Trade deals offer opportunities and risks

Two huge international trade agreements will offer Canada’s manufacturers unparalleled access to markets around the world, but companies must balance the opportunities that the pacts will bring with the risk of extra competition, and prepare for different business models and new trade relationships.

Once the Trans-Pacific Partnership and the Comprehensive Economic and Trade Agreement between Canada and the European Union are ratified, Canada will be the only major economy with guaranteed preferential access to both the 28 member countries of the European Union and to the 12 TPP member countries, a list that includes giant economies such as the United States and Japan, as well as smaller ones such as Peru, New Zealand, and Brunei.

It opens up a new supply chain for the manufacturing sector, raising the possibility of cheaper inputs for products made in Canada. But at the same time, a host of new countries will win preferential access to the Canadian market, both for their own products and as an investment opportunity that exceeds what they have at home. A Greek or German company with a Canadian subsidiary, for example, might win access to a Vietnamese or Mexican market that goes far beyond the parent company’s access.

“These agreements will allow for increased foreign direct investment from places like Europe and TPP countries into Canada, which should create greater economic opportunities,” says Philip Turi, general counsel and director, global business services, with industry group Canadian Manufacturers and Exporters. “Canada with both TPP and CETA would have preferential access to well over three-fourths of the world’s economy. There are significant opportunities.”

Turi says the biggest risk for exporters is failing to prepare adequately for these new markets, or failing to do due diligence on the markets or on what the trade deals themselves mean.
Arbitration rules will differ from those a company is used to in North America, and the legal framework could be different, too. And there are many different business models that could work, depending on the company, including local hires, partnership deals, or working with agents, distributors, and dealers.

“If you are corporate counsel in a large company and your company is now starting to look at the European market or the TPP markets, it’s going to be important that you ensure you have relationships in that market with local counsel, because you are going to have to leverage their expertise and their understanding of the legal systems,” he says. “Get to know procurement rules for foreign markets, especially if your company can bid on government contracts, and get to know local counsel in these markets because you will have to use them to close the deal.”

Both TPP and CETA have been controversial from the start, amid concerns about how Canadian companies will be able to compete against lower-cost economies, especially those in southern Europe, and in some of the Asian and Latin American TPP signatories. But trade lawyers say that risk is likely less important than the cost to firms in a relatively small economy such as Canada of not joining a big international deal, and then being squeezed out of the markets they are in at present.

“You have to look at the relative size of the Canadian market versus all these other markets, and in particular the U.S. market, and manufacturers in Canada succeed in part because of their ability to export to a market like the United States,” says Greg Tereposky, a partner in the Ottawa office of Borden Ladner Gervais LLP and a former trade policy officer at Canada’s department of external affairs and international trade.

“So when these trade agreements come up we have to look at it from the perspective of how do you preserve what we’ve got in the U.S. market. . . .  If Canada was not part of that [TPP] agreement, it would have been facing a host of new competitors in the U.S. market for all our exported goods, without us having a similar competitive advantage in terms of reduced tariffs for products or any sort of reciprocity to go into these countries.”

Of the two deals, CETA is closer to ratification — it was drafted in English and is now being translated into French, and the other 21 EU languages, to be followed by steps to make policies, regulations, and legislation conform with its goals. And as its name implies, the agreement goes beyond the broad tariff reductions of a traditional free trade agreement, with a heavy focus on non-tariff barriers. It will open up the market for government procurement, harmonize standards for goods sold in various markets, and allow far more freedom of movement for company employees, making it easier for a company in one place to bid on a contract in another and then send in the specialized staff that will be needed to make sure everything works as planned. But Canadian companies need to be ready to work with Ottawa to ensure their needs are met as the two sides iron out details on issues like harmonization.

“If there are important barriers to entry in the European market, it’s important to recognize those and see if you can engage the Canadian government in a relationship with those issues because they are going to be working hard with the Europeans on harmonization,” says Martin Masse, a partner at Norton Rose Fulbright Canada LLP in Ottawa, who describes the CETA as a “trade agreement plus.” “From a manufacturers’ perspective, the EU is a highly regulated environment and the complexity of those regulations can add to the administrative cost of doing business with Europe.”

Ratification of the TPP is further down the road, given a raft of political obstacles and uncertainties, including the hotly contested U.S. presidential race. Even Democrat Hillary Clinton, viewed as the most pro free trade of the candidates still in the race, might well seek amendments to some of the pact’s provisions, while Republican front-runner Donald Trump has described the TPP as a disaster. The Conservatives were Canada’s negotiators in the agreement, and Liberal Trade Minister Chrystia Freeland signed the pact in February. But the new government has two years to ratify the deal, and it is inviting public comment.

“The Government of Canada is committed to being transparent, open and consultative with Canadians on the TPP,” says the government’s web page on the issue. “As part of this commitment, the Government of Canada has already consulted and will continue to consult Canadians, as well as undertake full Parliamentary debate.”

But trade lawyers say Canada must look both at the likely advantages and disadvantages of the TPP itself, and at the likely impact of excluding itself from the deal.

“The comparison is not so much will manufacturers do better under TPP than without TPP. It’s will manufacturers do better if Canada is in TPP or out of TPP. There is no world in which TPP is not going to exist,” says Masse. “There are certainly advantages in terms of the supply chain. . . .   But at the same time we are reducing barriers in some very significant tariffs in relation to countries that have some cost advantages over Canadian companies, so we will have to see how that plays out.”

Clifford Sosnow, a partner in the Ottawa office of Fasken Martineau DuMoulin LLP, says exporters need to be aware of exactly what’s in the long and complicated agreements, in order to take advantage of new procurement rules, and general counsel need to be aware of the ways that Canadian laws will have to change to accommodate the deals.

“Identify where your markets are, identify where you think your sources of supply might be, and then understand what the rules are to help you extract an advantage in terms of the dollar value. It’s as simple as that,” he says. “What we tell all in-house lawyers is to understand the ratification process and understand the changes in the rules that will come about as a result of Canada bringing the TPP into force. It will have a significant impact on your companies, and if you don’t comply with the rules you will face the penalties associated with them. Understand where you can intervene, understand, if there is no clarity, how you can go about seeking that clarity.”

It is still not clear which companies, or which manufacturing sectors, will end up as the winners from the two big trade deals, and where the biggest risks will be. But Turi, from the manufacturers’ association, says the main complaint he’s hearing is the length of time it’s taking to get everything sorted out.

“I think that we are hearing more positive things than negative things. Really the main negative is what’s taking so long? Why is ratification taking so long, what is the delay in respect to implementation?” he says.