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Canada-EU trade deal heads for uncharted waters

Canadian and European leaders have expressed confidence thata far-reaching trade deal, seven years in the making, will get done as it headsinto the final ratification process. But what they do not highlight is that thedeal is fraught with unresolved issues that threaten to scuttle it entirely orbog it down in a jurisdictional quagmire for years to come. 

International law and trade experts, speaking with S&PGlobal Market Intelligence in interviews over the past week, say the bilateraltrade agreement tests unclear legal territory in a Europe that, some of themsay, appears to be less receptive to wide-ranging deals such as theComprehensive Economic Trade Agreement between Canada and the EU.

Among other things, the deal ends tariffs on metal productsand eases restrictions on investment in Canada's uranium sector, exceptingEuropean companies from rules that otherwise allow foreign firms to own only minoritystakes in uranium producers. It also sets out a contentious investor-statedispute resolution system and integrates the markets more closely onintellectual property and labor movement.

While the trade experts gave differing views of the deal'slikely fate — with most expressing a heavily qualified optimism CETA would goahead — they agreed that getting CETA to the finish line is not going to beeasy or straightforward.

"The situation is complex," said Riyaz Dattu, aninternational trade law lawyer at Osler, Hoskin & Harcourt. "It's ashifting landscape. And I think these are questions that have not been answeredbefore. No doubt experts will be poring over constitutional law on what can andcannot be done."

1st hurdle

The immediate test CETA faces is, relatively speaking, the simplestone. The European Council is set to vote on the final text of CETA, which wasagreed upon between Europe and Canada in 2014 after five years of protractednegotiation. The vote is expected by the end of October and requires unanimousagreement by the 28 member states, each of which will send a trade minister tothe council for the vote.

As it stands, CETA is set to fail the vote, as Romania andBulgaria have already declared their opposition unless Canada changes its visarules. Among EU nations, Canada requires only Romanians and Bulgarians to obtainvisas to travel to the country, which is viewed as unfair, even insulting, bythe Bulgarian and Romanian governments.

But trade experts in Canada, taking Romania and Bulgaria'sthreat at face value, expect Canada to fix the problem ahead of the vote. 

"For Canadian politicians it's a no-brainer," saidPeter Kirby, a lawyer at Fasken Martineau who specializes in internationaltrade law.

It is unclear why Canada has taken so long to address theissue, but recent events hint that it is set to do so. 

Patrick Leblond, associate professor of public andinternational affairs at the University of Ottawa, notes that Canada recentlyresolved a similar issue with Mexico. Back in 2009, the government of formerCanadian Prime Minister Stephen Harper imposed visa requirements on Mexicansentering the country. 

But Prime Minister Justin Trudeau, elected in 2015, droppedthe requirement in late June, removing a significant thorn in the side ofCanadian-Mexican relations. More recently, Trudeau hinted at progress onunspecified issues facing CETA.

In this light, Leblond has "high expectations" thatCanada will do the same for Bulgaria and Romania as it did for Mexico, removingthe most immediate hurdle facing CETA at the council vote. A spokesperson forCanada's Minister of International Trade, Chrystia Freeland, did not respond toa request for interview.

A complex journey

Following that vote — and assuming it passes — CETA is setto head to the European Parliament, where a majority vote is required on thedeal. It is expected to get the green light. 

If the deal passes the council and the European Parliament,the expectation is that CETA will largely go live shortly thereafter as aprovisional agreement ahead of the must-have national votes.

This means most tariffs are set to disappear if the counciland European Parliament vote for the deal, including significant levies onmetal products and the removal of barriers for European companies to invest inCanadian uranium production, among other things.

"Tariffs are clear-cut," Leblond said. They,largely, go to zero in the common market. "In terms of mining products,metals, that's on day one." Trade experts view "day one" aspossibly coming around mid-2017.

Less clear-cut are the issues that national governmentsstill consider within their purview. It is a legal gray zone that will hangover CETA as a provisional agreement and could trip it up at the national level.

One of the most contentious parts of the agreement is aninvestor-state dispute resolution mechanism. At its most basic, it gives acompany the right to sue the state over a grievance.

Given the increasing use of such mechanisms under othertrade deals, Osler's Dattu sees politicians in some European countriessecond-guessing CETA. To emphasize the point, he notes Spain has become one ofthe "most sued countries in the world." That is causing othercountries such as the Czech Republic, Poland and Hungary "to resist thepressure to sign on to the agreement," Dattu said.

Uncharted waters

If CETA stumbles in a national vote, it is unclear what willunfold. Leblond suggests that it is possible that CETA would remain aprovisional agreement forever. A few nations may vote against some of CETA'sclauses. Then both Canada and the EU would have to decide if they were OK withthose changes to the deal's jurisdictional scope. 

Leblond expects that they would agree to go ahead with CETAanyway. Kirby echoes that view. But both acknowledge that it is hard to seewhat course CETA may take in the end.

"No one really knows," Leblond said.

Dattu is pessimistic. He could see CETA being stalled foryears in part because he expects the ongoing negotiation between the U.S. andthe EU on a similar trade deal, the Transatlantic Trade and InvestmentPartnership, or TTIP, to weigh on CETA at the national level.

 "I have a hardtime seeing CETA being ratified until the TTIP negotiations are close tofinal," Dattu said. "And we're far away from that now." 

He notes that presidential hopeful Hillary Clinton hasbacked away from support of TTIP and that Donald Trump opposes it as well,suggesting that TTIP may not get traction under the next U.S. administration.

Another wrinkle for CETA is an impending decision by theEuropean Court of Justice on the separate, EU-Singapore trade deal.

The European Commission requested that the Court of Justiceadvise what matters within that trade deal are EU-only matters and beyond thejurisdiction of member states.

If specific to that trade deal, the court's decision willnonetheless have an impact on CETA — a more extensive agreement — as a rulingfor member states and EU governing bodies to interpret more broadly.

For instance, it is possible that the court could decide thatthe EU-Singapore trade deal is completely within the competency of the EU onlyand not member states whatsoever.

What then? Leblond wonders about the impact of subsequentvotes by member states on CETA. It may mean that a vote by a nationalparliament "could have no legal validity," at least according to theletter of the law.

It is a situation Leblond can imagine spawning legalchallenges — that is, more uncertainty over the fate of some, or all, of CETAas member states start voting on it in the years to come.

Fasken's Kirby, while bullish that CETA will make it, agrees.

"When you get to the nation-state level, you never knowwhat comes out of the woodwork," he said.