CETA: The Ghost Of Brexit To Come?

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Summary

CETA is one of the most comprehensive free trade agreements concluded to date. Under pressure the EC allowed for a country-by-country ratification process.

Wallonia, a small French-speaking enclave and one of the 5 sub-federal regions of Belgium voted decisively against approving CETA in the first test of popular parliamentary sentiment.

The EC agreement allows for 27 national and 11 regional parliaments to vote on CETA. Given the results in Wallonia, the EU ability to deliver trade agreements is in doubt.

The Comprehensive Economic Trade Agreement (CETA), the recently completed free-trade agreement (NASDAQ:FTA) between the European Union (NYSEARCA:EU) and Canada, has run aground in the tiny enclave of Wallonia-one of the five sub-federal regions of Belgium. While every member-state at the national level has publicly stated its preliminary support for the agreement, Belgium's affirmation is tied to the approval of its regional parliaments. The parliament in the French-speaking region of Wallonia, a region with a population of just 3.5 million, cast a resounding "non" vote last week that could block Belgium from ratifying the deal at a planned EU-Canada summit on the 27th of October-a summit that is now in jeopardy of being cancelled. The Wallonia vote has all the potential of scuttling negotiations that have been ongoing for the past seven years which could give the tiny enclave the uncanny power to determine the terms of commerce applying to the entirety of the EU, a single market of 517 million Europeans. Wallonia boasts one cow for every three humans and its lavishly subsidized farmers are understandably wary of cheap competition from Canadian dairy farmers. While an eventual agreement that essentially buys off the affected farmers in Wallonia could solve the crisis, there are certainly many more hurdles of a distinctly parochial flavor lurking across the vast European landscape.

In a nod to local pressure, the EU trade commission decided this summer to allow a country-by-country ratification process for the CETA agreement instead of the more standard "fast track" approval process confined in Brussels. This means that any one of the EU's 27 national parliaments and 11 regional parliaments hold sway over the final ratification of the agreement. Unanimity is required. With so many vetoes possible under such a format, the odds of the behemoth Transatlantic Trade Investment Partnership (TTIP) getting full EU approval seems hard to imagine. It is equally hard to imagine concluded EU trade agreements with East African countries, Vietnam, Ecuador, West Africa and Singapore that also face such a ratification process, not to mention ongoing negotiations with the Pacific Rim countries of Japan, Malaysia, Indonesia, Myanmar, India, the Philippines and Thailand. None of this bodes well for the UK-EU negotiations-let alone the ratification process of any agreement that may result from the process. Canada is a country of 36.3 million people. The UK is almost double that measure at roughly 64 million people. The current EU dilemma brings to the fore Brussels' ability to deliver seemingly any trade agreement in the foreseeable future.

CETA is an ambitious free-trade agreement that is projected to increase bilateral trade between the two trading blocs by roughly 20% with combined GDP of $20 trillion. The pact's goal is to eliminate most tariffs at full implementation and eliminate tariffs on all industrial goods between the two trading blocs within seven years. The main provisions include:

  • Nearly 92% of all agricultural products will flow between the two trading blocs duty free. Duty-free agricultural and foodstuffs include grains such as wheat, rye, barley and oats. Agricultural products include pork, beef and bison while fresh, frozen and processed vegetables are also part of the agreement. Specialty items like canola oil and maple syrup are also included;
  • EU fish processing industry will have better access to Canadian fish. The agreement sets up a regulatory mechanism to develop sustainable fisheries in parallel;
  • The two trading blocs agreed to set up a regulatory conformity assessment body that would allow both EU and Canadian goods such as electronics, machinery, measuring equipment and toys to under safety and quality testing export products in their respective countries without undergoing similar testing upon importation;
  • Canadian markets will now follow the appellation systems used widely throughout the EU for such national specific products like Aceto de Balsamico di Modena, cured meats like Prosciutto di Parma and Prosciutto di San Daniele in Italy, Italian cheeses like Grana Padano, Gorgonzola and Parmigiano-Reggiano, French cheeses like Roquefort and Camembert, Greek cheese like Feta and olives from the Messenia region, French wines and cognac, Kielbassa from Poland, specialty breads like Waterford Blaas from Ireland and a host of other national and regional designation products officially recognized by the EU;
  • CETA allows EU suppliers to bid on Canadian procurement projects at all levels of government above the base figure of $340,000;
  • EU companies will receive an 18-month extension on patent protection in Canada;
  • The agreement sets up a permanent arbitration body called the Investor State Dispute Settlement (ISDS) to handle trade disputes. The body was made a permanent feature CETA only in February.

Trade theory has long taught that the exchange of goods and services across international borders has secular benefits to all parties involved-provided the agreement is fair and regulated transparently. Still, in every trade agreement there are winners and losers. While winners invariably outnumber losers over time, it's the latter category that carries the most passion into the political arena. Modifying or giving up parochial interests to advance the cause of the greater common good is always difficult-both in articulation and implementation. Governments have a history of not providing sufficient public policy remedies to cushion the loss of jobs in impacted industrial sectors newly exposed to competition and economies of scale with the lowering or elimination of tariff regimes resulting from international trade agreements. The economic literature is replete with research outlining just how surgically damaging FTA can be across the local, regional and national economies, sowing the very seeds that fuel the rise of populist responses from both sides of the political spectrum-from the US to Germany to Italy to the Netherlands to France to Hungary. Many of these movements owe much of their mainstream legitimacy to rising popular distrust of government stemming from lost jobs and shuttered factories-and particularly to international institutions that supersede national regulatory and supervisory bodies. FTA feeds neatly into this paradigm. So does Brexit.

CETA has made a good deal of progress in the agricultural arena which is one of the most politically sensitive and protected sectors of commerce the world over. Yet only to a point: The liberalization of trade constraints on Canadian beef and pork will run afoul with growth hormones such as ractopamine, a drug that is widely in the US and Canada that has long been banned in the EU. Similarly, Canadian canola oil derives mainly from genetically modified grains will be exported to the EU-if at all-in the form of biofuel rather than for human consumption. CETA will not change EU food or environmental regulations currently in place. Nor will the agreement put any restrictions on future rules in these areas. Sensitive foodstuffs will continue to trade via quotas. Eggs and poultry are largely excluded from the agreement.

The appellation agreement implies that Canadian shelves will be stripped of products not officially designated as such which will include many such products that are currently produced in both the US and Canada.

Canadian exports of cars into the EU will be increased over time to 100,000 units per year-a long way from the 12,000 exported to the EU last year. The rub here is American car manufacturers already have a well-established sales and distribution networks throughout the EU which means Canada's export of US model cars manufactured in Canada will likely not change much with or without a trade agreement with the EU. From the EU vantage point, German luxury cars will become cheaper in Canadian markets as import tariffs are lifted under CETA.

The Canadian generic drug industry and consumers are net losers under CETA with the 18-month extension of patent protection for EU brand drugs sold into the Canadian market. The Trans-Pacific Partnership (TPP) between the US and 11 Pacific Rim countries saw patent protection extended from five to 12 years in a similar bid to shield international drug companies from generic competition while driving up drug prices for consumers.

CETA allows EU companies to bid on Canadian public sector procurements at all levels of government-a first in annals of free trade agreements. That Canada consented to such a deal is likely a tribute to the lure of selling into one of the biggest markets on the planet and just how much it costs in concessions to accomplish the task.

And then there is East European countries like Poland, Lithuania, Romania, Bulgaria and Hungary-all concerned with visa restrictions applied to their citizenry by G7 countries. Both Romania and Bulgaria have expressed public opposition to CETA without free movement guarantees enshrined in the text. While Canada is the immediate focus of East European wrath, Britain is an obvious and even bigger target on down the line.

A few words on Brexit: The EU view on Brexit continues to evolve and by bits and pieces is slowly making its way into the public domain.

  • By refusing to negotiate until the UK invokes Article 50 of the Lisbon Treaty, the common view in Brussels is that the refusal pushed Mrs. May into setting the March 2017 trigger date. Forcing the prime minister's hand on announcing a trigger date keeps maximum market pressure on the UK as investors continue to pummel the pound while UK borrowing costs continue to rise;
  • The current depth of the pound has triggered inflation as the price of imported goods and some services denominated in foreign currencies continue to rise in local markets across the country;
  • Rising inflation essentially puts any expansion of monetary policy on hold-an important element that cushioned the economy from the pains of rapid downward adjustment over the relatively short period of time since the referendum vote. Rising inflation also puts the screws on working class Britons-especially the working class poor who are forced to devote a greater percentage of their income to food and especially energy costs-the latter of which is priced in dollars. Many of these workers voted Leave.
  • Welfare benefits usually rise with prices in the greater economy. As of last year these benefits for working aged beneficiaries were frozen in cash terms until 2020 effecting some 12 million households.
  • Pleas from London-based banks and investment firms for Article 50 transitional clarity to allow for logistical planning have also gone unheeded. The financial services industry will be forced to make major decisions on scant information about the final outcome of the talks that will take years to conclude if CETA provides any frame of reference. If banks are forced to act the resulting decision will likely play into the EU's hand as such physical moves will find much of London's financial district planting new roots on the Continent.
  • To date, Brussels does not see the loss of passporting rights by London-based banks and investment firms as destabilizing to the Continent. True to form, much of the work currently being done is on the divorce side-calculating UK pension and retirement liabilities for scores of British nationals currently employed directly by the EU, severing the UK from current EU commitments and working on ways to plug funding gaps created by the possible loss of UK contributions to both the EU budget and ongoing projects.

The EU positioning on the upcoming Article 50 negotiations is becoming clear: to apply the maximum amount of pressure on the UK from literally all directions in hopes that the sheer expense of the operation will convince Britain to remain in the bloc-a view that is widely held in Brussels.

In the meantime, the UK government recently announced last week that work has begun on a targeted visa regime by sector on a work permit basis. According to draft documents, students would continue to be allowed into the country for educational purposes. The free flow of labor would be limited by skill level-the highly skilled would have to have a firm job offer in hand to gain access to the country while lower-skilled agricultural and construction workers would be given temporary six-month visas with no residency accrual rights and presumably an accompanying enforcement regime. The so-called Seasonal Agricultural Workers Scheme (SAWS) made provisions for 20,000 temporary workers mainly from Bulgaria to enter the country to pick fruits and vegetables.

Capping the migration of labor into the country flies in the face of the free movement of labor dictates that is one of the four freedoms of the single market which would disqualify the UK from any current FTA program with the single market-out of hand. Even if such a concession somehow wormed its way into a final agreement, countries like Poland, Lithuania, Romania, Hungary and Bulgaria would be assured to cast defiant vetoes during the ratification process. If CETA appears to be facing a difficult tenure in the ratification process, the UK-EU FTA based on current UK positions is screaming toward a brick wall.

For Brussels, even the thought of a country actually wanting to leave the bloc is difficult to understand. The harder the Brexit, the greater the probability of a second referendum-or some other face-saving action to reverse Britain's current path.

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