CIIT Committee Report

A. Introduction

Committee members who travelled to the Arabian Peninsula also stopped over in Brussels for two days of meetings on issues relating to Canada-EU economic relations. The two regions are a study in contrast; Canada’s economic relationship with the EU could hardly be more different from Canada’s economic ties with the Arabian Peninsula. While the Arabian Peninsula brims with economic potential, Canada is, at present, largely absent from that market. For its part, the EU lacks the economic dynamism of emerging markets, but is a stable, prosperous and growing region. Moreover, it has deep and well-established economic ties with Canada.

B. Canada’s Economic Relationship with the EU

The EU is Canada’s second most important trade and investment partner in the world. Five of Canada’s top ten export destinations are EU members, as are three of Canada’s top sources of imports. In total, Canadian merchandise exports to the EU reached $29.1 billion in 2006, while imports were valued at $49.2 billion. The UK, Germany, France, Italy, the Netherlands and Belgium are Canada’s largest trading partners in the EU.

After years of relative decline, Canada’s economic relationship with the EU is strengthening and the region is rising in importance as a trading partner for Canada. In 1999, current EU members accounted for about 7.3% of Canada’s total merchandise trade (exports plus imports). In spite of the tremendous growth in trade with countries like China and Mexico in recent years, by 2006 the share of total trade going to the EU had risen to 9.4%, its highest level in fifteen years.

On the investment side, Canada’s relationship with the EU is even more significant. In 2006, nearly 28% of total Canadian foreign direct investment was in EU countries, with a total value of more than $144 billion. Similarly, EU countries are major investors in Canada. That same year, EU countries accounted for 26% of total global FDI in Canada, with a total value of over $118 billion. Canada’s top investment destinations in the EU are the UK, Ireland and France, while the top sources of FDI are the UK, France and the Netherlands.

Our Committee’s meetings in Brussels followed shortly after the Canada-EU Summit, held in Berlin on June 4, 2007. As a result, much of the discussion at our meetings focused on the subjects and issues brought forward at the Summit. Specifically, the Canada-EU Summit focused on achieving closer cooperation in three main areas: peace and security; economic co-operation, trade and investment and air service; and the environment.

Of particular relevance to this Committee is the second of these priorities — economic co-operation, trade and investment and air services. Because Canada and the EU have a mature and well-established economic relationship, most of our discussions focused on removing the various impediments to trade and investment, rather than, as was the case in the Arabian Peninsula, on identifying specific areas of opportunity.

This is not to say, however, that there are not specific areas of opportunity for Canadian businesses in the EU. While Canada is well-established in the EU in a wide range of sectors, one particular area which holds ample growth opportunities is agricultural products, especially for the production of biofuels. The EU has a goal of increasing biofuel use from 5.75% to 10% of total fuel consumption. The primary products being used to create these biofuels are sugar beets and corn.

Biofuels also create a market opportunity for Canadian canola growers. While the issue of genetically modified organisms (GMOs) continues to prevent acceptance of canola for human consumption, Canadian exports of canola seeds have risen dramatically in recent years, in response to demand for feedstock for fuel.

C. Building Closer Economic Ties Between Canada and the EU

1. Free Trade

The most significant step Canada could take in removing obstacles to trade with the EU would be to pursue a Canada-EU free trade agreement. Indeed, as recently as the Canada-EU Summit in June, Canada has expressed its formal interest in pursuing such an agreement.

The timing for a free trade agreement with the EU is good. Traditionally, EU policy regarding trade liberalization has been to focus on multilateral negotiations. The EU, like Canada, holds the view that the WTO is the best solution for achieving a system of global trade.

However, the practicalities of the present-day economic environment have caused a recent shift in EU trade policy. With the prospects for a WTO agreement poor, some of the EU’s competitors in international markets, notably the U.S., have turned their attention to pursuing bilateral free trade deals with willing partners. The EU has recognized that unless it does the same, its businesses will be put at a competitive disadvantage abroad relative to countries like the U.S., which have negotiated preferential market access. As a result, the EU has also begun to place heavy emphasis on bilateral trade deals. Committee members heard that the EU has plans to negotiate 24 free trade agreements, beginning with India, ASEAN and South Korea.

Unfortunately, we heard that the appetite within the EU for a free trade agreement with Canada is low. We were told that the EU sees its relationship with Canada as mature and not in need of any fixing or greater focus. This was the same message Canada received at the Canada-EU Summit in the weeks preceding our arrival in Brussels. At the summit, the most progress Canada could make was to reach agreement with the EU to conduct a study on the costs and benefits of a closer economic partnership.

According to Canadian Embassy officials in Brussels, the study will examine existing barriers to trade and investment, and estimate the potential benefits of removing them. The study will also identify how a closer partnership could complement ongoing efforts to enhance cooperation in areas such as science and technology, energy and the environment. Leaders are to review the results of the study at their Summit meeting in 2008.

Although a feasibility study is at least a small step in the right direction, the Committee was disappointed with the lack of interest within the European Commission regarding a potential free trade agreement with Canada. While in Brussels, however, one witness offered an alternative strategy Canada might consider in lobbying for free trade negotiations. Specifically, it was suggested that Canada shift its lobbying efforts away from the bureaucracy of the European Commission and refocus those efforts on key countries within the EU. We were told that EU policies are often crafted by bureaucrats in Brussels and may not necessarily reflect the views of EU member countries. Canada’s key trading partners in the EU are the largest and most influential countries in the bloc — the UK, Germany and France. If Canada could convince these countries of the merits of Canada-EU free trade, it could put pressure on the EU from within to open negotiations with Canada. We thus recommend:

Recommendation 12:

That, given the tepid response within the European Commission for a free trade agreement with Canada, the Government of Canada lobby its major trading partners within the EU — the UK, Germany and France — for their support for a Canada-EU free trade agreement.

2. Regulatory Cooperation

Canadian and European businesses have identified regulatory cooperation as an area which could pave the way for closer economic relations. There are numerous regulatory obstacles that can obstruct the flow of trade and investment between Canada and the EU, and create formidable market access barriers. Many believe that regulatory cooperation, whether through harmonization or mutual recognition of standards, could remove significant impediments to trade growth between Canada and the EU.

Indeed, Canada and the EU have already made some progress in this area. In recent years, Canada and the EU have been negotiating a Trade and Investment Enhancement Agreement (TIEA), aimed at building closer economic ties between the two economies. Although negotiations were suspended in May 2006, significant progress had been made in the area of regulatory cooperation.

At the Canada-EU Summit on June 4, 2007 in Berlin, leaders committed to concluding a Regulatory Cooperation Agreement based on the progress made during TIEA negotiations. This agreement will enhance the voluntary Framework on Regulatory Cooperation and Transparency signed in 2004.

The Committee believes that a regulatory cooperation agreement is an important step in removing some of the obstacles preventing closer economic ties with the EU. Committee members heard that the EU is emerging as a world leader in setting regulatory standards, and we believe that it is Canada’s interests to pursue closer regulatory cooperation with the EU.

One of the challenges in doing so, however, is that Canada is also considering closer regulatory cooperation with the United States. To the extent that European standards differ from those of the U.S., regulatory cooperation with the EU could raise impediments to trade with the U.S. as it lowers them with the EU. Considering that the U.S. accounts for over 80% of Canada’s total exports and two thirds of total merchandise trade, it would be imprudent to lower regulatory hurdles with the EU at the expense of raising market access barriers with the U.S.

One way around this problem, we were told, is to establish a regulatory cooperation agreement with the EU that does not seek to rewrite existing regulations, but rather to achieve long-term policy harmonization by cooperating on new regulations. Under such an agreement, each time Canada or the EU is considering establishing new regulations (or updating old ones), they would first examine whether the other party to the agreement already had similar regulations in place. If adequate regulations existed in the other economy, then instead of duplicating the effort and producing similar (but not identical) regulations, the one set of regulations could be adopted by both parties.

The Committee sees regulatory cooperation with the EU as an important step in removing barriers to trade with that market. Provided that safety standards are not compromised and that Canada’s ability to trade with the U.S. is not harmed, we encourage the Government of Canada to make good on its 4 June commitment to conclude a Regulatory Cooperation Agreement with the EU. We recommend:

Recommendation 13:

That the Government of Canada undertake an in-depth comparative analysis of the regulations in Canada and the European Union in order to identify which ones could be the subject of a regulatory cooperation agreement without hindering the values and concerns of Canadians.

3. Other areas for closer Canada-EU Cooperation

While in our view, free trade and regulatory cooperation are the two most significant ways in which Canada can improve its economic relationship with the EU, there are a host of other, more incremental steps that can be taken to improve bilateral relations.

One of these steps is to improve air transport services across the Atlantic Ocean. Canada and the EU have committed to holding negotiations on a comprehensive air services agreement. This is expected to be a major negotiation, linking all of Canada’s existing air service agreements with EU members into one, as well as incorporating a regulatory component, potentially addressing such issues as consumer protection, competitive ownership, vehicle emissions, and so on. Formal negotiations commenced in the fall of 2007.

Opportunities for closer ties also exist in areas like science and technology cooperation, liberalizing trade in services, temporary worker agreements and recognition of professional standards. The Committee expects that many of these issues will be addressed in the study of a closer Canada-EU economic partnership which the two parties committed to on June 4, 2007. This Committee eagerly awaits the results of that study and we hope that it can be used as a springboard to closer economic relations with the EU.