Trade deal with Europe threatens many costly ill-effects

The governments of Canada and the European Union (EU) are in the final stages of negotiating a sweeping agreement that would impose unprecedented constraints on federal, provincial, territorial, and municipal governments’ capacity to put public interests ahead of corporate interests. The agreement goes much further than traditional free trade agreements. It will not just remove tariffs and liberalize goods and services trade, but will also cover labour mobility, standards, government purchasing power, and corporate and intellectual property rights.

CCPA recently released a report that examines the impact the deal could have on Ontario. That province is in the midst of a decline in manufacturing and facing calls for the “reform” of public services. At the same time, citizens are increasingly relying on municipal governments to support local economic development and environmental sustainability.

CETA, from an economic, social, political and environmental perspective, would clamp Ontario in a straitjacket. It would remove tariffs on goods and services, prevent “buy local” initiatives, threaten public services, and constrain government purchasing decisions. It could exacerbate the existing trade imbalance between Ontario and the EU, threaten tens of thousands of Ontario jobs, and cast a fear of litigation chill on government initiatives.

Trade imbalance effects

Between 2000 and 2011, the contribution of the manufacturing sector to Ontario’s GDP declined from 23% to 15%, leading to a loss of more than 300,000 jobs. This deindustrialization is reflected in trade between Ontario and the EU. Ontario’s exports are dominated by unprocessed and barely processed primary products such as gold, nickel, and uranium.

Largely due to a 400% increase in price, gold is by far Ontario’s largest export to the EU. It currently accounts for 55% of Ontario’s exports to the EU, compared to just 2% ten years ago. Record gold prices and the surging volume of gold exports are partly covering up a large underlying bilateral trade deficit. In 2011, trade with the EU produced a deficit for Ontario of about $1.5 billion. If we remove gold sales, however, the trade deficit swells to more than $12 billion. In effect, with gold out of the equation, Ontario imports $2 dollars worth of EU goods for every $1 it exports to the EU. Ontario (and Canada) are therefore relying on the extraction and export of gold to pay for a substantial ongoing trade deficit with Europe. This makes Ontario’s already imbalanced trade relationship with the EU highly vulnerable to the volatility of gold prices.

While mining has become Ontario’s main industry contributing exports to the EU, it has not offset the jobs lost in manufacturing. Over the past decade, mining has directly created only 6,600 new jobs and currently employs 25,000 people – less than 0.5% of Ontario’s total employment. Meanwhile, 88% of the EU’s top 25 exports to Ontario consist of high value-added manufactured products such as pharmaceutical drugs, motor vehicles, and aircraft engines.

The shift in Ontario’s exports to the EU and the associated trade deficit has long-term employment implications. Ontario is increasing exports of goods produced through resource extraction — a low employment intensity sector of the economy — while increasing imports of manufactured goods, which is a higher employment-intensity sector. In effect, EU imports are displacing employment opportunities in Ontario which will worsen the long-term employment difficulties facing the province.

CETA would hasten these trends by constraining the application of industrial policies that promote value-added manufacturing industries (such as “buy-Ontario” and other supports for provincial producers) and could entrench Ontario’s increasing dependence on resource exports. The agreement will also further dampen manufacturing employment in Canada as a whole and, as the country’s major manufacturing core, Ontario will be particularly hard-hit.

Projections that take into account the removal of tariffs, the record of past free trade agreements, and the impact of the appreciating Canadian dollar indicate that CETA could result in significant job losses in Ontario. CETA and the effects of our higher dollar on the manufacturing sector could result in up to 70,000 lost jobs in the province.

Pharmaceutical drug costs

As a prerequisite to CETA, EU negotiators are calling on Canada to extend patent protection for brand-name pharmaceuticals. These patent extensions would increase drug costs for individual consumers, employer-funded benefit plans, and public health care programs. Based on the estimated impact of these measures on overall Canadian pharmaceutical costs, private health plans and consumers in Ontario would pay an additional $672 million annually, and it would cost the provincial drug plan an additional $551 million a year. The total added burden on Ontarians would exceed $1.2 billion a year.

These costs would also have broader economic and employment implications. The additional cost to the health care system (if offset through incremental spending cuts to other program line items) could result in a loss of 9,300 health care-related jobs in Ontario and a decrease of $661 million in economic activity in the province. A province already struggling to manage its economic and fiscal affairs can ill afford these job losses and increased costs.

Greater litigation risk

Canadian negotiators propose to include in CETA NAFTA’s investor-state dispute resolution mechanism, which enables foreign investors to directly sue national governments for potential losses caused by government policies and regulations. Claims are considered and decisions rendered by unaccountable appointed tribunals operating outside of national legal systems. Under NAFTA, dozens of actions have already been launched by foreign corporations against the Canadian government. Several of these have been either decided against Canada or settled out of court, with monetary damages totalling more than $157 million. One investor has served notice of intent to pursue a $775 million challenge under NAFTA related to Ontario’s Green Energy Plan. CETA would increase the likelihood of an increase in this kind of litigation.

Virtually any measure that negatively affects the projected profitability of a foreign corporation operating in Canada can potentially be defined as “expropriation” or unfair treatment under the wide-ranging language of such investor rights agreements. Worse still, this undemocratic mechanism results in a chilling effect on policy development and revitalization by governments at all levels. In addition to ensuring that proposed policy changes are constitutional and beneficial, under CETA governments would also have to consider whether a new policy could result in expensive, risky litigation in a parallel tribunal system established solely for the benefit of foreign corporations.

Provincial and municipal governments will face even greater risk exposure, given the federal government’s declaration that future liabilities awarded under NAFTA resulting from policy measures implemented at the provincial or sub-provincial level will not be considered the federal government’s responsibility, but rather the responsibility of those lower-level governments. This step will add to the cost of public services in provinces and municipalities, especially once this investor-state dispute mechanism is entrenched in CETA.

CETA would significantly extend the range of government functions, including Crown corporations and municipal governments, which fall under the jurisdiction of its tribunals, thereby exposing more of the economy and public services to these anti-democratic investor-state claims.

The risk of facing multi-million-dollar claims from investors will add to the costs of public services in provinces and municipalities. Initiatives to bring private sector participation into the funding and delivery of public services, such as P-3s, become precedent-setting in the context of Chapter 11 rules, and could in effect lock in privatization by making it impossible to move a service which has been privatized back into public administration. In effect, the adoption of CETA will contribute to a general ratcheting down of public services in the context of increasing investor rights.

“Buy local” initiatives

CETA negotiators are intent on curtailing pro-active policies that support industrial development and prohibiting “buy Ontario” policies and other supports for local producers. In Ontario, procurement by all levels of government amounts to $60-$90 billion annually, providing governments with considerable economic clout. Under existing free trade agreements, public expenditure is one of the few remaining policy tools provincial and municipal governments have at their disposal to directly foster domestic economic development, increase productivity, promote environmental policies, and support disadvantaged communities.

Many jurisdictions (including the U.S., Brazil, and China, for example) continue to use active procurement policies to promote their economic development. There are many examples of the current and beneficial use of this policy lever at the provincial and sub-provincial level in Ontario.

The Green Energy Act, for example, seeks to transition Ontario away from coal-fired electricity generation, in part through preferential purchases of local renewable energy. These renewable energy companies are required to meet high provincial content levels in their energy projects. Similarly, provincial and local governments have supported the creation of manufacturing jobs through public transit equipment purchases under the requirement that publicly-funded transportation equipment has at least 25% Canadian content.

Some municipalities have initiated “sustainable purchasing” initiatives to promote local economic development and minority suppliers. Several Ontario municipalities and universities have “buy local” provisions that encourage and in some cases require publicly-funded institutions to purchase locally grown and processed foods.

Despite these – and many other – policy successes, CETA specifically prohibits procurement policies that promote local development or the use of domestic content, even if the contracts are open and non-discriminatory to foreign bidders.

CETA specifically prohibits procurement policies based on “any condition or undertaking that encourages local development … [and] the use of domestic content,” even if the contracts are open and non-discriminatory to foreign bidders. Under CETA, the only legitimate criteria for government procurement are cost and the ability of suppliers to fulfill a contract.

The Ontario government is also under pressure to submit its Crown corporations and municipal governments to CETA rules. This sweeping degree of CETA coverage could include airports, energy providers, ports, and rail transportation, and municipal water and wastewater facilities. CETA would completely trump domestic content rules. Not surprisingly, the provincial government is facing resistance from Ontario municipalities, 38 of which have passed motions expressing concerns about the impact of CETA on local governments.

Municipalities are seeking assurances that their capacity to use procurement for policy objectives will not be negotiated away by a federal government strongly committed to reaching a trade deal with a much stronger trading partner driven by hopes of greatly expanded access to sub-national procurement in Canada.

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The past decade has witnessed a shift in Ontario’s trade relationship with the EU, a relationship that is increasingly imbalanced. Instead of strengthening sorely needed industrial policy tools and protecting public resources, CETA would subordinate the province’s economic future to the priorities of private investors.

CETA is more aggressive than previous trade agreements in subjecting democratically elected governments, especially at the sub-national level, to the constraints of international trade and investment law. The resulting job losses, higher drug costs, regulatory chill, and erosion of public services would be extremely harmful for the people of Ontario. Agreeing to CETA would also constrain the democratic responsibility of governments to promote the interests of their citizens and communities.

(John Jacobs is the author of “Straitjacket: CETA’s Constraining Effects on Ontario,” a research associate and former regional director with the CCPA, and a PhD. candidate in Public Policy and Political Economy at Carleton University.)