The end is finally in sight for the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). The deal still faces hurdles, but is expected to finally come into effect in 2017. Implementing CETA before the United States and the EU complete their own agreement would give Canadian firms a crucial leg up in earlier enhanced access to the European market. Yet the deal itself is not enough. How Canadian firms adapt to European standards and respond to the opportunities presented will determine whether CETA is a success.
CETA is Canada's most significant and wide-ranging bilateral trade agreement since the Canada-U.S. free-trade deal of the late 1980s. It is also a modern trade agreement, going far beyond tariff elimination, which is usually the central feature of any free-trade agreement but only a small aspect of CETA. The agreement includes reduction of non-tariff barriers (such as regulations), improved protection of investment, increased access to government procurement, and enhanced movement of people.
The Conference Board of Canada has studied the importance of CETA to the Canadian economy and firms. We conclude that companies can take advantage of the provisions in the agreement if they innovate and adapt their products and services in the large and varied EU market. These firms will be able to get a much bigger slice of the opportunity than companies that sit passively and wait for their sales to grow.
Average tariffs on merchandise in Canada and Europe are already low, thanks to years of successive bilateral and multilateral trade negotiations. The largest export gains will occur in sectors where higher tariffs still exist: agricultural goods; food, beverage, and tobacco; chemicals, rubber, and plastics; and motor vehicles and parts sectors.
Over all, a recent Conference Board study estimates that tariff elimination on goods is likely to result in over $1.4-billion being added to Canada's product exports to the EU by 2023, compared to a scenario in which CETA is not in place. These gains could be even larger over time as companies adjust to the opportunities available in a European market of 500 million consumers throughout 28 countries, many of them among the wealthiest in the world.
The broader Canadian business sector may benefit from a reduced impact of EU regulations. Conference Board research on 9,000 Canadian companies that export to Europe reveals that many have found it difficult to adapt to EU norms that are different from those in North America. Under CETA, for some products, a Canadian regulator would be able to assess whether products meet EU specifications. If CETA's provisions reduce the impact of EU regulations, an important and often subtle barrier to trade would be lowered, which could make it easier to sell to Europe – particularly for smaller companies.
Furthermore, exporting goods is only one way to seize the benefits of access to the European market. CETA addresses activities that go beyond exports of products. For example, Canada sells many services to EU customers, either directly or through Canadian-affiliated operations in the EU. If the deal enables easier movement of people between the two markets, this could boost Canada's traded services. While traded services (such as IT and engineering) get little attention compared with goods, they are among Canada's most important sales to the EU and fastest-growing exports to the world.
Our research also indicates that the trends in growth in European demand will affect Canada's EU sales much more than getting rid of tariffs. Having easier access to the European market is helpful, but more robust economic performance in Europe is critical to continuing export success. The EU has 28 member countries with significant differences in their current and long-term economic performance. Canadian exporters will need to develop a deeper understanding of the varied opportunities that will exist by EU region.
In short, CETA represents a great opportunity for Canadian businesses to increase and diversify their sales, in a market comparable to that of the United States. CETA should meaningfully reduce tariffs and many other commercial barriers. But even with these barriers reduced or gone, Canadian companies will still need to adapt and respond to European opportunities and nuances. Firms that do so, and are already preparing today, will be able to reap the greatest gains from the deal.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada. Danielle Goldfarb is director of the global commerce centre at the Conference Board.