CIIT Committee Report

In January 2008, Canada signed a free trade agreement (FTA) with Switzerland, Norway, Iceland and Liechtenstein, a group collectively known as the European Free Trade Association (EFTA). The Canada-EFTA FTA (CEFTA) is the first agreement to be tabled in the House of Commons under the federal government’s new policy of allowing Members of Parliament the opportunity to review and debate international treaties by tabling those treaties in the House of Commons for 21 sitting days. The House of Commons Standing Committee on International Trade took the opportunity to conduct hearings on the CEFTA in order to contribute to those discussions. This report is the result of those hearings.

It has been ten years since a Canada-EFTA free trade agreement was first proposed. Formal negotiations began in 1998, but hit an impasse in 2000 on the issue of the treatment of ships and industrial marine products. Concerns were expressed in Canada over the possibility that free trade with EFTA would require Canada to remove its 25% tariff on ships and expose the Canadian industry, already struggling with excess capacity, to increased competition from subsidized Norwegian producers. It should be noted, however, that in the time since those concerns were expressed, Norway reported that it has stopped subsidizing its shipbuilders.

His Excellency Markús Orn Antonsson, Ambassador of Iceland to Canada, noted that several attempts were made to break the impasse, but negotiations did not resume until 2006. In June 2007, the two sides announced that negotiations were completed, and in January 2008, the agreement was formally signed in Davos, Switzerland. The intent is to implement the agreement by 1 January 2009.

The CEFTA is relatively modest in scope. It is a first-generation FTA, focusing on tariff elimination and trade in goods.  Unlike the North American Free Trade Agreement (NAFTA), for example, the CEFTA does not include any substantial new commitments in investment, services or intellectual property. These issues, as well as most safeguards, anti-dumping and countervailing duties will continue to be addressed at the World Trade Organization (WTO). However, as the Committee heard, there are provisions within the agreement to allow for these issues to be revisited after three years, should the two sides wish to do so.

The CEFTA is comprised of four linked agreements: a main free trade agreement and three bilateral agreements on agriculture between Canada and Norway, Iceland and Switzerland, respectively. Liechtenstein is covered in the Canada-Switzerland agreement. Under the terms of the main agreement, tariffs on all non-agricultural products will be eliminated immediately upon entry into force of the agreement. The only exception is Canadian ship tariffs. Tariff reductions in agriculture are country-specific, as will be discussed below.

The Committee heard that the CEFTA provides the Canadian shipbuilding industry with one-way protection by which Canadian shipbuilders gain immediate and full access to the EFTA market, while certain protections are maintained in Canada.

For Canada’s most sensitive shipbuilding products, there will be a 15-year phase-out of Canada’s existing 25% tariff. For less sensitive products, the total phase-out period is 10 years. In all cases, however, there will be no reduction in the import tariff for the first three years of the agreement.

The sole exception is for post-panamax sized cargo ships – so named because they are too large to navigate the Panama Canal. According to officials from the Department of Foreign Affairs and International Trade (DFAIT), no Canadian shipyard claims to be able to lay down a hull of this size. The Canadian tariff on ships of this size will fall to zero immediately upon entry into force of the agreement.

Moreover, the CEFTA also includes a safeguard mechanism which offers additional protection to the Canadian shipbuilding industry. If imports from EFTA are found to be causing injury to Canadian shipbuilders within the 10-15 year phase-out period, then the tariff rate can revert to the pre-free trade rate of 25% for up to three years.

The Committee also heard that the CEFTA does not oblige Canada to modify its “Buy Canada” procurement policy for ships.

The content of the three bilateral agreements on trade in agriculture differ from one another, reflecting the unique sensitivities and priorities of Canada and the individual EFTA countries. Under all three agreements, most agriculture and agri-food products will be traded tariff-free. However, each country has gained and/or limited concessions in certain key agricultural and agri-food industries.

For example, the Committee heard that Canada did not make any over-quota tariff concessions on supply-managed agricultural products, but did grant to Switzerland tariff-free in-quota access to the Canadian cheese market. Canada also gained improved, but not tariff-free, market access to certain sensitive sectors in EFTA countries. These include frozen French fries in Iceland; frozen blueberries and durum wheat in Norway; and durum wheat and horse meat in Switzerland.

The Committee heard that the expected economic gains from tariff reduction under this trade agreement will be modest. Tariffs on many non-agricultural products are at nuisance levels (2% or less) and many other products are already traded tariff-free.

Nevertheless, several witnesses anticipated an increase in trade to result from this agreement. Certain Canadian industries are expected to benefit from improved market access, particularly in agriculture where most of the major tariff reductions are found. Some industrial sectors are expected to benefit as well. These include wood and metal products in Iceland, apparel products in Norway and cosmetics in Switzerland.

Witnesses also observed that the benefits of the CEFTA may not be limited to lower tariffs. Other potential gains include opportunities for trade diversification; enhanced industrial cooperation; and, through increased interaction with European businesses active in the EFTA countries, closer economic ties with the European Union. The agreement will also put Canada on an equal footing with EFTA’s other free trade partners, and will give Canada an advantage over countries like the United States, which do not have a trade agreement with EFTA.

The Committee also heard that trade agreements have an important symbolic impact. George Haynal (Vice-President, Government Relations, Bombardier, Inc.) stated that trade deals create a level of confidence among investors, even if, as in the case of the CEFTA, investment is not included in the agreement. Per Øystein Vatne (First Secretary, Embassy of the Kingdom of Norway) also observed that the very presence of an FTA creates interest in the business community; the appetite for trade missions to Canada from EFTA countries has increased markedly since the CEFTA was announced.

However, some witnesses expressed reservations about the deal. Representatives from Canada’s shipbuilding industry in particular were concerned about the potential impact of the CEFTA. Andrew McArthur (Independent Consultant, Board of Directors, Shipbuilding Association of Canada) noted that Norway’s world-class shipbuilding industry is not subsidized today, but it owes its present competitiveness to generous government support in years past.

For this reason, Canadian shipbuilders wanted their industry to be explicitly excluded from the CEFTA, as it is from the NAFTA. They eventually agreed to accept a long-term phase-out of tariffs, but their support was contingent upon a new Canadian shipbuilding policy that included a “Buy Canada” policy for government procurement, and the combination of two existing support mechanisms that are currently mutually exclusive – the Structured Financing Facility (SFF) and provisions for accelerated capital cost allowance (ACCA).

The CEFTA includes a long-term phase out of tariffs, and preserves a “Buy Canada” procurement policy, but no action has been taken on the SFF or capital cost allowances. As per their submissions to the government, representatives of Canadian shipbuilders and marine workers were adamant that without combined access to the SFF and ACCA, the impact of the agreement would be devastating to the industry and would lead to job losses. In their view, this additional government support was critical if the Canadian industry was to survive increased competition from Norwegian producers.

It was noted, however, that the tariff phase-out schedule (and safeguard provisions) for marine industrial goods was particularly generous. According to Cyndee Todgham Cherniak (Counsel, International Trade Group, Lang Michener, LLP), the 15-year phase-out on sensitive ship products is the second longest phase-out she had encountered in her study of 100 free trade agreements. However, Ms. Cherniak also cautioned the Committee that this “ abnormally long” phase-out period could meet some resistance at the WTO from other major shipbuilding countries like China and South Korea.

In addition to shipbuilding, some concern was expressed about the impact of CEFTA on supply management in agriculture. Terry Pugh (Executive Secretary, National Farmers Union) suggested that the in-quota tariff cut for supply managed products might weaken the foundation of the supply management program.

Finally, several witnesses noted that no economic impact studies had been conducted to estimate the effect of the CEFTA on the Canadian economy. It was suggested that without such studies, it was difficult to judge whether or not the deal would be good for Canada.

The CEFTA is a basic free trade agreement covering trade in goods. It includes no significant provisions on matters such as services, investment and intellectual property, but does leave the door open for these issues to be revisited.

In terms of market access, the benefits of this agreement to Canada will largely be in the agriculture and agri-food sector. Some industrial sectors will benefit as well, although in most cases, tariffs on non-agricultural products are not significant.

Shipbuilding was the most contentious issue in trade negotiations. It appears that Canada was able to successfully obtain generous phase-out terms, giving the Canadian industry considerable time to adjust to increased competition from EFTA shipbuilders. However, concerns were raised about the long-term viability of the Canadian shipbuilding sector in the absence of additional government support. Therefore, the Canadian government must without delay implement an aggressive Maritime policy to support the industry, while ensuring that any such strategy is in conformity with Canada’s commitments at the WTO. 

In sum, this agreement promises modest gains in trade and could pave the way for an expanded agreement that includes subjects like services and investment. Moreover, according to several witnesses, the very presence of a free trade agreement could create interest within the business community to explore economic opportunities in Canada and EFTA. In addition to reducing tariffs, the CEFTA could act as a catalyst for increased trade, investment and economic cooperation between Canada and the EFTA countries.