Unscrambling the CETA Impasse: The Blackfly Chronicles

  • National Newswatch

By Peter Clark | April 27, 2013Canadians learn early in life that if you try to chase the black flies away, you'll never get any fishing done. The same principle applies to negotiations for the Canada-EU Comprehensive Economic and Trade Agreement (CETA).Has the Harper government missed the target on its ambitious free trade initiatives? Are they good at launching broad, ambitious negotiations but inept at closure? Should Canada bail on the slow-moving CETA to focus on Barack Obama's Asian pivot?Why is Canada having such trouble closing its deals, most notably the CETA? Is it fair to contrast CETA and NAFTA. I think not.In the 1980s, the government set up a massive Trade Negotiations Office under Simon Reisman and Gordon Ritchie. Ambassador Reisman had a more or less direct line to Prime Minister Brian Mulroney and the PM intervened with President Ronald Reagan and his closest advisors several times to keep the process on the tracks.Prime Minister Harper also used his chief of staff and discussions with President Obama to ease Canada's way into the TPP. Blarney is not Harper's long suit — but few can match him for determination. Don't mistake the lack of flash for neglect. Free trade with the U.S. was the result of a continuing effort where both sides had sensitivities which were put aside if they got in the way of the deal.Europe is like a herd of 27 cats. Canada's negotiators are respected around the globe. They are highly competent. But the TNO structure no longer exists. And CETA is not the only game in town no matter how important it is.The new tactic used in promoting trade agreements is to trumpet in advance the comprehensive everything-is-on-the-table rhetoric. This is great for a sales pitch — but very dangerous if politicians and, heaven forbid, the negotiators swallow their own spin.Mulroney and Reagan both relied heavily on their chiefs of staff to deal with problems and direct traffic. There was a high-level commitment to concluding a deal.Are the CETA logjams the result of excessive ambition or lack of leadership? A bit of both. Where should the blame be cast? On both sides.Stressing the comprehensive nature of the trade agreement, has become advance billing to secure support for negotiations. However, the concept, clearly difficult to achieve in reality, should be treated with pragmatism, not theological fervour. There is enough evidence in CETA and other negotiations that over-reaching has hampered speedy conclusions — and has put others into suspended animation.Common sense voices are entering the debate. No one dares to dictate the advance sales pitch but they are trying to inject reality into the process. The Atlantic Council and the Bertelsmann Foundation prepared a report on prospects for the U.S.-EU initiative — the Transatlantic Trade and Investment Partnership (TTIP) — calling it ambitious but achievable. But the conditions for attaining the ambition are flexibility and leadership.TTIP is quite similar to the Canada-EU CETA. TTIP's scope is vast. The report notes that “the U.S.-EU economic relationship currently dwarfs the $1.7 trillion NAFTA relationship”. The report cautions, however, that TTIP could get bogged down in the details that have scuttled transatlantic economic agreements in the past. The spectre of another Doha looms.In a March 2013 economic assessment, the Center for Economic Policy Research in London stated: “As much as 80 per cent of the total potential gains (from TTIP) come from cutting costs imposed by bureaucracy and regulations, as well as from liberalizing trade in services and public procurement.” This is the easy stuff — and another 15 per cent can be done with reasonable, if time-consuming, effort. The remaining 5 per cent (or less) are hardcore, entrenched, often immoveable issues.Are the CETA logjams the result of excessive ambition or lack of leadership? A bit of both. Where should the blame be cast? On both sides.In this environment, the “single undertaking” all-or-nothing approach puts everything at risk, leaving a deal hanging on for massive injections of political will which may never come.In terms of trade, it would appear that 90 to 95 per cent of the CETA has been addressed and agreed to; contacts with the EU suggest it has secured much of what it wants on geographical indicators, indeed much more than I would expect that the U.S. is prepared to offer. The public procurement package is very impressive but is still hung up on a few sensitive sectors of provincial activity. If you consider that mass transportation is one of these, it is not difficult to determine which major Canadian company benefits. They don't need access to Europe because they already manufacture there.Canada and Europe have never really left the table but the face to face discussions will resume with more urgency soon, probably within the next week to 10 days. Hopefully the negotiators will remember that focusing too much on deeply-rooted differences over issues like government procurement will be the death of a deal. These are the 'black fly' issues, the ones that distract from taking care of business.Negotiators must focus on doing the easy things first. If they started with the hard core sensitivities they would never get any traction. Selling the negotiations as a single undertaking makes this a risky business. This approach generally runs aground on extremely delicate political issues which hold up for ransom the early harvest. Mexico has negotiated some difficult FTAs (e.g., with Japan) by leaving problem areas aside for further consideration, after the deal has been implemented and benefits have become clear.The Atlantic Council/Bertelsmann caution that the deal should not be held to ransom over minor differences. While these issues represent 2 per cent of U.S.-EU trade (which, as noted, dwarfs NAFTA), preoccupation with these narrow differences could preclude any deal, even on issues where both sides largely agree.'Comprehensive' trade deals are easy to pursue or target, but they are incredibly difficult to achieve. If Europe is not yet a true single market after decades of trying, is this or something approaching it a realistic goal for the TTIP? CETA never pretended to go this far.No trade minister or negotiator wants to dilute or dampen ambition, but when it threatens to jeopardize very significant benefits, pragmatism and patience may point the way to phased incrementalism. The U.S. and EU are still referring to TTIP as a single undertaking. Some in Congress and the European Parliament are discussing how to phase adoption of results to permit different issues to be harvested when ready. A refreshing breath of sanity, long overdue — but will it work?Trade Minister Ed Fast should not be expected to roll over and play dead in response to the EU spin. And he will not. Free trade agreements, particularly with larger partners, should be assessed for their potential and not on results during the implementation period. The results must not be measured like quarterly corporate reports. The proper timelines are measured in decades, not months.'Comprehensive' trade deals are easy to pursue or target, but they are incredibly difficult to achieve. If Europe is not yet a true single market after decades of trying, is this or something approaching it a realistic goal?The CETA negotiations are hung up on a number of issues which are not expected to come together without high-level intervention. Their time has not come and may not come soon. Canadian and EU leaders need to blink together, not wait for the other to do so. The best agreement is one which is mutually unsatisfactory. It is not a shame or a disgrace to do what is doable and set an agenda to try to resolve the remaining deeply-rooted problems.Public posturing doesn't helpRepeating the alarmist reporting of the anti-trade, anti-corporate fringe is not helpful. Then there is negotiating in the press — typically the product of frustration with impasses. This can become a ritualistic stork dance, which continues until the parties remember that the dance is a prelude to mating. Then there is a fast flurry of activity and it's over – hopefully with the deal done.Is EU Commissioner Karel De Gucht grandstanding to the press or is he genuinely frustrated with Canada's entrenched position? It's not as if the EU does not have its own non-starters. The progress and significant benefits waiting to be harvested are massive but have not been sufficient to encourage breakthroughs on the tough issues left for last. While Canadian and EU negotiators are still meeting and will meet again in Brussels in the coming weeks, little has changed since late last year. There has been progress and issues have been narrowed. The toughest issues have been left to the end — and are proving why they are tough. But the lowest common denominator should be reached soon.We have been learning a lot lately about EU comfort zones. Is this accidental, or is this more negotiating in the media? These briefings are not new. They were prepared regularly through the negotiations. Earlier leaks were not necessary.Commissioner De Gucht is suggesting Canada must be more realistic. He should take his own advice. However, De Gucht is taking risks because the EU is living in a glass house. Perhaps he realizes that Canadian ministers are not accustomed to playing the offensive media game — strategic leaks are fine, but public finger-pointing is un-Canadian. Meanwhile, Ministers Ed Fast and Gerry Ritz are trying to take care of business — and ignore De Gucht's black flies.I believe Ed Fast is doing an impressive job — but without taking as high a profile as Michael Wilson did with the Canada-U.S. free trade agreement. When Wilson was faced with strong U.S. demands to open up our cultural industries to unfettered US competition, he countered by suggesting the U.S. put the Jones Act (which requires U.S. coastal trade to be confined to U.S.-built ships) on the table. The mutual sensitivities were offset, allowing the negotiators to get on with business.The auto industry roadblockCanada has made some progress in its quest for more favourable rules-of-origin for autos in CETA but serious imbalances remain. Brussels thinks Canada should be satisfied with the flexibilities offered. Whatever the rules of origin, clearly being able to combine the inputs from 27 member countries makes it easier to meet the threshold than using Canadian parts and inputs, particularly given the high degree of integration in the North American auto industry.The auto industry around the world has become very sensitive and protectionist. Market access tends to focus on keeping others out of domestic markets. It has been an important reason behind the delay in completion of the Canada-Korea FTA and it is now blamed for being a non-negotiable demand in CETA.The auto industry in Canada is even more exposed to foreign competition than the Detroit Three in their home market. The Detroit Three claim Japan's manipulation of the external value of the yen costs them $6,000 per vehicle. Canadian automakers also must cope with an overvalued loonie which is returning to a more realistic level at a very slow pace.The Detroit Three are taking a very tough position on autos, particularly with Japan in the TPP. The CAW would like to do the same. The Canada-Japan negotiations and the TPP will involve interesting challenges for Canada's automakers. Will Canada get the same U.S.-negotiated side deals Japan appears to have conceded to the U.S. in order to get to the TPP table?The auto industry around the world has become very sensitive and protectionist. Market access tends to focus on keeping others out of domestic markets.Canada tends to tread more softly with Japan than with the U.S., in part because of our historical relationship and in part because of Japanese investments in assembly in Canada. Canada will not give Japan a free pass on autos or farm trade. Our negotiators will insist on no less than the U.S. gets, but likely in a less abrasive manner.Procurement and protectionismWhile there has been extensive movement on government procurement in CETA, no WTO members are pure as the driven snow on this issue. Europe appears to be pushing hard for more extensive coverage in TTIP than the U.S. has been prepared to accept in TPP.Indeed, procurement has been an important stumbling block to FTAs and regional trade agreements. The U.S. offer in TPP is limited. Will Canada be able to discipline Buy American rules in the TPP? Don't hold your breath; Buy American is religion in Congress.Canadian plants are moving to the U.S. to take advantage of — or, more accurately, to avoid being penalized through — Buy American provisions. Local content rules are becoming more popular, whether dictated by governments or through State-owned Enterprises. Is Canada innocent? Hardly, given positioning on transportation and energy generation procurement in Ontario and Quebec — which have been holding up the CETA.Buy American provisions can do considerable damage. In a Globe and Mail piece in 2009, John Hayward, president of pump maker Hayward Gordon Ltd, said, “the ultimate goal must be to implement full reciprocity, whereby Canada and the United States agree to treat goods and services produced in the other country as domestically produced. In the interim, we must demand immediate relief by insisting that all U.S. federal funding carry international trade obligations with it, regardless of whether it's spent at state or local levels.”Buy American rules are not WTO-consistent but escape because of the holes in the agreement on government procurement (GPA) — and because these benefits are achieved through sub-national or state procurement. Canadian manufacturers and exporters continue to regard the Buy American tendency as a risk to business, suggesting that “new or more restrictive Buy America and Buy American provisions ... are likely to pop up often this year as the U.S. economy remains fragile and the mid-term elections of 2014 draw near.”Canada, too, has held back on fully opening up its government procurement markets, particularly at the provincial level — in large part because the U.S. has sheltered procurement for small business and minorities under a wide range of set-asides. Less-than-comprehensive deals can also be attractive.Will Canada be able to discipline Buy American rules in the TPP? Don't hold your breath; Buy American is religion in Congress.It is not surprising that investor state dispute settlement is still open and actively debated in the CETA. Europe also has differences with the U.S. on this issue. And should Canada open its financial services sector to European investment and modify regulatory systems as part of a Financial Services Agreement, there are serious issues for Canadians. Ministers must avoid a race to the bottom and inferior regulatory systems.And then there's agriculture. It should be recognized that Europe is not the biggest open market in the world for food and agricultural products. It is the largest rigged market in the world. And it is rigged by the Common Agricultural Policy known as the CAP. In a seminar at Carleton University early in the negotiations, the EU's deputy chief negotiator admitted that the CAP was not on the table.Access for Canadian beef to Europe has been a focal point in this recent debate. Ireland is clear: they do not want our beef — or at least not very much of it. The EU offer is considered by Brussels to be generous. The Canadian Cattlemen's Association no doubt considers it to be meager and insulting. Given the size of the EU market, is it surprising this would be the CCA's reaction?Ireland currently holds the EU presidency. This brings a lot of influence and control of agendas. True, France is also interested in beef and cheese exports. The EU concern is keeping Canadian meat products out. The Irish Farmers' Association claims that imports of Canadian pigmeat could put Irish farmers out of business. EU imports of pork from the world are one-fifth of one per cent of pork consumption. Irish intransigence and resistance must be countered in the context of this debate.Europe has had difficulties concluding other deals where agriculture has been a sticking point. Take, for example, EU negotiations with Mercosur, which was comatose for 6 years and after relaunch has still been very slow to get down to market access negotiations. Nearly half of Mercosur exports to the EU are agricultural products, and the hiatus was due to Europe's unwillingness to further liberalize farm trade.European farm interests have already made clear that they do not want U.S. beef. They have also lobbied against increased imports of dairy products which benefit from subsidies. U.S. beef does not enjoy anywhere near the state support provided in Europe.U.S. dairy farmers have not, in most years this century, recovered their cost of production on milk used for processing. This pricing provides a benefit to processors who receive milk at less than full cost of production.European dairy producers have their own form of supply management, and imports of dairy products are limited to about 2.7 per cent of consumption. Milk production is heavily subsidized. These differences over dairy negotiations between the EU and the U.S. will not be easily resolved.Is CETA about to collapse?CETA is clearly not on a fast track. The negotiations are not totally paralyzed, but in key areas it is moving very slowly. Concluding the deal will require leadership. Does this mean that Prime Minster Harper needs to sit down with his European counterparts? Not necessarily, but all leaders will need to send a clear signal to the negotiators that a deal must be done and that they should focus their ability on salvaging whatever is possible on the disputed issues. But it seems clear the time is not ripe. Both sides need to compromise.We should not ignore the fact that the EU has begun “comprehensive” trade and economic negotiations with Japan and hopes to start the TTIP negotiations with the U.S. in July.This increases frustration in Brussels about delays in negotiations which they believed would be over. Steve Verheul, Canada's chief trade negotiator for CETA, cannot meet with his EU counterpart when he is in Japan or receiving Japanese delegations in Brussels.CETA appears to be in a survival mode and may soon move into a salvage mode. At the end of 2012, I had optimistically predicted a March 2013 conclusion for CETA. So much for that. EU representatives now suggest that it may conclude this summer. I have no reason to dispute this.For those anxious to see CETA done and who recognize its importance, a wrap-up by early summer would be most welcome.Focusing on artificial deadlines is like chasing black flies. But no one will venture any guesses about deadlines and the chances of meeting them. The deal will be done when it is done and we will all wake up to a pleasant and unexpected surprise.Is the CETA too big to fail? I do not believe it will come to this. The deal is just around the corner — but these are long blocks and it is not clear which corner. Don't count on size to save the deal, but it makes it much more difficult to abandon. The stumbling blocks could be rather small in terms of the total package, but there is always a danger that symbolic concerns will trump pragmatism and there will always be politically sensitive exclusions.The negotiations are not as hopelessly deadlocked as some pundits believe. And missing deadlines is not all that serious. What matters is quality. And a quality agreement takes time.Peter Clark, a former Canadian trade negotiator, is president of Grey, Clark, Shih and Associates Ltd., an Ottawa-based international trade consultancy. He is a frequent media commentator and appears regularly before Parliamentary Committees, analyzing trade and commercial policy issues.