What the Heck Is Up with CETA?

On Thursday October 27^th Canadian Prime Minister Justin Trudeau and the President of the European Council, Donald Tusk, were planned to meet at the EU-Canadian Summit. At the festive meeting, both parties were set to put their final signatures on the long negotiated CETA free trade agreement. That was before the event got cancelled due to the boycott of one small Belgian region. Even though Wallonia by now has agreed to the new terms of the deal, the consequences of the last few days are still unclear. What happened?

The results of this blogpost in short:

• Wallonia’s boycott has cast a serious shadow of doubt on EU negotiation power
• While Canada stands to gain the most from CETA, EU member states, too, could see significant GDP boosts
• Belgium in particular would be one of the clear winners of CETA and TTIP
• Europe must be careful now not to give away its role in shaping the future of global trade governance

The power of the few

The source of all the trouble came from an unexpected place; the small Belgian region of Wallonia. Similar to TTIP, before CETA can come into power, it does not only have to be signed and ratified by Canada and the EU but also on the national level by all 28 (UK still included) EU member states. Here, however, Belgium faced a problem. The regional parliament of Wallonia had declared it would boycott the agreement, stating that the agreement would fail to guarantee sufficient protection of local farmers and would place too much power in the hands of international courts of arbitration and thus large multinational corporations. Without Wallonia though, Belgium cannot sign and without Belgium, the EU cannot sign.

CETA has been in preparation since 2009 and in 2014 the EU and Canada declared they had finished negotiations. Since then the agreement and free trade in general, have had an increasingly difficult time. With the growing public awareness of TTIP in particular, voices against free trade agreements on both sides of the Atlantic were on the rise. While critics of such agreements point to the non-transparency of negotiations, the fear of reduced standards and the implementation of international courts of arbitration, defenders of globalization cite the large welfare and job increases mega-regional trade agreements can produce. For CETA alone the European Commission expects an annual increase in GDP of around 12 billion Euros. In previous posts, we too showed how increased trade generates more growth and how different countries profit from increased globalization.

How would CETA affect its member countries?

If CETA was enacted it would broadly eliminate tariffs between Canada and the EU granting European companies a facilitated access to the Canadian market and vice versa. Harmonized regulations and rule making would further reduce existing bureaucracy and help predominantly small and medium sized enterprises, for which until now the obstacles of international trade were too great, effectively banning them from being able to export their goods to other markets. In cooperation with the German ifo Institute we calculated the effects on income CETA would have on all 28 EU member states and Canada. In figure 1 you can see a select few of the results:

annual increase in GDP of around 3% under CETA. As a much smaller market Canada relies on trade with the EU much more than the EU does on trade with Canada. The EU represents Canada’s second largest trading partner, only topped by the US, with a total EU-Canadian trade flow (Imports plus Exports) of a little more than 90 billion USD in 2015. In comparison Canada is only the EU’s 11^th largest trading partner. Understandably then Canadian trade minister Chrystia Freeland and Prime Minister Trudeau have shown little understanding so far for the European situation. Having “done their part”, Freeland said, they would now wait and hope for Europe to reach a positive solution by Thursday’s summit.

Another interesting point from our data is that Belgium among the other EU member states would be a relative winner of CETA. Of the 28 current EU countries, it would reap the 4^th highest GDP gains under the deal with an annual increase of roughly 0.4%. Only Finland, Slovenia and Luxembourg can expect higher income boosts. Germany, with an annual GDP increase of around 0.2%, lies somewhere in the European midfield of CETA expectations.

Is free trade in trouble?

CETA of course is not the first trade deal that has stirred up controversy in Europe and abroad. Over the last three years TTIP has been a constant feature in European news and headlines have rarely been positive. Today, it seems less likely than ever that the envisioned US-EU deal can come to fruition. On the other side of the Atlantic, the planned US-Asian TPP deal is equally in trouble as now both major presidential candidates have expressed their rejection of the deal after it became increasingly unpopular with the American people.

Competition does not sleep though and while Europe is arguing with itself, Asia and other regions of the world are working on their own mega-regional free trade agreements. Examples are the purely Asian RCEP or the comprehensive FTAAP. Europe now still has a chance to take part in forming the trade rules of tomorrow and it should be extremely careful not to give up this privilege improvidently. Our calculations show that a combination of CETA and TTIP, too, would bring immense welfare benefits to the European Nations.

Again, we can see Belgium as one of the main winners of these deals. With an annual income increase of slightly more than 3% it yields the 5^th largest benefits of a TTIP/CETA combination, only behind Malta, Lithuania, Luxembourg and Ireland. Germany, too, can expect significant wins through TTIP and CETA, with a little under 3% yearly GDP increases.

Conclusion

There are many problems with the Wallonian stand-off with the European Union. For one, the possibility that a very small minority can impede and effectively stop the decision of a large European majority could be seen as somewhat undemocratic. It furthermore sets a dangerous precedence for future EU deals. If Wallonia gets its special demands, any future minority can insist on their demands for future deals. If Wallonia had not backed down and the CETA deal had been prevented all together, the European ability to create any kind of EU deal down the line would have been shattered and the reputation of the European Union as a negotiation partner would have been even more fundamentally undermined. Most importantly though perhaps, in combination with a failed TTIP negotiation, the EU is in danger of losing its role in forming the global trading rules for decades to come. We can hope then, that from now on the rest of CETA preparations will go off less problematically. One thing is for sure; if we give in now to protectionist tendencies, in the end everyone will lose out.