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CETA could be huge for Canada—if companies are ready to adapt

A new free-trade deal with Europe will knock down tariffs, but it only matters if we seize the opportunity

David Cameron, Stephen Harper and Angela Merkel

David Cameron, Stephen Harper and Angela Merkel at a G7 summit in June 2015. (Michael Kappeler/AFP/Getty)

After long negotiations, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) is expected to come into effect in 2016, once ratification by the European Parliament takes place. The deal is Canada’s most significant and wide-ranging bilateral trade agreement since the Canada-U.S. free trade deal of the late 1980s. Tariff elimination is usually the most talked-about feature of any free trade agreement, but it is only one aspect in CETA. The bigger story here likely goes far beyond tariffs. How Canadian firms adapt to European standards and respond to the opportunities presented will determine their success.

The stakes are high. Canada and the EU have an historic and strong two-way commercial relationship. Despite its recent economic troubles, including the deepening financial crisis in Greece, the EU is a more than $17 trillion market with high-income customers.. In addition to removing duties that companies have had to pay when they sell into the EU, provisions have been made for improved protection of investments, reduced impact of regulatory barriers, and measures to facilitate people movements. The deal also opens up the EU government procurement market to Canadian companies (and vice-versa), which could be a very lucrative market once some EU governments start spending again.

New Conference Board of Canada research finds that companies that proactively innovate and adapt their EU offerings will be able to achieve much larger gains than companies that sit passively and wait for the deal to boost their sales. Stronger Ties: CETA Tariff Elimination and the Impact on Canadian Exports shows that average tariffs on merchandise in Canada and Europe are low, thanks to years of successive bilateral and multilateral trade negotiations.

The sectors where higher tariffs still exist—agricultural goods; food, beverage, and tobacco; chemicals, rubber, and plastics; and motor vehicles and parts sectors—will experience the largest export gains as a result of tariff elimination under CETA (See chart below). Overall, we estimate that tariff elimination on goods is likely to result in over $1.4 billion being added to Canada’s product exports to the EU by 2022. There is potential for these gains to be even larger over time as companies adjust to the new market opportunities.

Chart showing potential economic gains of CETA

For the broader Canadian business sector, further benefits of CETA may come from the other provisions in the agreement.

For instance, the deal promises to reduce the impact of EU regulations. For some products, a Canadian regulator would be able to assess whether products meet EU specifications. A related Conference Board study on 9,000 Canadian companies that export to Europe suggests that many have found it difficult to adapt to EU norms that are different from those in North America. If CETA’s provisions manage to reduce the impact of EU regulations, they would lower a barrier to trade, which could make it easier to sell to Europe, particularly for smaller companies.

Furthermore, exporting products is only one way to seize the benefits of access to the European market. CETA addresses activities that go beyond exports of products. For example, Canada sells many services to EU customers, either directly or via Canadian affiliate operations located in the EU. If the deal enables easier movement of people between the two markets—critical to the provision of services—and provides greater certainty for investments, this could boost Canada’s traded services.

Finally, we find that the trends in growth in European demand will affect Canada’s EU sales much more than will getting rid of tariffs. Having easier access to the European market is helpful, but more robust economic performance in Europe is critical to on-going export success.

In short, CETA is a new type of trade deal that should meaningfully reduce tariffs and also other commercial barriers. But even with these barriers reduced or gone, it will still be up to Canadian companies to adapt and respond to European opportunities and nuances. Those firms that proactively do so will be able to reap the greatest gains from the deal.

Doris Chu is senior economist with the Conference Board of Canada. Danielle Goldfarb is Associate Director of the Conference Board of Canada’s Global Commerce Centre.