Happy Anniversary to CETA!
CETA, the Comprehensive Economic Trade Agreement, our free trade agreement with the European Union, had its third birthday on September 21. As customs duties (or tariffs, as they are also called) on most products were eliminated on that date, the agreement opened great opportunities for Canadian manufacturers and importers to competitively source raw materials, components, parts and finished products from Europe.
It also provided our exporters with access to a huge new market, at a time where our largest export market, the United States, remains unpredictable, as we saw with the aluminum tariff issue. In addition to making European products more competitive in Canada and Canadian products more competitive in Europe, trade in services and public procurement were made easier in both directions.
Evolution of trade
As this trade agreement came into force at the end of September 2017, let’s look at how Canada’s trade with Europe evolved between 2017 and 2019. There is not much point looking at our 2020 figures, since they are greatly impacted by Covid-19; our international trade nose-dived across the board in March and has not yet reached pre-pandemic levels.
We’ll look at our exports and our imports to and from the first eight individual markets. Together, they represent about 85 percent of the total and are therefore representative of the trend. As we can see from the tables below, trade between the two partners has increased significantly in both directions.
Meanwhile, a recent Global Affairs study of Canada’s international trade provides interesting insight. The study measures, among other metrics, the utilization rate of the preferential tariffs by Canadian exporters and importers, and the results are surprising.
Not taking advantage
It seems that so far, not all Canadian exporters and importers are taking full advantage of CETA. The utilization rates show the proportion of eligible goods for which a preferential tariff was used. In 2019, the average rate for Canadian exports to the EU was only 53 percent and it was even lower for imports at 46 percent. The good news is that both rates were up from 2018, CETA’s first full year of implementation: up three percentage points for exports and close to nine percentage points for imports.
While the annual utilization rates are trending up for the EU overall, they differ for individual countries; both import and export rates for Germany and the United Kingdom (which leaves the EU in January 2021) were below the average, while they were above for France.
One element not taken into account is the Incoterm, which determines if the seller or buyer pays the customs duties. That would be an interesting additional piece of information for the research to include. In any event, these findings do suggest that further promotion efforts are needed, with special attention to some markets like Germany and the United Kingdom, to increase CETA utilization rates by Canadian businesses.
And since according to this study, only about 50 percent of Canadian companies dealing with Europe actually take advantage of the preferential tariff treatment, it means there is still room to grow the market and increase our business with Europe. This, together with CUSMA with the United States and Mexico, and the Trans-Pacific Partnership with Pacific countries, brings new opportunities for our exporters as we gradually emerge from the pandemic.
Why are exports so important? According to World Bank data, in 2019, exports of goods and services represented 31.64 percent of Canada’s GDP.