includes the premiers of the Canadian provinces and the heads of government of the 27 EU member states.

That political agreement now has to be turned into treaty language, however. While the negotiators have produced compromise wording, lawyers have to review these and make the wording consistent throughout.

Once the treaty text is legally “scrubbed”, as they say, and there is a final document, it will be SIGNED on behalf of Canada and the European Union. But signature of a treaty isn’t enough. The signing just indicates that each side is now willing to be legally bound under international law.

The SECOND STEP after signature is RATIFICATION. It’s the act of ratification that brings the treaty into force under international law. It’s ratification that will create a legally binding contract between Canada and the EU – the contract being the CETA.

Under Canadian constitutional law, ratification is an executive act, meaning that under the Royal Prerogative, the Governor in Council – i.e., the Harper cabinet – can pass an order in council that allows Canada to ratify the CETA as signed. Ratification involves each side exchanging a so-called “instrument of ratification” with the other. Once instruments of ratification are exchanged, the treaty becomes binding between under international law.

BUT – before we get to ratification, the government of Canada and the European Commission have to ensure that all necessary INTERNAL steps have been taken to make sure that they can live up to the terms of the agreement. This step is called treaty implementation So, the CETA will not be ratified until this is done.

For Canada to be in a position to implement the terms of the CETA, federal as well as provincial legislation will have to be passed. For example, Canada will have to amend the Customs Tariff to provide for lower rates of duty for European goods. The Patent Act will have to be amended to give extent protection to EU patent holders. And a myriad of other things. SD, implementing legislation will be presented to the House to make these necessary changes.

It’s not clear whether the government will actually table the CETA itself for debate and adoption by Parliament. That step is not strictly necessary under our constitution. That being said, it is likely that as part of the CETA implementation bill, the government will table the treaty and seek parliamentary approval. That means that there will be a debate in the House on the CETA at some point. With a Conservative majority, the result is a foregone conclusion.

Similarly, provincial governments will table legislation so that the CETA can be implemented in those areas under provincial jurisdiction. Changes may be required, for example, to ensure that EU bidders have access to provincial procurement projects.

THIRD, after all these internal legislative and regulatory changes are made to allow Canada to implement the CETA, Canada will then be in a position to ratify the agreement. The same with the EU. These internal measures will take some time to put into effect. We are probably looking at a two-year period, perhaps more.

FOURTH, will be formal ratification, as explained, through an exchange of ratification instruments between the two parties.

FINALLY, after that, there will be a PHASE-IN period, so that full implementation of the CETA, even after ratification, will not occur immediately. In other words,there will not be a flood of European cheese at the grocery stores or the arrival of European cars in auto showrooms for some time to come.

So, sit back and relax.

The fallout from the clothing factory collapse in Bangladesh – which caught media attention for a while – has subsided. However, it has left western industries scrambling for a solution and for very real and effective safeguards against this thing happening again. There’s commercial self-interest involved, sure.

Companies can’t afford the public opprobrium in ther key markets when their brands are associated with sub-standard condiditions in the developing world. There’s also general concern about trying to effect improvements in local conditions in low-cost countries where western goods are made.

The response has been to formulate a set of industry standards to which many manufacturers have signed on. The interesting thing about these standards is that they represent another example of what’s been called “private industry regulation”.

In fact, private standards with global impact have been around for many years. They are gathering momentum in today’s fast-paced, dizzying global economy, where commercial events move far too quickly for governments to keep pace.

Hence, the private sector often steps in. A good example is the development of standards of social (including environmental) responsibility under the CSR rubric. Many of these CSR norms and standards are industry-formulated and applied outside of governmental regulation or treaty.

The question raised by the Bangladesh tragedy is whether there is a role for governments – including some kind of intergovernmental agreement – to make sure these industry rules and norms are in accordance with the public interest.

Joe Oliver, Minister of Natural Resources, fired a shot across the European bow last May over the possible enactment of the proposed EU Fuel Quality Directive (FDQ), saying that if it’s passed, Canada could march the Europeans to the World Trade Organisation.

This came at a delicate time, as Canadian and European negotiators are trying to put final touches on a ground-breaking, comprehensive economic and trade agreement (CETA). A high-profile controversy involving Canada’s oil sands certainly doesn’t help that process.

But the Federal government has no choice in avoiding a fight when it comes to anything that tarnishes the international reputation of Alberta’s oil but to get into the ring and take the gloves off.

In public relations terms, the fight is doubly challenging because of photo images of the physical impact of oil sands production on the Alberta landscape. This has been combined with effective public condemnations by media-savvy environmental groups.

For the Canadian government, this is shaping up as a fight for hearts and minds, not unlike the one Canada has been engaged over the years fighting foreign restrictions on imports of seal products or Quebec-made chrysolite asbestos.

While Oliver was in Brussels and using a European platform to make his comments, he and federal government are most concerned with Washington and the impending decision on Keystone XL.

Anything that looks like Canadian bitumen-made fuel is environmentally harmful plays indirectly into the Keystone file.
The fight over the FDQ, if it comes to that, will involve an air war and a ground war. The air war will be the ongoing PR battle, the fight for public sympathy in Europe and in the United States.

The ground war, the battle for the mind, will be the trade battle and that’s what Oliver’s statement was all about — preventing EU carbon offsets being imposed that differentiate between bitumen-derived products and conventional fuels.

These offsets are effectively a border tax on Canadian imports, to increase the price of Canadian oil-sands-made fuels as compared to conventional fuels.

There’s a fundamental WTO legal issue at stake in the ground war.

It concerns the WTO prohibition against governments discriminating against “like” goods from different countries.

This is the famous most-favoured-nation (MFN) treatment rule. It requires fully equivalent treatment to imports of “like” goods wherever they come from. And the equally famous “national treatment” rule means that you can’t discriminate against imports in favour “like” domestic products. It means that all duties, taxes or other border measures — such as carbon offset requirements –that differentiate between these like goods are WTO-illegal.

The question comes down to what is “likeness” in WTO terms.

Numerous WTO panel decisions have said that “likeness” is based on the intrinsic nature of the goods, not how they are made. Likeness is determined by physical properties, usage and, importantly, whether the goods compete in the same market. It is the direct “competitiveness” of the goods that is normally critical in determining likeness, according to these decisions.

How the goods are made – production and process methods (called PPMs) – is not a differentiating factor when the imported goods are like domestic products and other imports in every other respect. A 2011 WTO Secretariat Working Paper examined the jurisprudence in depth going back many years and concluded that border measures based on production methods that don’t affect the “likeness” of the final product would be in contravention of the WTO Agreement.

Coming back to the Canada-EU dispute, the issue is this: Can the EU apply differential border measures – such as carbon offsets – on fuel from Canada that is produced from bitumen but is “like” conventional fuels in terms of physical and chemical properties, end-usage and, importantly, that competes in the same market?

Canada says definitely not. Admittedly each case must be looked at on its facts but WTO jurisprudence leads to the conclusion that Canada is right.

Canada is being sued under the NAFTA investment arbitration regime (in NAFTA Chapter 11) more than Mexico and the US combined.

Today, there are eight active cases underway against Canada – all by American investors.

There are only two cases on the books against Mexico and only one underway against the United States.

Taking into account all these NAFTA investment disputes – active and completed – Canada has been the defendant in more arbitrations than the US and Mexico combined. While the claimants have usually lost, it’s puzzling that Canada has been taken before these arbitration panels so often.

Why is this? Why hasn’t Mexico been the most frequent defendant? After all, Chapter 11 was really designed to address Mexico where it was felt private American and Canadian investors needed a greater degree of protection from unfair, non-transparent and discriminatory laws.

There are some possible explanations for this. First, it’s a lot easier for American investors to sue Canada because of the common English language. Bringing a case against Mexico means working in Spanish.

Second, Canada has a common legal tradition with the US and an open and accessible governmental system where information is readily obtainable – either directly or through use of Access to Information legislation. Little can be hidden under the Canadian system. Not so with Mexico.

Third, US private investors have typically a bundle of available cash to spend on litigation and a long and abiding tradition of aggressive use of litigation as a commercial strategy. The intrinsic long-term value of a given investment may be considered greater in Canada than in Mexico.

While these points may not answer all the questions, the inference is that the fruits of a successful claim against Canada may be more cost-effective than a claim against Mexico. Whatever the reasons, it is interesting to see Canada being hauled before binding NAFTA arbitrations much more frequently than the other two countries.

Last May, the WTO Appellate Body turned down Canada’s appeal from the earlier WTO panel decision that found the local content requirements of the Ontario’s Green Energy Act and the Feed-in-Tariff (FIT) program offended the WTO Agreement.

The decision is a critical one for the WTO, the first directly dealing with a country’s green energy laws.

Canada was formally the defendant even though the case involved a provincial measure. That’s because Canada at large subject to WTO obligations even if in the case of laws enacted by a province.

Many observers of WTO disputes thought from day-one that Canada’s defense to the EU and Japanese complaint would face an uphill battle.

Basically, Canada (Ontario) argued that the FIT entailed government procurement of electricity and was therefore outside the normal obligations that prohibited conditioning market access on local content purchases.

This was a difficult argument to sustain from the get-go. Leaving aside the finely-crafted legal arguments advanced by Canada, history has shown that WTO panels really don’t like discriminatory market barriers of any kind, no matter how they may be dressed up in legal garb.

So the Appellate Body didn’t think much of Canada’s government procurement argument. It said that Ontario clearly wasn’t buying electricity to use on its own behalf – like desks, computers, pens and staplers – but was channelling renewable (“green”) electricity on to the commercial market.

Without that exemption, Canada was disentitled to treat solar equipment from Japan and the EU differently from Ontario-made products.

Where do we go from here?

Well, since the case was brought against Canada as the WTO member, Canada will now have to comply with the Appellate Body decision by Ontario bringing the Green Energy Act into conformity with our WTO obligations. Ontario has said it will do so and the WTO has agreed that it has until March 2014 to make the needed changes.

If this isn’t done, Canada will face the threat of compensatory measures – better described as retaliatory duties – applied by Japan and the EU against Canadian exports to make up the lost trade affected by the offending measure.

That may be difficult to quantify precisely but the threat is a real one. What usually happens is that the winning side chooses a list of exports to hit with punitive tariffs that hurt the most, as Canada is doing in its win against the US in the dispute over discriminatory beef and pork labelling requirements.

So, in the event that the Green Energy Act isn’t changed sufficiently to meet the WTO ruling, Japan and the EU will target those Ontario-made exports most likely to be hurt the most by retaliatory duties.

This WTO decision of course isn’t a total loss for Ontario. For one thing, these decisions are prospective, meaning that it doesn’t affect current FIT contracts but only future projects.

As well, the decision doesn’t affect other parts of the Green Energy Act. That means that higher prices can still be paid by the Ontario Power Authority for renewable energy generated from green sources, except that the qualifications for getting these rates in the future cannot be made contingent on meeting local purchasing obligations.

I suspect that, ultimately, Queen’s Park will make all the necessary legislative and regulatory changes to bring the law into line. The chances of Canada facing retaliatory duties on our exports seems unlikely.