Deep-CETA’d ties

At a time of near-daily protectionist measures, when affirmations of a deglobalizing world are ubiquitous and industrial policy rollouts commonplace, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) stands not only as an important reminder of the benefits of trade liberalization, but also of the vast opportunities offered by this long-standing relationship.

Most Canadians are likely aware that the United States is our largest trading partner. However, fewer may know that our second-largest partner is the EU, comprising 27 member states, more than 440 million consumers and 32 million active enterprises. In fact, the EU is the third-largest market in the world, after only the U.S. and China.

While still under provisional application, Canadian businesses have enjoyed preferential access to this affluent market since September 2017, thanks to CETA. The agreement has fundamentally redefined the trade relationship between our two economies, leading to faster post-implementation trade growth than any other free trade agreement signed by Canada. And this, despite the fallout from Brexit, the COVID-19 pandemic, and the Russian invasion of Ukraine. The agreement has been especially beneficial for Canadian small- and medium-sized enterprises (SMEs), with the value of SME exports up 80% from their 2016 levels.

The agreement has translated into substantial cost savings and enhanced competitiveness for Canadian goods exporters in the European market. Some estimates peg 2022 tariff savings for Canadian exporters at close to C$375 million—a substantial amount given myriad challenges facing businesses over the last few years.

CETA also seeks to address non-tariff barriers, by fostering regulatory co-operation as well as mutual recognition of standards, thereby reducing administrative and compliance costs. This is particularly important for trade in sectors, like pharmaceutical products, which experienced growth of 178% over the 2016-2022 period.

While there have been challenges in regulatory alignment on beef and pork, the agreement provides for resolution mechanisms. The Canada-European Union Regulatory Cooperation Forum, for example, was established to reduce duplication and avoid misalignment.   

The modernized agreement also contains provisions on services and investment—creating opportunities for Canadian companies to establish a stronger presence across the pond through direct exports as well as European subsidiaries and joint-venture partnerships. This is a critical feature, given that the EU is the ultimate source of some 20% of all foreign direct investment into Canada.

When it comes to co-operation around the transition to a green and digitized economy, the Canada-EU strategic partnership on raw materials will help plug Canada into the EU critical mineral and battery value chains, in support of its ambitious climate targets. Europe’s 55% emissions reduction goal by 2030 also presents significant opportunities for Canadian companies specializing in green technologies, renewable energy, and sustainable products.

Bilateral trade in environmental goods has thrived since CETA, with the value of Canadian exports to the bloc quadrupling since implementation. Opportunities await Canadian exporters in this sector looking for like-minded partnerships in the EU. Additionally, Canadian exports with low carbon content will benefit from reduced competition in the EU, once Europe’s Carbon Border Adjustment Mechanism (CBAM) kicks in—in 2026.

The bottom line?

As the chorus of protectionism grows louder, the Canada-EU trade agreement reinforces the advantages of our strategic partnership with Europe. CETA has significantly enhanced the trading relationship between Canada and the EU, offering Canadian exporters unprecedented access to a large and diverse market.

This year marks an important milestone in this partnership, when almost all products are considered “duty-free,” with the full elimination of tariffs. Canadian businesses stand to benefit immensely from understanding and leveraging the agreement in a way that helps them fully thrive in this market.

This week, a very special thanks to Sanjam Suri, country risk analyst in EDC’s Economic & Political Intelligence Centre.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.