Canada is a trading nation and relies on two types of international trade agreements, free trade agreements (FTAs) and foreign investment promotion and protection agreements (FIPAs), to make it easier for Canadian companies to conduct business in markets around the globe.
The difference between FTAs and FIPAs is structural in nature. FTAs focus on lowering or removing tariff barriers that restrict trade between two countries. FIPAs are more economic in nature, with the aim of promoting foreign investment in a particular country and ensure a stable environment for the flow of investment.
The ABCs of FTAs
Free trade agreements have the basic goal of eliminating tariffs on goods made in one country and sold in the other, so companies are on equal footing. However, they may address non-tariff barriers including quotes, product standards, labour mobility and intellectual property.
Canadian companies often wonder if an FTA can help them in a particular market. That depends on whether the market actually suits the needs of a particular company. Determining that relies on research to see if it that potential market is a good fit. Often, doing your homework can unveil some unexpected potential for exports and investments.
NAFTA benefitting all partners
Canada currently has a total of 13 FTAs, but none are as important as NAFTA, which includes Canada, the US and Mexico. In a nutshell, 72.6% of Canada’s total exports, valued at $453.7 million, were destined to the US market in 2016. Canada was also the top market for 32 of the 50 American states.
In terms of Mexico, NAFTA is responsible for increasing bilateral trade by an average of 10% annually since it came into force in 1994.
Currently, NAFTA is under renegotiation with no set deadline, however it’s expected that negotiations will be complete in the early part of 2018.
CETA a big trade deal
More recently, Canada signed the Canada-EU Comprehensive Economic and Trade Agreement (CETA) which came into effect in September of this year. The country’s biggest trade agreement since NAFTA, CETA will give Canadian exporters access to a market of approximately 500 million people. It’s labelled as comprehensive because it covers many areas including removal of tariffs, investment flows and movement of people and services.
With the United Kingdom’s departure from the EU in 2019, it won’t be part of CETA, however politicians in both countries have recognized the importance of bilateral trade between Canada and the UK, and are looking at possible options, including mirroring many provisions of CETA in a Canada-UK agreement.
Canada has other bilateral trade agreements in force with other countries, including South Korea, Colombia, Chile, Costa Rica, Israel, Honduras, Jordan, Panama, the European Free Trade Association (EFTA) as well as the Ukraine.
Unlike FTAs, FIPAs don’t deal with trade of goods or services. Rather, they focus on investment with an aim to establish consistent treatment for investors in both countries to protect against political risks and currency controls.
Canada also currently has 37 FIPA agreements in place with countries around the globe. The nuts and bolts of each particular agreement may vary, but each normally addresses the equal treatment of both domestic and international investors; the sectors that may be excluded from the particular agreement (telecommunications or financial services); transfer of funds out of the country in addition to taxation measures and dispute resolution mechanisms.
FIPAs: Equal footing in a global market
The presence of a FIPA is an important tool for exporters when looking to invest in another country. If a FIPA is in force, the Canadian company will enjoy equal rights as a locally owned firm and cannot be penalized for being an international firm. As a result, investing in a country with a FIPA may provide more substantial benefits than trying to do business with a country that does not have one.
FTA helps dTechs break into Colombia
With the main goal of reducing punitive tariffs on imported goods and services, doing business in country that has an agreement with Canada can provide benefits.
For Calgary’s dTechs, Canada’s FTA with Colombia is translating into new opportunities.
CEO Roger Morrison had a skewed impression of the country until he decided to participate in a trade mission four years ago.
“At first glance, I was reticent to expand into Colombia, having all the same preconceived misconceptions from its recent history regarding corruption and drug violence,” he told EDC in May 2017. “Going down there I found a much different country. I found a very friendly people and very friendly business environment and discovered the Canadian government and the Colombian government have a free trade agreement.”
Since then, the Canadian software company has had great success exporting its technology in the Colombian electricity market. dTechs is the creator of the epmSuite, an electrical management software that enables electric utilities to wirelessly monitor technical and non-technical energy losses across their distribution systems. Using accurate voltage sensors coupled with a robust software platform, the company addresses the last-mile gap in grid monitoring.
At first glance, I was reticent to expand into Colombia, having all the same preconceived misconceptions from its recent history regarding corruption and drug violence. Going down there I found a much different country. I found a very friendly people and very friendly business environment and discovered the Canadian government and the Colombian government have a free trade agreement.
“We found a very strong need for our technology in Colombia,” added Morrison. “Hence, we decided to enter the Colombian market, and since that time, I have been to the country probably upwards of 20 times.”
A lesson in tariffs for CoolIT Systems
Calgary high-performance computer cooling specialist, CoolIT Systems learned about some of the hidden costs of doing business free trade agreements eliminate, the hard way.
“Brazil is a very protectionist country and we didn’t realize the import tariff there is 100%,” Chief Operating Officer Randy Coates explained to EDC in January 2017.
The company was excited that it was expanding its global footprint into South America, until a bill arrived in the mail.
“Many countries have tariffs that you are aware of and are in the range of 4%,” Coates said. “But in Brazil, you have to do some of the assembly there or it’s outrageously expensive to sell into.”
Brazil is a very protectionist country and we didn’t realize the import tariff there is 100%.
“Unfortunately, I’m sure we are not the first company to sell into Brazil only to get a bill for the same total as our shipment from the government and wonder what the heck it’s for. It’s an exporting lesson learned the hard way.”