What Might Be The First Trade Issues Under The Canada-EU CETA?

By Cyndee Todgham Cherniak on July 27, 2017

Posted in Agriculture, Canada, Canada's Federal Government, Canada-EU CETA, Cross-border litigation, Cross-border trade, Government Procurement, Imports Restrictions, Trade Agreeements, World Trade Organization

Canada

The Canada-EU Comprehensive Economic and Trade Agreement (the “Canada-EU CETA”) will come into provisional effect on September 21, 2017. Sometimes, disputes that have arisen prior to the implementation of a free trade agreement, which are left unresolved at the time of implementation, turn into full disputes between the parties. What could those disputes be? The first place to look is areas where both parties, Canada and the EU or an EU member or territory, have overlapping preferred industries. The best place to look for potential problems is at the World Trade Organization (“WTO”) disputes (existing and past problems) and recent or historical trade irritants to predict where Canada-EU CETA consultations may arise.

Cheese

The Canada-EU CETA provision implementation has been delayed (it was to start on July 1, 2017) due to a disagreement between the EU and Canada concerning the allocation of new entrant cheese quota in the Canada-EU CETA. In the Canada-EU CETA, over a 5 year gradual increase period, Canada has agreed to grant more quota for cheese over and above the WTO commitments. Canada has made commitments regarding the allocation of the new cheese quota. In Annex 2-B, “Declaration of the Parties concerning tariff rate quota administration“, Canada has agreed to allocate cheese quota using an import licensing system on an annual basis. The EU cheese quota allocation method must allow for new entrants each year. During the phase-in period from Year 1 to Year 5, at least 30 per cent of the tariff rate quota will be available to new entrants every year. After the end of the phase-in period from Year 6 and in subsequent years, at least 10 percent of the tariff rate quota quantity will be available for new entrants.

However, in June 2017, it was leaked that Canada planned to grant 60% of the new entrants quota to cheese producers in Canada, who might prevent the importation of the European cheese into Canada or not make the quota available to consumers. This upset the European Union who negotiated the new entrants quota to ensure European cheese will have improved market access in Canada.

If Canada does not resolve this issue to the satisfaction of the EU, this could very well be the first dispute under Canada-EU CETA Chapter 29 “Dispute Settlement”. If the Canadian allocation program does not result in the desired market access (because it is used in a protectionist manner), a trade dispute could arise. The focus will be on implementation and effect, rather than legislative changes or restrictions.

Wine

Canada and the EU both have important wine producing regions. The EU and Canada produce wines and market wines domestically and internationally. Canadian provincial measures have become a point of contention. Provinces have set up liquor monopolies (such as the Liquor Control Board of Ontario) through which marketing and sales activities occur. The provincial liquor monopolies in British Columbia and Ontario have come under criticism by promoting local wines over imported wines. In addition, provincial programs that allow wineries to sell wines at farmer’s markets, at retail stores, at wineries and directly to local restaurants creates a trade issue because all imported EU wine must be sold through the liquor monopolies.

The EU joined the consultations in WTO dispute DS520 “Canada: Measures Governing the Sale of Wine in Grocery Stores”, which was filed by the United States against Canada in January 2017. This case involves regulations in British Columbia that are alleged to discriminate against imported wine. The British Columbia regulations are:

BC Liquor Control and Licensing Act [RSBC 1996] Chapter 267;
B.C. Reg. 42/2015, deposited March 17, 2015, under the Liquor Control and Licensing Act [section 84] and the Liquor Control and Licensing Amendment Act, 2014 [section 48]. Order in Council 121/2015, approved and ordered March 16, 2015. The British Columbia Gazette, Part II, Volume 58, No. 6 (March 24, 2015);
Policy Directive No. 15-01, issued by the BC Liquor Control and Licensing Branch, re: Liquor Policy Review Recommendations #19 and 20: Phased-in Implementation of Liquor in Grocery Stores, dated February 26, 2015; and
“Wine Store Terms and Conditions, A Guide for Liquor Licenses in British Columbia,” BC Liquor Control and Licensing Branch publication, updated September 2015.

These British Columbia regulations and policies are argued to provide advantages to BC wine through the granting of exclusive access to a retail channel of selling wine on grocery store shelves.

The European Union has similar concerns about placement of Ontario wines in Ontario retail stores. The regulations are drafted to appear to allow both domestic and foreign wine sales in grocery stores. However, the regulations grant special access to small producers, which happen to be local Ontario wineries. The Ontario concerns have not developed yet into a WTO dispute. The Ontario and British Columbia concerns may turn into a dispute under the Canada-EU CETA if the EU believes that they will see quick political action to resolve the disputes since the provinces were at the Canada-EU CETA negotiating table.

It also is worth noting that in 2008, the European Union filed a request for consultations at the WTO concerning Canada’s excise taxes against wine and beer. DS354 “Canada – Tax Exemptions and Reductions for Wine and Beer” was resolved between the parties.

Beer

Similar concerns arise in respect of beer as with wine. Micro-breweries and craft breweries sell beer at their production facilities and to local restaurants without having to go through the provincial monopoly. This may result in preferential treatment being granted to local beer producers over EU producers.

Pasta/Durum Wheat

Earlier in 2017, the Government of Italy asked the European Commission to allow it to impose mandatory country of origin labeling (COOL) rules for Italian pasta. Italy wanted the COOL rules to apply in all EU members. On July 20, 2017, Italy signed a decree to impose COOL labeling requirements for pasta and rice.

The Italian government decree also included that pasta packaging must reveal where the wheat was grown and milled into semolina for pasta-making. Canada is the world’s largest exporter of durum wheat. Canada is concerned about the proposed measures because the country of origin labeling is protectionist and could affect sales of durum wheat (an ingredient in pasta) into Europe and depress prices.

Canada and the United States have been in a contentious battle over country of origin labeling for beef. Canada was successful in challenging the U.S. measures at the WTO and the U.S. was required to reverse its protectionist measures. The spectre of country of origin labeling rules has new life in the Trump Administration NAFTA Renegotiation objectives. As a result, Canada will want to take a strong position on and challenge at the WTO or under the Canada-EU CETA any EU country of origin labeling rules for pasta.

A second issue is that the Italian government has stopped durum wheat imports from Canada on two occasions taking the position the Canadian wheat has higher levels of toxicity. The wheat was found to not be contaminated, but this happened after news spread about the seized Canadian wheat. There seems to be underlying protectionist sentiment that is limiting Canada-EU trade.

Refined Sugar

Canada imposes countervailing duties against refined sugar from the European Union (and antidumping duties against refined sugar from Denmark, Germany, the Netherlands and the UK). The term “refined sugar” is defined to mean “refined sugar, refined from sugar cane or sugar beets, in granulated, liquid, and powdered form. Refined sugar is sold as white granulated, liquid and specialty sugars. Granulated sugar comes in a range of grain fractions (e.g., medium, fine and extra fine). Liquid sugar includes invert sugar. Specialty sugars include soft yellow sugar, brown sugar, icing sugar, demerara sugar and others and may be sold in granulated, liquid or powdered form.” A number of sugar products are excluded from the Canadian International Trade Tribunal Order.

However, the European Union ended its preferential sugar policies and ended export subsidies. As at September 30, 2017, the EU will no longer impose sugar quotas. The EU agricultural policy has undergone a profound reform, including in the sugar sector. Since 26 September 2008, Commission Regulations 947/2008 and 951/2008, export refunds in the sugar sector do not apply anymore. The new system, the basic payment scheme (“BPS”) is in line with WTO commitments and qualifies for inclusion in the green box (i.e. it is not trade distortive) as defined in Annex 2 of the WTO Agreement on Agriculture, and in particular the decoupled income support described in paragraph 6 of this Article.

A fundamental goal of the reform was to limit production. The reform was very effective, as 5 million tons of production capacity was dismantled. Production has been reduced accordingly. EU production now varies between 15 and 19 million tons depending on weather circumstances. Before the reform EU production was around 22 million tons. As a result, EU production is now well below EU consumption and the EU has become, and is expected to remain, a net importer of sugar. The full implementation of the reform in the EU sugar sector will lead, as from September 2017, to the elimination of the EU sugar quota regime (Regulation (EU) No 1308/2013 of 17 Dec. 2013). As a result, the price differential between quota and out-of-quota sugar in the EU will disappear. In practical terms, there will no longer be minimum prices and no cross subsidy from quota sugar to out-of-quota sugar production.

Canada has not taken steps to terminate the CVD order imposing countervailing duties in light of the removal/termination of the offending program. If Canada maintains the CVD duties, this may become a trade dispute.

Steel

The European Union has said that should President Trump impose steel tariffs, the EU will expedite a steel safeguard case. While Canada may be excluded from the U.S. Section 232 tariffs, Canadian steel companies would be caught by the European Union safeguard case. There is no provision in the Canada-European Union Comprehensive Economic and Trade Agreement (the “Canada-EU CETA”) to exclude Canada from EU safeguard actions.

Chapter 3 of the Canada-EU CETA covers the agreement relating to trade remedies and does not establish an exemption for Canada. None of the provisions say that the EU must exclude Canada from definitive measures. This means that Canada may be caught up in any EU safeguard action taken in retaliation to the U.S. steel tariffs. Since global safeguards look at imports from all countries combined and not at imports from specific countries, there will be no preferential treatment even if Canadian steel imports into the EU did not cause serious injury to EU steel producers.

What this means is that the solution to this problem may be at the WTO. Most challenges of global safeguards are successful. While in Chapter 3 of the Canada-EU CETA, the Parties reaffirmed “their rights and obligations concerning global safeguard measures under Article XIX of GATT 1994 and the Safeguards Agreement” and agreed to impose global safeguard measures “in a way that least affects bilateral trade”, it may be more risky challenging any steel safeguard under the Canada-EU CETA dispute settlement provisions.

Seal Products

There have been two WTO cases filed by Canada against the European Union concerning EU bans of seal products from Canada. Canada was successful in DS400 “European Communities – Measures Prohibiting the Importation and Marketing of Seal Products”.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.