EU-Canada Trade Pact: Compromise Allows Signing

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On October 30, Canada and the European Union finally signed the Comprehensive Economic and Trade Agreement (CETA), after objections by a Belgium province almost derailed the agreement. Only after intensive negotiations involving the EU, Belgium and its regional governments, and Canada did the EU receive the green light from member states to sign CETA. This post considers the stumbling blocks to EU’s signature and the interpretative statement that was designed to address Belgian concerns. It also outlines the steps to provisional implementation, expected in early 2017.

After the EU agreed in July to treat CETA as a “mixed agreement”, it could not sign the trade accord without the approval of its 28 member states. All were willing to sign-off, except Belgium, where the national government could do so only with the agreement of its five regional governments since national law gives them a veto over international accords. The Belgian region of Wallonia refused to give its approval, maintaining the position that it had taken in April 2016 when its Parliament voted against giving its federal government the authority to sign CETA “without receiving additional guarantees”, according to Bridges.

As the planned signing date neared, Wallonia continued to hold out. After several days of intense negotiations, a compromise was struck with the Belgium government and its provinces, as reported by Borderlex. Its provisions included that they reserve the right to trigger special safeguard measures in case of a “market imbalance” and the right to refuse to ratify CETA. Also, the Belgian government will request an opinion of the Court of Justice of the EU on the compatibility of the new investor-state system with EU law.

The results of the negotiations are reflected in a Joint Interpretative Instrument that the EU and Canada incorporated into the CETA signing process. It constitutes “a clear and unambiguous statement” of the agreement between Canada and the EU and its member states on the interpretation of a number of CETA provisions “that have been the object of public debate and concerns”. It particularly emphasized the impact of CETA on the ability of governments to regulate in the public interest, as well as the provisions on investment protection and dispute resolution, sustainable development, labor rights and environmental protection.

A major element of the interpretation relates to the investor-state dispute settlement system (ISDS), which has been a major stumbling block for member state approval of CETA. To address those concerns, during the “legal scrub” of the Agreement, Canada agreed to a EU proposal to replace the ISDS provisions with a new Investment Court System (ICS). The Interpretative Instrument elaborates on that system, noting for example that CETA’s investment rules preserve the right to change a law even if it affects a foreign investment; it also provides that compensation of foreign investors will not be greater than the loss they suffer.

The joint interpretation also notes that “shell” or “mail box” companies established in Canada or the EU by investors of other countries will not be able to bring claims under CETA. It further points out that to avoid and correct any misinterpretation of the Agreement by its investment tribunals, the parties may issue binding notes of interpretation. The Instrument also commits Canada and the EU to work toward the establishment of an Multilateral Investment Court, which will replace the CETA system once it has a minimum critical mass of participants.

With regard to the CETA provisions related to labor, the environment and sustainable development, the Instrument emphasizes that they “are subject to dedicated and binding assessment and review mechanisms” and that the parties are committed to make effective use of them, including initiating an early review.

With the approval of the member states in the Council of the European Union, the EU was able to sign the agreement. CETA can enter into force on a provisional basis with the consent of the European Parliament, which is expected before the end of 2016 or early in 2017. The EU pointed out that the new investor-state system would not be included in CETA’s provisional application, because “the public debate on it is not finished in many countries”. Its implementation will be deferred until all member states have ratified the Agreement.

The ratification by the national parliaments of the member states will vary among states based on their national procedures. This process can take years; for example, the EU’s trade accord with South Korea was provisionally applied in 2011 and only fully implemented in 2015.

In Canada, its national parliament must approve CETA’s implementing legislation, which was introduced by the Government on October 31. Given Canada’s parliamentary system, its approval should be straightforward, unlike the torturous and unpredictable approval process that the Trans-Pacific Partnership (TPP) faces in the U.S. Congress.

The challenges in obtaining member state approval of CETA may not bode well for future EU agreements, such as a trade agreement that the United Kingdom is expected to negotiate with the EU once it triggers the Brexit process, or the Transatlantic Trade and Investment Partnership (TTIP), provided its negotiations resume in the next Administration.

Jean Heilman Grier

November 1, 2016

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