European Commission presents CETA proposal in the wake of Brexit

As Brexit creates shock waves of uncertainty around the globe, supporters of the landmark Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA or the Agreement) may, ironically, be getting an answer to the long-pressing question of how the Agreement will be ratified – even if it is not the answer they wanted.

In the wake of the Brexit vote, the President of the European Commission (EC), Jean-Claude Juncker, informed EU leaders that the EC planned to bring CETA into effect without individual member countries ratifying the Agreement. This was a welcome announcement for supporters of the trade deal. However, on July 5, 2016, the EC changed course and presented a proposal to the EU Council that the Agreement be put forward as a “mixed agreement” requiring ratification by all EU member states. The Agreement may, however, be provisionally applied pending its full entry into force.1
 


The ratification question

Prior to Brexit, the EC had not formally announced its ratification plan for CETA, despite the fact that the draft text was released almost two years ago and its legal review was completed this past winter. CETA is one of the first comprehensive trade agreements negotiated by the EC on behalf of the EU member states following the 2009 Treaty of Lisbon.

The looming question has from the outset been whether the Agreement covers only matters within the EU’s exclusive competence, in which case it could be passed by the European Parliament and the EU Council, or whether it is a “mixed agreement” that must also be ratified by each EU member state. The ratification question relates to how much sovereignty individual member states retain in relation to trade agreements – a question that mirrors concerns inherent in the Brexit debate.

The EC has asked the European Court of Justice (ECJ) to determine which provisions of the EU-Singapore free trade agreement, negotiated in parallel to CETA, fall within the EU’s exclusive competence and which fall within the jurisdiction of individual member states.2 The ECJ has not yet rendered a decision. However, the EC made a nod to this outstanding decision in its July 5 press release, indicating that the decision to push CETA forward as a mixed agreement is “without prejudice to its legal view” as expressed in the pending ECJ case. EU Trade Commissioner Cecilia Malmström explained that, while the EC’s legal view is that the Agreement falls within exclusive EU competence, it is being put forward as a mixed agreement to satisfy political pressures:

…the open issue of competence for such trade agreements will be for the European Court of Justice to clarify, in the near future. From a strict legal standpoint, the Commission considers this agreement to fall under exclusive EU competence. However, the political situation in the Council is clear, and we understand the need for proposing it as a ‟mixed” agreement, in order to allow for a speedy signature.

The EC’s decision to propose that CETA move forward as a mixed agreement will make the road to CETA’s implementation more challenging. It opens the Agreement up to scrutiny by national parliaments, which could delay or threaten full and final implementation of the Agreement, particularly as the EU’s competence in relation to foreign investment under the Treaty of Lisbon remains controversial. CETA contains novel investment protection provisions that proved contentious during negotiation of the Agreement. In fact, as part of the legal review of the Agreement, Canada agreed to modify certain of these investment provisions, presumably to keep the deal afloat. It is unclear whether even the modified provisions will satisfy all EU member state concerns in the proposed ratification process.
 

CETA and Brexit

Even with a ratification proposal, a great deal of uncertainty exists with respect to how the deal will be affected by Brexit going forward.

The Agreement could be ratified while the UK formally remains part of the EU – for the time being, the referendum has not sparked any changes in UK law and it officially remains part of the EU. However, if and when the UK leaves the EU, it would likely have to withdraw from CETA unless an agreement can be reached. CETA could conceivably continue as a UK-EU-Canada agreement or as two bilateral agreements – one with the UK and one with the EU – with necessary adjustments. Britain may also opt to completely re-organize its trading relationships, focusing, for instance, on deepening trade ties with the Commonwealth countries, which could benefit Canada.

If the UK withdraws from CETA altogether, Canada may be left facing a deal that from some angles looks little like the one it spent five years negotiating. Every trade agreement is an exercise in balancing the bargaining scales through compromises and concessions. Assuming CETA moves forward without the UK, the scales may be tipped off balance.

CETA is a significant agreement for Canada in large part because the EU is the largest integrated economy in the world that, at least when the Agreement was negotiated, comprised over 500 million consumers and a gross domestic product (GDP) of at least $CAD 17 trillion. The EU with Britain is also Canada’s second-largest foreign investor, with investments in Canada reaching €225 billion in 2013.3 However, within that market, the UK is, in the Government of Canada’s words, “by far Canada’s most important commercial partner.” The UK is also Canada’s third most important trading partner after the United States and China.4 A British exit from CETA would mean the loss of 64 million potential consumers and a GDP of almost $USD 3 trillion.5

The EU post-Brexit looks quite different than it did when CETA was negotiated and while CETA provides for accession of new member states to the European Union, it does not provide for the departure from the EU of any member countries. The bargain struck in CETA will therefore require a careful evaluation to determine if the same net benefit to Canada can still be expected.

The UK also stands to lose important benefits conceded by Canada at the bargaining table, including: tariff elimination and elimination of non-tariff barriers; an increase in the monetary threshold triggering a pre-closing review of investments by Canada’s minister of industry under the Investment Canada Act to ensure the investment provides a net benefit to Canada, and deeper and more favourable access to procurement opportunities – including at the provincial and territorial level.

Many EU nations may also be left wondering whether CETA still represents a fair bargain for them, for instance because certain concessions may have been made on the understanding that the burdens would be shared by Britain, currently one of the EU’s largest economies.

Assuming the UK formally withdraws from the EU without putting in place a bilateral or multilateral trade treaty with Canada in its own right, the default regime would be the reciprocal application of Canada and the UK’s most-favoured-nation (MFN) terms under the rules of the World Trade Organization, of which the UK is a member in its own right. There is no bilateral trade agreement between the UK and Canada. In terms of tariffs, the UK currently applies the EU’s common external tariff to Canada;6 however this is likely to be replaced by the MFN tariffs at the time of withdrawal.
 

Conclusion

Ironically, Brexit may have had the unintended consequence of providing the EC with a much-needed impetus to announce a ratification proposal for CETA. Unfortunately, facing a fork in the road, the EC seems to have selected the riskiest route to implementation. The EC’s decision – like Brexit itself – may seriously delay or 
threaten full and final implementation of the Agreement.
 

Footnotes

1 European Commission – Press release: European Commission proposes signature and conclusion of EU-Canada trade deal.
2 Commission Decision of 30 October 2014 requesting an opinion of the Court of Justice pursuant to article 218(11) TFEU on the competence of the Union to sign and conclude a Free Trade Agreement with Singapore, C(2014) 8218 final (2014).
3 European Commission: Questions and Answers.
4 Government of Canada: Commercial and Economic Relations.
5 Export Development Canada, Country Info.
6 Global Affairs Canada, Tariffs and Non-Tariff Measures.

Recent publications

Subscribe and stay up to date with the latest legal news, information and events...