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FX101: CETA Explained

In Business and Currency by Continental StaffLeave a Comment

The last time the CETA agreement was in the news Wallonia, the French-speaking region of Belgium, threatened to scuttle the entire deal. This time the Comprehensive Economic and Trade Agreement is in the news for much more promising reasons.

The EU Parliament voted to pass the CETA agreement by 408 to 254 votes, with 33 members abstaining. After nearly eight years of negotiations, and about 1,600 pages, the deal is finally being put into place…or at least most of it is.

The European Parliament vote means that tariff reduction will be implemented, but the controversial investor court system (whereby businesses could take any member country they believed was in violation of the deal to binding arbitration) will be reviewed, and have to pass through the labyrinth that is the complicated EU legislative system. The investor court system, and other contested aspects of the deal will have to be ratified by each EU member country, as well as the EU Parliament. The deal still also needs to be ratified by the Canadian Senate, but there is no anticipated issue with this final (Canadian) step.

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What is the CETA agreement?

The CETA agreement is a Canada EU free trade agreement. The deal will see Canada and Europe remove tariffs and other barriers on eachothers products (and some services). Once fully implemented the deal is expected to remove 99% of all non-farm duties between Canada and the EU.

Why?

The EU, when including all member countries, is the largest economy on earth (according to the UN), while Canada is the world’s 10th largest economy (not bad for only 35 million people, eh?). The two economies already have a bustling trade relationship of about  €63.5 billion. The deal is expected to save EU exporters about €500 million in tariffs every single year.

According to the European Commission’s (one of three pillars of the EU) website, “Canada is a large market for Europe’s exports and a country rich in natural resources that Europe needs.”

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What are the arguments in favour of CETA?

Supporters of free trade agreements in general usually argue that reducing tariffs and other barriers to trade allow economies to grow more specialised, competitive, and prosperous. NAFTA (North American Free Trade Agreement) between Canada, the US, and Mexico helped boost US investment in Canada from $70 billion in 1993 to $368 billion in 2013.

Many supporters argue that the deal comes at the perfect time, as Canada’s largest trading partner, the US, is in turmoil under the Trump administration which has threatened to “renegotiate” NAFTA. Moving closer to the EU would be a prudent move to reduce reliance on the US.

As the European Commission Vice-President for jobs growth, investment and competitiveness tweeted, the CETA agreement is “Good for jobs and businesses in Europe and Canada!”

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What are the arguments against CETA?

Most opposition to CETA comes from anti-globalisation campaigners. Wallonia, the Belgian region which blocked the deal earlier this year and is “staunchly socialist” did so for protectionist reasons, believing that certain industries would be out-competed by Canadian firms. They also stood in opposition to the aforementioned complex investor court system which they believe will effectively mean multinational corporations dictate policy.

Many groups also raise environmental concerns, and concerns about the quality of Canadian products. The EU has some of the highest quality-assurance standards in the world, and some EU members are concerned that Canadian goods don’t meet those standards. Lowering labour standards in Europe is another common concern.

Far right French candidate Marine Le Pen has been vocal in her opposition to the deal. Donald Trump has also spoke out against NATO, and ended the proposed Trans Pacific Partnership, throwing all global trade deals into question.

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What the CETA agreement means for businesses

Most businesses should be thrilled by the CETA agreement. It opens up a market of about 500 million people to Canadian businesses. That means goods and some services can be sold, with no tariffs, to a market more than 10 times the size of Canada.

Companies that capitalize quickly on the deal should find themselves in a much stronger position than they were prior to the deal. Detractors argue that Canadian businesses may face stiffer competition, and some could even go out of business. Dairy farmers are some of the most concerned, but for such threatened industries the Canadian government is offering financial assistance to help them adjust and compete.

EU firms will also be allowed to bid on deals for public contracts in Canada. This means that the government will likely pay less, but also that fewer Canadian companies may win contracts.

CETA will also make it somewhat easier to move employees between Canada and Europe temporarily for work purposes, but it should be clear it will not increase immigration.

The CETA agreement will also make investment between Canada and Europe easier, which could be a major boost for Canadian companies. The deal will, according to the European Commission’s website, “remove barriers for EU firms wanting to invest in Canada”.

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What the CETA agreement means for consumers

Consumers should be thrilled by the deal. It will mean more products, more brands, and more businesses to choose from. European cheese imports will almost double over the next five years. Luxury vehicles like Audis and BMWs will no longer be subject to a 6.1% tariff.

One downside is that pharmaceutical companies will be able to extend their patent by about 2 years if they experience delays in the approval process. This provision is designed to eliminate the cost of delays to big drug manufacturers, but could mean that it takes longer for generic drugs to become available. The consequence of this is that in eight years Canadians may notice a rise in some drug prices.

Wine and spirits will also be allowed to enter Canada from Europe without paying tariff, bringing prices down and increasing your selection at the LCBO!

European businesses competing with Canadian businesses should mean, in theory, that prices drop as more companies compete for your dollar.

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What CETA means for currency exchange

As we have explored in previous FX101s the currency exchange market is vast, complex, and is affected by many different factors. Balance of trade is one of those factors. The more a country exports, the more of their currency that other countries need in order to buy their goods. This raises the value of the currency, which then over time may make goods less competitive, and rebalance trade. So in theory, as trade is boosted with the EU, the value of the loonie could rise. In practice this would be a very slow process with minimal impact compared to other factors.

A stronger Canadian economy, which proponents argue will be the result of the CETA agreement, would encourage the Bank of Canada to raise interest rates. Higher interest rates mean a stronger currency, but again, this could take a while and may be offset by other issues.

Right now Canada’s currency is heavily tied to oil prices. Oil drives much of Alberta’s economy, and is one of the country’s biggest exports. While oil will likely still be around for decades even as green energy slowly becomes more prevalent, we are still affected by spikes and drops in value, as evidenced by the loonies precipitous fall in 2014. Opening trade with Europe could allow the Canadian economy greater diversity, protecting it from swings in commodity prices.

More trade with Europe would also mean more demand for euros, and with more demand would hopefully come more competition. Currently every bank and currency exchange in the country offers much higher markups on buying and selling EUR than say, USD. As EUR trades become more frequent the markups should become smaller and more competitive.

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