Inside CETA: Unpacking the EU-Canada free trade deal

3 November 2014

How are sustainable development objectives treated in the latest major preferential trade agreements? 

In late September, the European Union and Canada released the long-awaited text of a bilateral free trade pact, five years after launching talks, and almost one year on from announcing they had reached an “agreement in principle” on the subject. The EU-Canada Comprehensive Economic and Trade Agreement (CETA), as the deal is formally known, will still need to be ratified by both sides but negotiations are understood to be more or less complete.

For Canada, the agreement is its most important in terms of trade and investment volumes since the North American Free Trade Agreement (NAFTA). On the other side of the pond, it marks the 28-nation EU’s first developed country free trade agreement outside of Europe, and the bloc’s third trade pact with a non-EU OECD country. Ottawa has described the deal in glowing terms as “historic” and “by far Canada’s most ambitious trade initiative, broader in scope and deeper in ambition than the historic North American Free Trade Agreement.”  Meanwhile EU officials have added that the agreement contains “all the guarantees to make sure that the economic gains do not come on [sic] expense of democracy, environment or consumers’ health and safety.” But is such fanfare warranted?

The conclusion of CETA also has wider ramifications beyond its significance as an economic agreement between the EU and Canada. It has been sealed as negotiators continue to try and make headway on the Trans-Atlantic Trade and Investment Partnership (TTIP) talks ongoing between the EU and the US. This planned deal cannot help but be influenced in its starting points and principles by the shape of CETA given the respective parties involved.

More generally, CETA comes at a time when the world’s approach to international economic governance is in flux, with multilateral efforts stalled and new mega-regional initiatives such as the Trans-Pacific Partnership (TPP) underway. What sort of snapshot does CETA provide of this moment in the evolution of regional trade agreements and also around their relationship to sustainable development?

CETA sustainable development, environment, labour chapters

CETA contains dedicated chapters on trade and sustainable development, trade and environment, as well as trade and labour. This was not a pioneering move for the EU; the 2012 agreement it concluded with Columbia and Peru, for example, has a chapter on trade and sustainable development that covers environment and labour from which much of the structure and language of the CETA’s three corresponding chapters are taken.

Canada’s traditional approach – and, in the context of environmental cooperation, an approach also used in many other EU agreements – is to deal with environment and labour considerations through side accords. In the end, however, whether environment, labour, and sustainable development are treated as chapters within the treaty or as a side agreement probably makes little functional difference. Much of the institutional infrastructure created under CETA’s trade and sustainable development chapter is identical to what has been created in Canadian side agreements attached to other free trade agreements such as the one sealed with Honduras that entered into force at the beginning of October.

One novel piece of institutional infrastructure in CETA is an as-yet unnamed body on trade and sustainable development composed of high-level officials that will meet on an ad hoc basis to review the implementation of the sustainable development, environment, and labour chapters. The sustainable development chapter also creates a “Civil Society Forum” that will meet annually to discuss sustainable development aspects of the agreement. Both parties also commit to “review, monitor and assess the impact of the implementation of this Agreement on sustainable development in its territory”. This self-review may be supplemented by a joint review where the parties so agree. However, while all of these elements have the potential to be significant and positive, this will only be the case if enough political will is dedicated to make them so, as the written mandates alone are not strong enough to guarantee any meaningful impact.

The environment chapter has some standard elements. These include an elaboration of the precautionary principle – which places the onus of proof on proponents of potentially harmful actions or policies to show that they are safe – it promises collaboration on multilateral environmental agreements (MEAs), it obliges parties not to lower environmental standards to attract trade or investment, and it pledges cooperation on environmental issues through, for example, “technical exchanges, exchanges of information and best practices, research projects, studies, reports, conferences and workshops.” It also has specific sections on cooperation in the areas of forest products and fisheries.

The labour chapter similarly has fairly standard obligations that national law should respect International Labour Organization (ILO) core principles and that the parties should promote the objectives of the Decent Work Agenda.

None of those commitments are novel for regional or free trade agreements. Only the commitment not to lower environmental standards is binding – the other obligations in the environment chapter are best-effort pledges – and none of the environment or labour chapters’ elements are subject to the normal CETA dispute settlement procedures. Nor do the commitments impose any new obligations on the parties beyond their existing international obligations.

The environment and labour chapters do, however, have a separate process for review in the event of disputes over the implementation of their obligations. In contrast to the NAFTA side agreement – the North American Agreement on Environmental Cooperation (NAAEC) – such disputes cannot be initiated by civil society. CETA procedures in these areas would only be triggered by government-government dispute settlement specific to the relevant chapter. Penalties are limited, as in NAAEC, to naming and shaming.

The environment chapter also has puzzling text on the right to regulate and levels of protection:

“Recognizing the right of each Party to set its own environmental priorities, to establish its own domestic levels of environmental protection, and to adopt or modify its relevant laws and policies accordingly in a manner consistent with the multilateral environmental agreements to which they are a party and with this Agreement, each Party shall seek to ensure that those laws and policies provide for and encourage high levels of environmental protection and shall strive to continue to improve those laws and policies and their underlying levels of protection.” CETA Chapter XX: Trade and Environment, Article X.4.

Much of this is standard text and, like the right to regulate in a manner that doesn’t contravene the CETA, is hardly necessary to assert. Moreover it is not entirely clear why the novel requirement was added for such regulation to also be consistent with MEAs to which the regulating country is party. Few MEAs constrain the types of domestic environmental regulations their parties may enact, but in the case of an MEA that did so, what CETA body would decide whether a measure was inconsistent with that separate body of law? What would be the legal status under CETA of a measure that was found to be inconsistent with an MEA? Would that measure, for example, be disadvantaged in trying to resort to the environmental clauses in the CETA’s general exceptions?

Sustainable development in the whole

CETA has more to say on sustainable development beyond the specific chapters devoted to environment, labour, and sustainable development. Positive elements include the agreement’s preamble – the 1998 WTO US-Shrimp case showed preambular text to be important for interpreting substantive obligations – which is full of good language on sustainable development as an objective of the agreement. [Ref 1]

The chapter on general exceptions reiterates what has been established by WTO case law clarifying the WTO’s General Agreement on Trade and Tariffs (GATT 1994) text; namely, that environmental measures can be considered measures necessary for the protection of human, animal or plant life, or for health reasons, and that exhaustible natural resources include living organisms.

Elsewhere the chapter on subsidies contains an – albeit extremely weak – commitment to a “resolution to fisheries subsidies”. The dispute settlement chapter has an explicit provision for the submission of non-party opinions in the arbitration process, otherwise known as amicus curiae briefs. An annex to the chapter on technical barriers to trade has provisions that might work to strengthen automobile efficiency standards.

There are also some areas that give cause for concern around sustainable development objectives. The chapter on domestic regulation obliges parties to make their licensing requirements – which could include environmental permissions and approvals – “as simple as possible” in their application to all economic activity of each other’s nationals or firms. This is an unqualified requirement that could be disastrously interpreted. Meanwhile the subsidies disciplines, like those in the WTO, are not covered by the general exceptions that would shelter “market correcting” subsidies such as those for renewable energy.

In addition some provisions could constrain the ways in which national and subnational governments can pursue economic development. The creation of “national champions,” or sole actors in a sector, is prohibited by the investment chapter’s market access provisions, as are joint venture requirements. The same chapter’s provisions on performance requirements also prohibit technology transfer requirements and local content requirements. The latter are, in any case, illegal under WTO rules.

The provisions in the chapter on government procurement, which apply right down to the municipal level for tenders above a de minimus level, prohibit the favouring of local suppliers and any other tender specifications that seek to encourage local economic development, for example, local training requirements or licensing of technology. These provisions reflect a deep pessimism about the desirability of industrial policy.

Sizing up the investor state dispute settlement mechanism

The chapter on investment has drawn a great deal of attention for its inclusion of an investor-state dispute settlement mechanism. Consistent with the structure found in other such agreements, the CETA mechanism relies on the judgment of arbitrators who may also be serving as counsel in similar arbitrations, in a clear case of conflict of interest. No standing roster of arbitrators is created from which to draw in regular proceedings. Instead a roster is created from which to choose arbitration chairs in the event of parties’ inability to agree. Another shortcoming is that the mechanism contains no effective channels for appeal. In all these facets the investment provisions, like those of other international investment agreements, fall short of the standards established in the context of the multilateral trading system.

Furthermore, the investor protection elements of the investment chapter are not sheltered by the CETA’s general exceptions. This may be appropriate, since it is arguable that GATT Article XX – incorporated in CETA general exceptions by reference – is not appropriate for investment dispute settlement. The case law from Article XX is based on exceptions as applied to traded goods and not investment flows. A case in point is the understanding that “necessary” in Article XX(b) means “least-trade restrictive.”  But neither does CETA create a custom-made exception provision that is appropriate.

That said the CETA investment chapter seems to have learned some of the lessons from the history of such agreements in practice. The most-favoured nation clause does not allow investors to import procedural obligations from other agreements. The provisions on expropriation have language designed to curtail the use of an indirect expropriation argument – in other words, the argument that measures sufficiently harmful to a firm are tantamount to expropriation, even where there has been no taking of ownership – against non-discriminatory public welfare regulations like environmental laws, though not a full carve out. There are provisions to provide for some measure of transparency, including open public hearings, and respect for the standard set by the new UN Commission on International Trade Law (UNCITRAL) rules on transparency effective from last April.

The provisions on fair and equitable treatment – those most used against public welfare regulations in practice – appear to be carefully worded to avoid the worst kind of overbroad interpretation. [Ref 2] But then they include additional language that allows arbitrators to re-extend some of the most controversial case law on fair and equitable treatment:

“…[A] tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.” CETA Chapter X: Investment, Article X.9(4)

The problem here is the vague notion of a “specific representation,” which goes more broadly than written agreements or pledges, and could include for example rhetoric taken from political speeches.

Many have asked whether investor-state dispute mechanisms are even needed in an agreement between countries with properly functioning domestic avenues for legal redress. This misses the point. Both Canada and the EU anticipate eventually signing more free trade agreements in countries where the legal systems are not so well developed and neither would want their respective partners in future agreements citing CETA as precedent for anything less than what they see as strong investor protection.

Trans-Atlantic frontrunner?

Overall the fanfare that accompanied the signing of this agreement seems a bit overdone. CETA is not particularly ground-breaking in its approach to trade and sustainable development; instead it draws on a mix of existing commitments and the standard approaches taken by the EU and Canada to create a sort of hybrid model.

The agreement’s approach to sustainable development issues outside the scope of the chapters on sustainable development, labour and environment is a mixed bag. Within the chapters on sustainable development, labour, and environment many of the institutional structures and commitments offer potential for positive results if there is the political will on behalf of both parties to use these to their full potential. And the objectives laid out on environmental and labour cooperation, if they are given due attention and budget, may produce results that will help foster progress in other fora such as the WTO and other regional trade agreements.

But there is also some ground for pessimism. Canada has not traditionally showered funds and enthusiasm on its trade deal-based environmental cooperation commitments. And within weeks of the CETA’s finalisation the EU backtracked on its intention to penalise oil and diesel imports according to life cycle emissions – a proposal that Canada had bitterly opposed because it would affect the country’s oil sands exports. The onus sits squarely on both parties to show that the CETA institutions and commitments will indeed be used to pursue sustainable development through trade and investment. Will they be up to the task?

Both the EU and Canada will be under scrutiny from various stakeholders and civil society groups eager to answer the question. A wide interest from the trade community should also be expected Roberto Azevedo, Director General of the troubled World Trade Organization (WTO) told Canadian press in Toronto in October that “the world is watching” to see how the two parties overcome remaining ratification challenges and implementation procedures for their agreement.

The influence of CETA on the looming TTIP negotiations – much more significant for the EU in terms of trade and investment at almost ten times the volume of merchandise trade – are clear in the negotiating directive issued in October by the European Council. The directive duplicates elements of the CETA approach such as preambular language on sustainable development and commitments on sustainable development, environment, and labour.

But in a number of other areas it moots the possibility of going further than CETA seems to have been able to go. In the area of investment, for example, it considers the possibility of “creating an appellate mechanism applicable to investor-to-state dispute settlement.” In the area of regulatory issues and non-tariff barriers it considers discussing equivalency of animal welfare measures. Notably, it does not seem to aim to replicate CETA’s problematic language on domestic regulation. Perhaps building on the ongoing plurilateral talks towards an environmental goods agreement, it directs negotiators to consider measures to “facilitate and promote trade in environmentally friendly and low carbon goods, energy and resource-efficient goods, services and technologies.” And it considers provisions ensuring “open, transparent and predictable business environment in energy matters,” and access to raw materials; new ground on these issues would be significant for sustainable development in ways that could be both positive and negative. Of course these items are simply part of a “wish list,” and may not feature in the final negotiated TTIP, but they signal that the EU will likely actively push to move beyond the precedent that CETA has laid down.

Aaron Cosbey, Environmental economist, Senior Associate at the International Institute for Sustainable Development (IISD)

[Ref 1] See paragraphs four, five, six, nine, and ten in the CETA Preamble Text. The WTO case cited is United States — Import Prohibition of Certain Shrimp and Shrimp Products, (WT/DS58/AB/R). For analysis of the Appellate Body ruling in that case, see Robert Howse, The Appellate Body Rulings in the Shrimp-Turtle Case: A New Legal Baseline for the Trade and Environment Debate, Columbia Journal of Environmental Law 27, 491 (2002).

[Ref 2] CETA Chapter X: Investment, Article X.9(2) gives a specific list of characteristics that would define a measure that breached the obligation for fair and equitable treatment. It is, however, not specified whether this is an exhaustive list; if an arbitral tribunal decides that it is not, then the list’s value in reining in broad interpretations of the provision is greatly reduced.

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