CETA at five: working as intended but not as promised

Every September since 2017, Canada and the European Union toast their now five-year-old Comprehensive Economic and Trade Agreement (CETA). Statements from both sides combine data showing increased two-way trade with heartfelt expressions of the shared principles that are said to be enhanced and put to work by the deal.

For example, the European Commission boasted last year that CETA “contains strong commitments on sustainable development,” though these are not really enforceable. In 2020, Canadian Trade Minister Mary Ng said deals like CETA are “vital to our efforts toward economic recovery from COVID-19, restoring supply chains, diversifying trade relationships and strengthening rules-based trade for the 21st century.”

I hate to crash a good party, but the rhetoric and the headline numbers give us a very partial and, in some cases, a very misleading picture of how the Canada-EU trade deal works and in whose benefit. In some areas, the effect of CETA in Canada has been worse than we predicted it would be before the deal was inked.

So, here are five reasons to hold off celebrating CETA’s five-year birthday.

1. Patent terms are growing, brand-name pharmaceutical investment is not

Patents on brand name drugs are getting longer in Canada. We don’t know yet how much that will cost public and private drug plans, but the best guesses out there suggest it will be a lot.

In a 2014 paper analyzing the leaked CETA intellectual property rights chapter, Joel Lexchin and Marc-André Gagnon estimated that the patent provisions Canada agreed to—patent term restoration, or extension, of up to two years plus a new right of appeal for brand-name firms under Canada’s notice of compliance system—would lengthen average market exclusivity terms for patented drugs by about a year.

Longer patents mean longer delays for cheaper generic versions of the same drugs. According to Lexchin and Gagnon, we can reasonably estimate that, had CETA been in effect in 2010, an extra year of patent exclusivity would have delayed 15 generics from hitting the Canadian market that year, adding $795 million to Canada’s total expenditure on patented drugs.

These numbers line up with a confidential federal government assessment of CETA’s patent changes. According to a Canadian Press story from 2012, the government anticipated that lengthening patents to accommodate the time companies spend seeking regulatory and market approval (the CETA outcome) would “add an average of 1.23 years to patents, and cost Canadians between $367 million and $903 million annually.”

As Lexchin and Gagnon note in their 2014 report, patent term restoration only applies to drugs approved after CETA came into force in 2017. Generic versions of those drugs will only begin to hit the Canadian market in 2023 and we cannot know how they will be priced or how well they will sell. It is, therefore, difficult to accurately predict how much annual drug expenditures will go up due to CETA.

What we do know is that, to date, Health Canada has granted patent term extensions—officially called certificates of supplementary protection, or CSPs—to 71 of 93 applications. Only 12 applications have been rejected and six were pending as I wrote this, while four were withdrawn by the applicant. That means in about 82% of cases, Canada approves the extension. In 62 of the 71 cases in which a CSP was issued (87%), the brand name drug patent was lengthened by the maximum of two years. u2028

Why would Canada agree to such a costly concession to the EU and Big Pharma generally? The official reasoning is that stronger intellectual property rights attract investment and jobs in innovative sectors like pharma and the life sciences.

But according to a November 2021 presentation from the Patented Medicine Prices Review Board (PMPRB), “Despite having among the highest [drug] prices in the OECD, the percentage of R&D-to-sales by pharmaceutical patentees in Canada was 3.9% in 2019, its lowest level since the PMPRB first began reporting on pharmaceutical trends in the 1980s.”

The following two charts show both the steady decline in brand-name research and development in Canada beginning in the mid-1990s and Canada’s bottom ranking for R&D among the seven countries the PMPRB relies on to set drug prices.

Note: “ SR&ED” indicates R&D expenditures that would have qualified for a Scientific Research and Experimental Development (SR&ED) in ves tment tax credit under the provisions of the Income Tax Act that came into effect on December 1, 1987. * The R&D to sales ratio for 2018 using a non SR&ED definition is only available for Canada and was calculated using the R&D estim ates published by Statistics Canada, which indicate that IMC members performed between $0.8 billion and $1.2 billion of total R& D in 2018. Statistics Canada’s range includes $188 million outsourced by IMC members to foreign recipients which was excluded from this analysis.

Source: Patented Medicine Prices Review Board (PMPRB)

Canada’s strategy of maximal IP protections may yet bear fruit. The point is that it hasn’t yet, past trends give us no reason to be hopeful it will, and even if the plan does work it will not be without substantial costs to public and private insurance providers and out-of-pocket consumers. Federal compensation to the provinces will defray some of those costs, but it won’t help the substantial number of Canadians not covered by drug plans who will have to wait longer for cheaper generics while paying more for brand-name ones.

Rather than celebrate CETA, then, this five-year anniversary should be a kick in the pants to governments to find other ways to contain drug prices in Canada—through coordinated purchasing and, ideally, a national pharmacare program. “Grovelling in front of drug companies” for research and development investment is not a good look for the federal government.

2. Strategic procurement and industrial strategy options stunted

Public procurement—basic public expenditure on goods, services and construction projects—has never been sexier. Governments around the world, including Canada’s top trading partners, acknowledge the power of procurement to support demand for domestic goods and services and drive investment in low-carbon technologies like electric vehicles. The more money that can be directed to high-wage jobs in the country, the greater the public benefit of public spending will be.

In the CETA negotiations, restricting the ability of Canadian provincial and municipal governments to give preference to domestic goods and services was, arguably, the European Union’s top priority. It also became a highly contentious part of the negotiations in Canada, as dozens of municipal councils, including Toronto, Victoria, Hamilton, Sackville and the Alberta Association of Municipal Districts and Counties, passed resolutions demanding they be exempt from CETA’s procurement rules.

The Harper government pushed back against these demands and negotiated away what little procurement policy flexibility Canada had held onto in other trade agreements (e.g., the right to favour Canadian goods and services in highway and transit construction) in exchange for increased quotas for Canadian meat exports—quotas the industry is not using (more below). Setting aside a portion of annual contracts or a portion of the value of all public spending for small, women-owned, or minority-owned businesses was also largely outlawed in Canada’s sad CETA trade-off.

Canadian governments may still be able to apply social and environmental criteria to government contracts—as long as they do not intentionally or unintentionally discriminate in favour of Canadian producers and service-providers. If an EU firm believes that to be the case, it can challenge the procurement tender before a federal or provincial tribunal. I recently sent a submission to the federal government’s reciprocal procurement consultation outlining how Canada might navigate CETA’s onerous procurement rules to maximize the public benefits of public spending in Canada.

3. Canadian meat exports missing in action

Canada-EU trade increased faster in the three years following CETA ratification and up to March 2020 than in the five years before it, according to an assessment released in March 2021. This has included export gains for some crops, fruits, maple syrup and seafood. As the pandemic set in, lowering trade volumes globally, it even appeared Canada was closing its persistent trade deficit with Europe. Since then, however, the deficit has again trended higher (see figure).

In one notable area—meat exports—Canada’s performance has been, well, non-existent.

“Despite increases in their duty-free quotas, beef and pork exports have stagnated,” writes May T. Yeung in a Simpson Centre policy note from this year. “Canadian beef has hardly used any of its allotted export quota and pork exports are not worth mentioning.”

Imports of European beef and veal into Canada, on the other hand, “have grown considerably,” according to the study, while the doubling of European cheese import quotas is regularly filled each year by Canadian importers.

In the March 2021 CETA Joint Committee statement, the EU claims that if Canada has “not yet managed to benefit fully from its beef and pork [tariff rate quotas, or TRQs],” it was “related to the need to ensure respect of EU [sanitary and phytosanitary] standards and, in particular, the ban on use of growth hormones.”

Canadian producers of meat products could abide by those EU food standards if they wanted to but elect to complain about them instead, with the Canadian government’s help, in bilateral CETA committees and in the media.

The vegan in me takes some limited satisfaction in this failure of Canadian pig, cow and calf meat producers to profit from CETA. What burns is that, due to the power of the animal agriculture sector, Canada went hard on meat TRQ and paid a high price elsewhere in the negotiations (e.g., on government procurement, as discussed above). All for nothing, apparently.

4. A “living” agreement living in the dark

The idea that CETA would be a “living agreement,” able to grow and adapt with the times, was sold to the public as a great benefit, again with progressive potential. There are 20 CETA committees that meet at least once a year to discuss how the agreement is working in areas such as food standards, agricultural trade, biotechnology, access to raw materials, regulatory cooperation, etc. Canada and the EU use these committees to raise trade irritants with each other. Meeting agendas are published in advance and summaries posted afterwards, but, largely, this work takes place below the radar for most people and elected politicians.

A report out this week from Foodwatch, a German non-governmental organization, points out the democratic deficit in these CETA committees, which are empowered to make changes to the agreement without the express approval of national or provincial legislatures.

“CETA therefore means: ‘governing by committee,’ as mandated by the executive, rather than governing by elected representatives of the legislature,” said a Foodwatch report out today. “This undermines the accountability of leaders, a key pillar of democracy.”

It’s a fair assessment. Based on an access to information requests for CETA committee documents in Canada and the EU, Foodwatch finds that Canada is using several committees to pressure the EU to change food policies to suit the interests of North American meat, chemical, pesticide and GMO producers. While this lobbying pressure predates CETA, the committees serve to formalize the influence of those sectors on Canadian trade policy while presenting additional opportunities for them to press for unpopular regulatory changes in Europe.

5. CETA is not ratified yet in Europe—and that’s a good thing

One of CETA’s most controversial elements in Europe, as in Canada, is the agreement’s proposed investment court system—a more permanent version of the ad hoc investor-state dispute settlement (ISDS) tribunals empowered by international trade and investment treaties to hear corporate complaints against government policy. Backlash to ISDS is growing pretty much everywhere, with climate scientists now warning of its strong potential to slow or halt government efforts to phase out fossil fuels.

Canada agreed to remove ISDS from the “New NAFTA,” or CUSMA, partly because of the chilling effect it can have on environmental policy. But the Trudeau government is dead set on making sure CETA’s investment court system sees the light of day. That can’t happen until all EU member states have fully ratified the agreement, which just over a dozen, including Germany, have yet to do.

Opposition to CETA from the German Greens might have made ratification difficult there. But the party reached a compromise earlier this year with its “traffic light” coalition partners, in which German ratification would depend on clarifications to certain of CETA’s investment chapter provisions to shield non-discriminatory environmental measures from investor lawsuits. Those clarifications, which were leaked this month, must be agreed by all EU member states and, eventually, by Canada through the CETA Services and Investment Committee (see above).

So, is the clarifying language up to the task? Almost certainly not. Attempts to rein in the interpretive flexibility of private arbitrators in ISDS cases—through changes to ambiguous investment treaty language on “fair and equitable treatment,” for example—have repeatedly failed. We should not expect a different result here, with the German proposal (see these insightful threads from legal scholars Wolfgang Alschner and Ben Heath).

Well over 90% of CETA has been provisionally active in Canada and the EU since September 21, 2017. Only parts of the services and investment chapter, including the investment court system (and Canada’s strange demand that the EU make it a crime to camcorder movies), have yet to be implemented. There’s no reason to hope that CETA will be soon fully ratified in Europe and good reasons why it never should be.

Germany’s interest in speeding up its CETA ratification may be partly related to coalition hopes to secure access to Canadian mineral resources needed in the transition to electric vehicles and other “clean” technologies. About two-thirds of ISDS lawsuits against Canada under NAFTA have related to environmental or natural resource policies and, globally, delays in mine approvals have triggered ISDS cases.

CETA’s investment court system would also give German firms the right to sue Canada for attempts to condition foreign investment in natural resources—to achieve specific levels of domestic content, for example. Not only climate policy, but also more pro-active industrial strategies—where the state takes on a larger role in economic decision-making—are prone to ISDS challenges.

Where’s my loot bag?

CETA celebrations make for convenient political and public relations exercises. The agreement itself might be better forgotten if we didn’t have to live with its bad effects and imbalanced outcomes.

Large, mostly foreign brand-name pharmaceutical companies have increased their power and profits at the expense of drug consumers. Canada’s procurement and industrial strategy options are unreasonably compromised compared to other countries. Animal agriculture export quotas are going unfilled despite using up much of Canada’s leverage in the EU negotiations. And low-key CETA committees have created new avenues for corporate lobbying on both sides of the Atlantic.

The main upside so far, besides some impressive growth in Canadian fruit and maple syrup exports, is that CETA is not yet fully operational. The agreement’s ISDS process may never see the light of day and nor should we want it to. Contrary to Minister Ng’s comments at the top of this blog, restoring supply chains in the wake of the pandemic is a worthy effort. But it will take a different kind of rules-based international order to the one locked in by CETA.