November 2, 2016

CETA Offers a Crumb of Hope for Free Trade

Nita Ghei

Director of Policy Editing
Summary

With the prospects of multilateral trade agreements equally dismal, treaties like CETA might be the best we can hope to achieve to secure the gains from international trade.

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With both of the U.S. presidential candidates advocating protectionist policies, there seems to be little hope in America for further advances in freeing trade. This means the best way forward might be regional and bilateral arrangements.

And there is some good news on this front if you happen to be reading from Canada. With Belgium finally agreeing, the provisional application of Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada is finally back on track. It offers a glimmer of hope in a world grappling with growing protectionist sentiment.

Agreements like this, imperfect as they are, might well be the best we can do to secure the gains from freer international trade. But it is still a sad testament to the world we live in that a bilateral treaty between the world's largest trading bloc and one of the world's richer countries, which took seven years to negotiate, is viewed as a sign of hope.

CETA's path has been far from smooth, and there is no guarantee as yet that it will be fully applied. Various activist groups have opposed it, displaying little understanding of how trade benefits consumers, particularly low-income consumers. Political activist groups Foodwatch and Compact, among others, sought to prevent its implementation earlier in October by injunction and were rebuffed by the German Federal Constitutional Court.

This denial and the court's recognition of the value of trade agreements is heartening. But CETA hit its next snag shortly thereafter, when Belgium's tiny Wallonia region successfully vetoed the deal. This led to the departure of Canada's International Trade Minister Chrystia Freeland from the EU. That a treaty potentially benefiting over 500 million Europeans and 36 million Canadians could nearly be derailed by 3.6 million residents of Wallonia is disheartening.

The most recent agreement, however, will make about 90 percent of the treaty effective, removing 98 percent of tariffs on goods traded between Canada and the EU, as well as removing many non-tariff barriers to trade.

The EU is Canada's second-largest trading partner, after the United States. Canada is the EU's twelfth largest trading partner. Both are important destinations for each other's investors, with a quarter of Canadian foreign investment heading to the EU and Canada the fourth most popular destination for European investors.

Canada exports, on average, about $2 billion worth of agricultural goods to the EU annually, which are subject to an average tariff rate of just under 14 percent. Canadian metal and mineral exports, valued at an annual average of just under $16 billion, are subject to an average tariff rate of 7 percent, with some facing tariffs as high as 10 percent. On the other end, getting rid of tariffs will save European exporters save about half a billion dollars annually, according to the EC's directorate-general of trade.

The bad news is that there is not yet a unanimous vote on the CETA's provisions that create an investor dispute resolution system — with a version of loser pays to discourage frivolous suits — and encourage suits that focus on true violations of treaty obligations. Belgium is poised to be the holdout once again. Without unanimous agreement, the provisions with respect to liberalization of investment will not come into effect. Even so, the gains from liberalization in the trade of goods will be significant.

Regional and bilateral trading agreements are a poor second or third best alternative to a regime of global free trade, which benefits consumers and producers. Unilateral free trade is not a feasible policy option in the existing environment. The piecemeal approach is less efficient, in that it requires many more negotiations.

In addition to CETA, the EU is negotiating a treaty with the United States, and another with India (both of which are largely stalled), while the United States blows hot and cold on the Trans-Pacific Partnership. Regional blocs can result in partners to trading agreements looking inward, due to low or no tariffs within the trade bloc compared to tariff barriers with the rest of the world. This can result in inefficient trade "diversion."

However, an increasing number of such arrangements, if they increase the size of the political community, could restrict the influence of growth-retarding interest groups who seek out privileges from national governments.

Unilateral trade liberalization is still the best policy if the goal is to help consumers, but that remains a pipe dream. With the prospects of multilateral trade agreements equally dismal, treaties like CETA might be the best we can hope to achieve to secure the gains from international trade.