Europe, Canada and the Comprehensive Economic and Trade Agreement

Kurt Hübner

• Publisher: Routledge
• Year: 2011
• Print ISBN: 9780415600286
• eBook ISBN: 9781136741302
• Topic: Business
• Subtopic: Business General
• Index: Business

The Great Recession and the turn towards all forms of protectionism stress the relevance of international trade policy. With the global economy undergoing deep structural changes, the negotiations between Canada and the EU on a Comprehensive Economic and Trade Agreement (CETA) present a real-time experiment that sheds light on the direction that the relationships between two economic units of the G8 will take. For Canada, an agreement with the EU would end its current dependency on the US; for the EU, an agreement with Canada would be a first with a G8-economy and indicate how its new trade strategy 'Global Europe' will look like.

This book is the first to simultaneously analyze the undercurrents of this project and introduce the main topics at hand. CETA is much more than a simple free trade agreement, its breadth covers regulatory aspects in goods, services, and finance; the opening of public procurement markets; attitudes and policies of Canadian provinces towards liberalization; climate policies and international leadership claims of the EU in comparison to Canadian policy attempts; the challenges of the Euro project and the reform efforts; and the challenges of the Euro as a international reserve currency.

CETA is a challenging project that will kick-start enormous changes in trade policy-making as well as in market openness in Canada. It will mark the EU's efforts to re-make the Atlantic Economy. This book provides deep insights into the ambiguity of the project and addresses the implications of a rapidly changing global economy for trade policy. Offering analysis of the financial industry, banking, trade policy, climate change strategy, and the Euro exchange rate, this book should be of interest to students and policy-makers alike.

1 Canada and the EU

Shaping transatlantic relations in the
twenty-first century

Kurt Hübner

Introduction

When Canadian Prime Minister Stephen Harper undertook his first official visit to Europe in June 2007, the global economy was supposedly in good shape. The fiasco of the New Economy had passed, and economic growth had returned to almost all corners of the world. The initial climb of the euro exchange rate vis-à-vis the US dollar was widely seen as a sign of international investors’ trust in the common currency, and in the promised widening and deepening of European integration in general. Given the stalemate of the Doha round on global trade negotiations, politicians in Canada and Europe saw the opportunity to politically lock-in the promising developments by ‘fast-tracking’ negotiations on a far-reaching economic agreement. Already in late 2006, the German government, which would hold the rotating presidency of the EU starting in 2007, signaled that it would be interested in supporting efforts for closer economic cooperation with its North American partners. Ironically, at this point in time the positive response did not come from the federal government in Ottawa but from Quebec Premier Jean Charest, who established himself as the strongest proponent for closer economic and political ties with Europe. The project of the Comprehensive Economic and Trade Agreement (CETA) was born. After four years, many draft versions, and four rounds of intense negotiations, both sides are still signaling their willingness to reach a positive conclusion. Such an agreement between two G8 economies would be a first, thus indicating the direction that global political–economic relationships may move in the next couple of years.

The various chapters of this book provide a comprehensive analysis of the endeavor of this planned second-generation agreement. The book argues that the relevance of CETA goes far beyond the agreement itself. A comprehensive economic partnership between the EU and Canada could act as template for further agreements, including an agreement between the US and the EU, and thus move global trade negotiations out of its current standstill. Even though the elimination of tariffs plays a key role in ongoing negotiations, CETA derives its importance from its truly comprehensive agenda that focuses on non-tariff barriers in trade with goods and services, market access and mutual recognition of regulations and standards, the radical opening of public procurement markets, issues of competition policy and intellectual property rights, tax and investment issues, as well as cooperation in arenas such as the environment and labor standards. An agreement between the largest economic market in the world and an economy that has a coastline along the Atlantic, Arctic and Pacific oceans – and is thus inherently connected to these regions and economies – has the potential to establish rules, practices and institutions that may be emulated by other political actors. Negotiations on CETA are emblematic for political problems to find and eventually establish new forms of global, regional and national forms of economic governance in times of seismic changes in the global economy. It is true that trade negotiations follow their own logic and speed, but in the end it may also be true that ongoing negotiations cannot fade out the implications of far-reaching changes. In the aftermath of the Great Recession, for example, the euro's economic and financial architecture came under siege. Even though the euro may survive as a common currency, the outcome of the changes in the political and economic underpinning of the joint currency may render the EU a less attractive economic space than it was before. This may result in the continuation of the current under-trading between the EU and Canada, despite the potentially successful signing and ratification of CETA. In short, the analysis of the CETA project helps one to understand the implications of the economic and political undercurrents that influence the dynamics of the emerging forms of global economic government.

CETA, ‘spaghetti bowl,’ and the reshaping of the global economy

Economic globalization, past and present, is an uneven process in which not all national economies participate with the same depth and scope. For some time it seemed that globalization would propel the emergence of a small number of regional trading blocs that would structure the long-evolving multilateral world economy alongside the logic of bloc-internal trade (Schott 2008). The formation of the Common Market in the 1980s in Europe and the emergence of a North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico in the 1990s were seen as prototypes of regionalization on a global scale. The formation of trading blocs was accompanied by, and even superseded, a parallel development described with the concept of the spaghetti bowl. The concept stems back to Bhagwati (2007), who argued that the arrival of so many regional trade agreements undermined an efficient multilateral global trading regime. Whether regional trade agreements are effective stumbling or building blocs is not yet decided. This concept is used in a pragmatic way that accepts the breadth of such agreements. According to this view, the global economy and in particular world trade is characterized by the emergence of a vast variety of bilateral and multilateral regimes and relationships that nation states can choose from (Baldwin 2006). Nation states and supranational entities such as the EU are acting on both the regional as well as the bilateral level, and this creates a web of agreements and regulations that surmounts and perforates the previous multilateral regime. This ambiguous character of the spaghetti bowl indicates that the patchwork of agreements should not be seen as an alternative global mode of economic governance. Rather, it adds to the strategic complexity of the global economy and underlines the notion that national interests still dominate trade policies. Not all nation states participate in this process. As a matter of fact, the long history of the world economy – as well as the more recent history of the second wave of globalization – indicates that in political terms, economic globalization is a highly asymmetrical process. The making of a world economy and globalization comes with strong growth of all sorts of cross-border transactions but only with limited efforts of global political cooperation. This gap was usually bridged, at least partially, by the emergence of a hegemonic power that provided the global public good of stability and economic management. It was the United States that played that role after World War II, and with it came the prominence of the Atlantic economy. Starting in the late 1970s, the US hegemony began to falter, even though the US was still the globally dominant economy, and the production of the global public good became more difficult. New economic powers began to settle, in particular in Asia, leading to the rise of a Pacific economy. The period of a decline in multilateralism starts here.

It would be misleading to view the rise of the Pacific economy as a zero-sum game. The Atlantic economy and transatlantic relations overall may have lost its uncontested poll position, but they still are pivotal elements of the global political economy. The emergence of a Pacific economy since the early 1990s is based on the export-oriented growth models of particularly Southeast Asian economies. Export destinations are markets in North America and Europe that need to be kept open in order to facilitate the export growth strategies. Until the outbreak of the Great Recession this requirement mainly was secured by the US and its strategic interest in capital inflows in order to finance its external deficits. The economic and political rise of China went hand in hand with the economic and political decline of Japan, thus contributing to the already fragile political state of the region, while providing an anchor of stability.¹ Simultaneously, the US experienced a strong period of overstretch and no longer has the economic and financial resources to unilaterally steer the global economy. The EU has never seized the opportunity to become a truly leading global economic actor. As a result, the global political economy is characterized by economic and political divisions that are accompanied by the spread of soft modes of governance. This holds in terms of global economic governance, but also in terms of trade relations where one can observe the emergence of a spaghetti bowl of treaties and agreements in the last two decades.

Despite the hype of global governance, however, the gap between economic and political globalization has increased in the last couple of years. The financial and economic crisis that started in 2008 uncovered this asymmetry in a brutal manner. Even though some commentators view this crisis as a decisive turning point in the long history of economic globalization, it can still be put into question whether this event finally will lead to the political catch-up to globally embed and underfeed the processes of deepening and broadening of global markets by political and social means. Still, efforts to launch new forms of international political coordination and even cooperation can be identified. There is the new role of the International Monetary Fund (IMF) as crisis manager for developed market economies; we see the rise of deeper cooperation of central banks; there is the rise of the G20, which soon may overturn the prevailing G8 institution. However, there are also counter-movements. Numerous critical political arenas show strong divisions between main global political and economic actors. Divergent views exist in the arenas of financial regulation and exchange rate policies, while opposing views emerged in global climate policy where the EU's ambitious project suffered a crushing defeat at the Climate Conference in Copenhagen in late 2009. Even in the arena of global trade negotiations, Canada and the EU differ, particularly in regards to agriculture (Charlebois and Boyer 2008). Not all of those conflicts proceed along the lines of Organization for Economic Cooperation and Development (OECD) versus non-OECD economies, nor does it seem that the template of developed and emerging market economies is useful in understanding the fault lines. In all those arenas conflicts and differing views can be easily identified inside the above-mentioned ‘blocs.’ In other words, the global economy and global polity are undergoing fundamental changes that are no longer captured by static theoretical concepts. Tools such as regional trade agreements, strategic partnerships and economic partnership agreements are increasingly being used to create new alliances that add to the network of political and economic ties between nation states. One of the many early indications that the world of multilateralism has come to a halt was the stall of the Doha Trade Round, which was supposed to provide a further push towards global economic and political integration. The halt of Doha strengthened an already existing tendency towards Regional Trade Agreements (RTAs), which has recently mushroomed to close to 300. Even during the most critical phase of the financial crisis the number of new RTAs increased by 25, including three by Canada, namely with the European Free Trade Association, Colombia, and Peru (Freund and Ornelas 2010).²

At a point in time when the financial crisis was more an unfounded prognosis of a small number of critical observers than an economic and political reality, Canada and the EU launched a series of talks in order to begin negotiations about a CETA. At first hindsight, this initiative can be seen as a pure continuation of the paused negotiations about a Trade and Investment Enhancement Agreement (TIEA). Those negotiations started in March 2004 and came to a stop after three rounds in May 2005, officially explained with the argument that both partners wanted to wait until the results of the Doha Round were known. In this regard, the newly initiated negotiations on CETA can be interpreted as an indication that neither the EU nor Canada is actually putting much hope into the eventual success of Doha and move along on a bilateral track. Even though TIEA already was intended to be more than a routine free trade agreement (see Chapter 2), the new round definitely goes further by trying to create genuine bilateral rules and principles, and simultaneously prepare the ground for far-reaching consultation mechanisms for a broad range of transatlantic political and economic issues. CETA would be a first agreement for the EU with a developed market economy; and for Canada such an agreement would mean adding a legal framework of cooperation with the largest trading bloc of the global economy and thus diversify its available choices in order to overcome its fixation on the US.

In 2010, the negotiations entered a critical phase. Whether all this results in a new agreement has yet to be decided. Despite this uncertainty, it is still worth the efforts to dedicate a whole volume on this planned agreement as already the negotiations can be seen as a test case for future transatlantic and even international cooperation in at least three respects. First, unlike other regional trade agreements, CETA would be an agreement between two economic spaces that belong to the world of developed capitalist market economies. In this respect it indicates the willingness of advanced capitalist economies for an economic and political partnerships that meets the needs and requirements of the twenty-first century. Second, the negotiation for a comprehensive partnership agreement extends over the most critical period of the global economy. It started under extremely rosy global economic conditions and will be finalized under totally new (and grim) realities of the global economy. Furthermore, the talks culminated in a situation when the project of European integration (with its Economic and Monetary Union core) was fundamentally put into question. Third, CETA is supposed to be much more then a bilateral trade and investment regime. It comes as an omnibus framework that would allow the EU and Canada to establish a wide range of coordination and even cooperation opportunities in areas such as environment and climate change, regulation of the finance industry, and global imbalances and currency affairs. CETA obviously is no substitute for effective global governance. Being strictly bilateral in its character, it still offers insights on the ways economic and political global relations will be shaped in times of increasing global uncertainty and the potential faltering of the European project. The chapters of this book take the ‘C’ of CETA literally, and provide a deep analysis of the undercurrents for a first-ever encompassing agreement between Canada and the EU.

Canada and the EU: unlikely partners?

Transatlantic economic and political relations have been shaped predominantly by the US with Canada taking the backseat. On the European side, the nation states and their foreign policy interests gave the tune, and then played the second fiddle. This picture has not changed fundamentally but it has displayed some weaknesses, not least due to the Lisbon Treaty, which brings some foreign policy clout to Brussels. Canada, on the other side, follows a carefully orchestrated diversification strategy in order to avoid an overt trade fixation on the US. Both developments indicate that the previous US dominance of transatlantic relations may decrease.

Like the EU and its member states, Canada is no major military power on the global level. Both entities, at least for the greater part of the World War II period, were strongly committed to international cooperation in the framework of emerging international institutions. On the European side, after World War II it was not the rising EU and its political institutions, but its member states that were in different constellations and formations vis-à-vis preferred partners of US administrations. Even though international trade has become the political prerogative of the EU since the Treaty of Rome in 1957,³ the various layers of the Atlantic economy were designed and materialized by the interaction of nation states, and the EU accompanied and guided these processes. Politically organized economic relationships between Canada and the EU date back to 1959 to the Agreement for Cooperation in the Peaceful Uses of Atomic Energy. In 1976, the Framework Agreement for Commercial and Economic Cooperation was successfully negotiated and signed. Since then, the so-called EU–Canada Joint Cooperation Committee meets on an annual rhythm. The Transatlantic Declaration of 1990 was followed by the Joint Canada–EU Political Declaration and Action Plan of 1996 as well as the signing of sectoral agreements in areas such as education, competition, science, and technology.⁴ This dense network reflects the economic prominence of the EU for Canada: the EU is Canada's second-largest trading partner,⁵ and an extremely important destination for Canadian foreign direct investment (FDI). In 2007, the stock of Canadian FDI in Europe made up 26 percent of all Canadian FDI; contrarily, European economies accounted for close to 32 percent of all FDI in Canada (Holden 2008). This data illustrates that Canada and the EU are beyond shallow integration. Given the relative size of both economic entities, it comes as no surprise that the EU is a potentially more interesting magnet for Canada than Canada is for the EU. Proxy calculations indicate that Canada and the EU do not trade according to their bilateral potential. Accordingly, both entities can expect welfare benefits from a liberalized bilateral trade regime (Joint Study 2008).⁶ In terms of GDP increases, the effects are relatively small – a yearly increase for the refer...

Table of contents

• Frontcover
• Title Page
• Copyright
• Contents
• List of figures and tables
• List of contributors
• Preface
• 1 Canada and the EU: shaping transatlantic relations in the twenty-first century KURT HÜBNER
• PART I Driving forces and motifs for the project of a comprehensive economic partnership: the case of the EU
• PART II Canada and the global political economy
• PART III Regulatory and tax regimes
• PART IV Beyond “traditional” trade agreements
• Index