Taking down the tariffs

Government departments and industry stakeholders are taking steps to prepare for the entry into force of Canada’s new free trade regime. To the extent that Canadian enterprises and their industry associations are not engaged in an analysis of how they might be affected — whether they import, export, purchase or domestically supply goods or services — now is a very good time to start.

Canada is on the cusp of entering into a new era of unprecedented free trade that will involve countries throughout the Americas, Europe and the Asia-Pacific region. The Comprehensive Economic and Trade Agreement (CETA) seeks to promote cross-border trade and investment between Canada and the 28 member states of the European Union. At the same time, the Trans-Pacific Partnership (TPP) aspires to create a massive free trade area encompassing Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, while improving the environment for foreign direct investment among those countries. Under these agreements, Canada will establish new regional free trade relationships with 35 countries, while updating and reinforcing existing trade pacts with the United States, Mexico, Chile and Peru.

When the CETA and the TPP eventually come into force, they will affect the competitive landscape for agricultural, manufacturing and service industries throughout Canada, as well as in markets abroad. For industry stakeholders, this may mean potential new market opportunities, but it may also mean potential risks to established trade flows and business arrangements as a result of increased competition involving new participants. Assessing such opportunities and risks involves: (1) identifying which elements of the CETA or the TPP will apply to, or otherwise affect, trade in particular goods or services; and then (2) determining how market access for those goods or services may be affected, not only in Canadian domestic markets but also in foreign markets.

A simple example involves the elimination of most customs tariffs that apply to goods imported from CETA and TPP countries. For Canadian industries that import their input materials, the preferential market access provided for goods originating in CETA or TPP countries could mean new competition in the Canadian market that leads to more favourable prices and supply terms. On the other hand, firms supplying the Canadian market may face increased competitive pressure as a result of new CETA and TPP participants, leading to decreased purchase prices and volumes. Looking outward, tariff elimination may mean new competitive opportunities for Canadian exporters enjoying preferential market access to markets in the CETA and TPP free trade areas, but it may also mean increased competition and shifting trade flows in important export markets like the United States.

To give a very simplified example, a Canadian parts producer whose business is focused on supplying North American manufacturers of advanced machinery or equipment will be affected by (1) increased competition in the Canadian market from new EU and TPP suppliers, and (2) increased competition in the U.S. market from new TPP suppliers. However, if this Canadian company has the resources to market its goods to manufacturers in EU and TPP countries where market access is opening up, there may be new competitive opportunities for export sales to those markets. In some cases, the high quality control standards for Canadian goods and the reliability of Canadian suppliers may provide a competitive advantage in certain export markets. Another broad example contemplates the fact that once the CETA enters into force, Canada will be the only G-7 country to have guaranteed preferential market access to the world’s two largest economies: the EU and the United States. This means that the CETA will provide trade and investment opportunities for U.S. enterprises based in Canada (e.g., through Canadian subsidiaries of U.S. companies), at least until the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States comes into force.

Questions that industry stakeholders and their legal counsel should be asking include: Does our industry produce goods for export or provide international services that could benefit from the new preferential tariff treatment or market access under the TPP and/or the CETA? Are there risks to my existing accounts with established customers — both in Canada and abroad — that might arise due to new competitors entering markets where we do business? Does my industry import input materials, finished goods or use services that I could source more competitively under the TPP or the CETA? Alternatively, will shifting trade flows caused by changes to the competitive landscape adversely affect my lines of supply?

The reason why these enquiries and analyses should be undertaken now is that the “implementation” of Canada’s international commitments under the CETA into Canada’s federal and provincial legislation is imminent, and it may not be long before the same process proceeds with respect to the TPP. To the extent there is interpretative flexibility in the text of the agreements, the necessary legislative changes will generally reflect an interpretation that favours Canadian interests. Consultations between Canadian stakeholders and the appropriate government departments and agencies through administrative working groups are a key element of this process, as industry input is critical to fully inform the government of the practical implications of CETA and TPP provisions. In some industry sectors, such consultations have begun.

This has been written by Dan Hohnstein, an associate of Borden Ladner Gervais LLP, and Greg Tereposky, a partner, who specialize in international trade law, for the April 2016 edition of the Lawyers Weekly.