By: Andrea Gorga
The EU-Canada Comprehensive Economic and Trade Agreement (CETA) went into effect on September 21, 2017. (European commission summary 2016). CETA included several innovative provisions, some which should be included in future free trade agreements (FTAs) and some provisions which need improvement. Developing free trade means finding a new way to enhance global economic integration outside neo-protectionism and the neoliberal agenda. According to a survey, 86% of economists are against tariffs and non-tariff barriers to trade (Klein and Stern 2006). At the same time, free trade agreements are rarely truly free, but rather manage trade in attempts to ease the difficult transition for the worst off in one or more of the trading partners. Some consider CETA the new gold-standard of trade agreements, representing an important step towards a more sustainable and fair global economic integration. The EU and Canada, with similar commitments to public welfare, environmental protection, and enforcement of labour rights, have a great advantage in negotiating a truly progressive and sustainable FTA.
Evolution of trade
After over a century of protectionism in which mercantilist theories were widely accepted, Adam Smith’s and David Ricardo’s works contributed decisively to trade liberalization. The “comparative advantage theory” was revolutionary and finally able to explain the benefits of trades. The basic argument is based on the concept of opportunity cost, best explained with an example. Canada is a major oil exporter, while the EU exports food and wine. Assume Canada can either produce $1 in wine bottles or $10 in barrels of oil. Canada’s opportunity cost of producing a bottle of wine is $10. The EU can instead either produce $10 in wine bottles or $1 in barrels of oil. The opportunity cost is therefore reciprocal. The EU clearly has a comparative advantage in producing wine over oil while Canada has a comparative advantage in producing oil. David Ricardo demonstrated how if the two countries only produce the good they are best at, and then trade, they will both be better off than living in autarky.
At the beginning of the 20th century, the rise of extreme right movements in Europe posed a further obstacle to the implementation of open markets. But, since the middle of the last century, the necessity of freeing trade has become widely accepted in research and policymaking. The UK and U.S. (until recently), have always supported trade liberalization. With their prominent roles in the Bretton Woods Agreements and the foundation of the General Agreement on Tariffs and Trade (GATT) there began a process leading to an increasingly open global economy. The WTO was then instituted in 1995 and now counts over 145 members. In the last century, globalization has accelerated steeply and the global economy has become highly interconnected. The value of global exports in 1950 was nearly 32 times smaller than it was right before the financial crisis in 2008 (Giovanni and Tena-Junguito 2016). Adapting to this clear trend of a globalizing economy spurred government interventions to facilitate trade between countries and end the wave of protectionism.
Over the last 50 years many free trade agreements (FTAs) developed and the topic has attracted the attention of policymakers and the public. Even though there is a general agreement on the benefits of trade for the economy, there are also drawbacks. Until the late 90s, most FTAs only aimed at reducing tariffs and barriers, while recently further elements of integration have been included. NAFTA (the FTA between the U.S., Canada, and Mexico) was the first of this kind and introduced many innovations in trade facilitation, the environment, and support for SMEs (small and medium enterprises).
One of the most important ones is the introduction of Investor-State Dispute Settlements (ISDSs) which allows foreign investors to directly sue governments for allegedly discriminatory regulations. It was the first time such a provision was implemented in an agreement between industrialized countries. In recent years, there has been increasing aversion towards FTAs.
The main concerns are the constraints FTAs can pose on public policy, the downward pressure on wages of manufacturing workers and the negative effect on environmental regulations. CETA tries to respond to these concerns with a series of innovative provisions. It is one of the most comprehensive and ambitious FTAs ever negotiated.
Canada is one of the EU’s oldest commercial partners. The first commercial agreement was signed in 1976 (Framework Agreement for Commercial and Economic Cooperation). In the years following, trade between the two regions strengthened. The EU is Canada’s second largest trading partner after the U.S. In 2009, the EU and Canada launched negotiations on CETA, which is the EU’s first comprehensive agreement with another industrialized country. The agreement was approved on the 15th of February 2017 by the EU parliament. In April, 95% of the treaty was already operational even though a vote from each of the 38 national and regional parliaments was necessary for the final approval. The provisions concern almost every aspect of the countries’ economies: goods, services, investments, government procurements, intellectual property, and sustainable development.
Goods. The EU and Canada agreed to eliminate more than 98% of each other’s tariff lines (EU commission summary 2016). This will save Europe 470 million euro annually in industrial goods. Some tariffs will be kept to preserve agricultural businesses. Also, the two parties will remain free to grant domestic agricultural or fishery subsidies.
Services. Contrary to FTAs in previous generations, CETA is also about the liberalization of the market in services between the two countries. This type of market presents complications in terms of non-tariff barriers. For the first time, the EU agreed to a “negative list” approach. This means that CETA only mentions the services that are excluded from trade liberalization which are: health care, education, social services, water distribution, audio visual services, and air services. The agreement also has a section for mutual recognition of professional qualifications that facilitates temporary movement of people across the border and makes competition fairer.
Investments. Canada is the 4th largest investor in the EU, therefore it strongly pushed for a broad chapter on investments. CETA indeed contains provisions that ensure investors from both countries are treated equally (National Treatment clause) and also provisions concerning investment protection against discrimination. CETA clearly states the obligation to provide “fair and equitable treatment” and, for the first time in international investment agreements, it also defines the actions that constitute a violation of this obligation. One of the main innovations introduced by CETA is a new form of ISDS discussed in the next section.
Government procurements. The EU’s public procurements were already open to Canadian companies. With CETA, EU companies gained the opportunity to compete in Canadian’s public tenders. The EU also gained access to federal, provincial, and municipal entities’ tenders.
Intellectual Property and Geographical Indicators (GIs). CETA uses the WTO’s agreement on Trade-Related Intellectual Property Rights (TRIPS) as a starting point and then strengthens the protection in some sectors like pharmaceutical patents. It is also the first FTA that achieves the recognition of a broad range of GIs. They are successes especially for SMEs relying on the recognition of the special quality of their products to compete with multinational companies.
Sustainable Development. CETA entails rules that aim at high standards in labour and environmental issues. The parties committed to respecting the International Labour Organization (ILO) standards and other rights, like health and safety at work. They also ratified the ILO Conventions. On the environment, the EU and Canada committed to implementing various Multilateral Environmental Agreements. CETA also guarantees labour and environmental laws are not used for gaining competitive advantages (for example, by weakening the standards). It provides procedures based on an independent third-party review mechanism for the resolution of disagreements. Another progressive provision is that goods and services must satisfy the respective import market regulations, which further protects domestic policymaking.
Elements of progressivism
CETA is a modern and ambitious FTA that acknowledges the necessity of moving beyond traditional arrangements primarily focused on removing tariffs and custom duties. It indeed has a special focus on non-tariff barriers such as domestic regulations, standards, and procedures. It also acknowledges the necessity of giving meaningful answers to the concerns previously mentioned (constraints on public policy, protection of labour standards).
CETA is one of the few agreements that directly adopts the ILO Conventions (rather than merely adopting the ILO Declaration which is much less specific and nearly unenforceable) (Agustí-Panareda et al. 2014). The Conventions are self-explanatory and provide thorough protection for labour rights. This is a significant improvement compared to previous agreements, especially U.S. FTAs. CETA also includes mechanisms to support the domestic implementation of ILO standards and a dispute resolution mechanism. A worker can request advice from the Joint Committee on Trade and Sustainable Development, trade unions, and industry associations. The Committee can subsequently call for a panel of experts to examine the matter. The panel finally makes the appropriate recommendations to resolve the alleged violation.
Even though it is the first time these kinds of provisions have been included in an FTA, CETA lacks enforcement mechanisms and there are no specified penalties or fines. This is very common for the EU, although not the U.S. which often specifies sanctions for not respecting (much less strict, but defined) labour rights. This approach, called promotional, assumes a degree of cooperation and dialogue to foster the trade-labour rights liaisons. Van den Putte (2016) claims that, even if the trade agreement does not have any impact on regulation at all, there are often positive effects through knowledge-building during the dialogue and negotiations. This approach was employed as an alternative to the results of prescribed sanctions in U.S. agreements. Those sanctions are very rarely applied and often hinder dialogue and cooperation (Ebert and Posthuma 2011). At this point the natural question one can pose is: why are the labour standards not enforced? Although this is not the purpose of this essay, explaining a few of the reasons behind this choice can help to understand and contextualize the framework in which CETA was approved.
Neither the U.S. nor the EU approach worked at enforcing labour rights through FTA negotiations. Enforcement is founded on the ratification of standards and their implementation (Moore and Scherrer 2017), but FTAs can only set up institutional foundations and legal frameworks. It can then only depend on the states’ political will whether these provisions will be binding and effective. Moore and Scherrer (2017), together with many other researchers (see Greven 2005), claim that the capacity of local trade unions is the variable with the most impact in enforcing ILO standards, which is why there is no significant difference between the EU’s and U.S.’s approach in terms of enforcement.
The common critique to CETA is that the chapter on sustainable development, and the section on protecting labour standards in particular, is not going to be effective because of the lack of specific sanctions. This is not necessarily true according to the idea that improving labour conditions cannot come directly from the legal framework, but it needs further effort from civil society and domestic political action. Many FTAs negotiated by the U.S. include sanctions, but those were employed inconsistently and on very rare occasions. The sanctions therefore had no significant effect.
Investor-State Dispute Settlements (ISDS)
This is probably one of the most innovative features of CETA. ISDS responds to the demand of investors from developed countries for certainty and fairness in the judicial process in case of disputes. Domestic tribunals in developing countries were often considered corrupt and unreliable. The ISDS system was initially a way to lower political risk for investors. Agreeing to these dispositions shows commitment to complying with the investor protection obligations regardless of the political environment. Since their first application, ISDS procedures have been harshly criticised for the lack of democratic accountability (Gaukrodger and Gordon 2012). They often interfere with domestic legislation for the sake of free trade. Also, critics have identified a lack of independence among the board of arbitrators. Half of them are usually appointed by each party and they choose a last neutral arbitrator as chairperson. As only the investors can initiate a case, arbitrators can favour them with the hope of future work opportunities. This behaviour can be aggravated when it comes to jurisdictional challenges. Favouring the investors, counsel can severely affect the independence of the domestic legislature. CETA is designed to respond to these criticisms. Canadian FTAs already provide the most advanced regulation on ISDS, but CETA goes even further. Following is a short list of significant innovations in CETA’s ISDS rules.
- Investors cannot submit any claim before 180 days from their request. This provision is designed to try to encourage cordial resolutions (also present in NAFTA, but shorter time limits).
- There is also a time limit on claims that can be extended if the investor is willing to address local and domestic courts first. This aims at encouraging investors to use domestic standard procedures (also considering the reciprocal trust in domestic tribunals).
- For the first time, CETA makes it mandatory for tribunals to discuss preliminary objections of the states concerning jurisdictional issues.
- CETA also improves the legitimacy of ISDS practices. It is the first treaty that adopts the UN Commission on International Trade Law (UNCITRAL)’s Rules on transparency. UNCITRAL prescribes that all the relevant documents submitted for the ISDS must be made public. CETA goes beyond and requires that even pre-arbitration documents be published.
- The highest institution created under CETA is the CETA Joint Committee. Among its tasks is the approval of a 15-member tribunal formed by 5 EU nationals, 5 Canadian nationals and 5 from other countries. Only ISDS will be discussed by this tribunal. This solves the issue of conflicts of interest in appointing the arbitrators. CETA also has a permanent section that sets a series of provisions aiming at ensuring the independence of tribunal members (randomness of appointments on cases, more permanent salaries for tribunal members). CETA clearly represents a further step towards a judicial model (fixed term appointments, independence of funding).
- CETA is the first FTA to create an appellate tribunal for ISDS that has a broad ground of intervention, including errors in domestic law interpretation.
In short, CETA tries to fully respond to the previous criticisms of ISDSs and indeed provides an important innovation towards fairer, more legitimate and independent judicial processes. There are still flaws that need to be addressed. Tribunal members, for example, do not have fixed compensation and they are allowed to do outside work (though not in the fields discussed in the ISDS) (Van Harten 2016), but overall CETA is considered a milestone in the evolution of regulation on ISDS. It develops from the provisions of new generation treaties like NAFTA and goes further with substantial innovative elements (VanDuzer 2016).
The era of globalization with increasingly developed global markets raises the need for new tools aimed at preserving the worst off in a given state. Trade can put downward pressure on wages and labour rights, and poorly designed FTAs can further weaken the democratic power of the disadvantaged (through ISDSs). Although there is a well-established rationale behind investor protection and trade liberalization, recent experiences with NAFTA and other FTAs raise doubts about these justifications. CETA is a new generation FTA that tries to respond to the critiques often made in the past, both on the side of investor protection and on the side of preserving labour standards. The agreement will be a great opportunity for sustainable economic growth and it will be the test for important innovations that could significantly shape future FTAs.
Editor: Eric Witmer
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