CETA: Carte blanche for the private sector?

Article as analysis
States are to have less regulatory powers, whereas foreign investors will be able to file suits against legislative changes. The new free trade agreement between the EU and Canada is alarming.

The European Union (EU), a giant with 500 million people, has negotiated with Canada, a dwarf in population terms with 35 million inhabitants. Yet in the Comprehensive Economic Trade Agreement (CETA), the first of the new mega- deals on which negotiations have ended, the Canadian model has prevailed. And CETA could well pave the way for the ongoing negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA as well as the Trade In Services Agreement (TISA) in which 23 members are holding negotiations, outside the World Trade Organization (WTO) framework, on the far-reaching deregulation of services. CETA represents nothing short of a radical paradigm shift for European countries in trade and investment. The result could well be a two-speed world trade: strict rules for rich countries amongst themselves and other rules for countries that are still developing. And it could sound the death knell of multilateralism in the WTO framework.

But we are not quite there yet. The 28 EU Member States and the European Parliament must first ratify CETA, and this is by no means certain. This process could take years. The new Greek government has already announced that as with the TTIP, it will not ratify CETA. But who knows how long Syriza will stay in power.
Foreign individuals to have a say

CETA contains many obligations of a kind never before assumed by the EU. First there would be the trade in goods, for example: whenever new technical regulations are to be introduced – e.g. environmental standards, rules on occupational safety or toy safety – the EU would also be required to consult all "interested parties" in Canada and to reply in writing to their objections.

In the case of trade in services, the EU and its Member States would for the first time be accepting "negative lists" in an international treaty. To date, bilateral accords and WTO arrangements – under the GATS, the General Agreement on Trade in Services – have been confined to positive lists, which designate the sectors and subsectors to which an agreement applies. Under a negative list system, in contrast, all service sectors are liberalized. In other words, foreign firms have access to all sectors, except where they have been expressly excluded. This means that during the negotiations, each party must know precisely what restrictions apply to which sector and must determine which regulations could be important in the future. Canada has made an exception of the entire cultural sector, whereas the EU has done so only for the audio-visual industry. There is an enormous risk of forgetting a sector – in particular one that does not yet exist!

As regards investments, the definition is a very broad one. It is not definitive and is based primarily on the concept of capital. This distinguishes it from traditional definitions, which refer to real investments, for example the purchase or acquisition of a company. What is more, the new definition is meant to protect even investors merely intending to invest.
Standstill and ratchet clauses: the cog wheel of deregulation

A binding standstill and ratchet clauses have been built into no less than five chapters of the agreement. They are:

  •     investments
  •     cross-border trade in services
  •     temporary employment of persons
  •     financial services
  •     maritime transport.

Standstill and ratchet clauses mean that a contracting party may never go back on any liberalization or deregulation that was effective at the time of signing the agreement. Nor can any liberalization be done retrospectively, unless explicitly provided for during the negotiations. Any evolution in legal provisions can only be in one direction: that of liberalization – like a rack and pinion railway that can only go forward, never backward. Whether it is funding highways by means of tolls in Germany and France, municipal energy supplies or local transport companies – in these and many other sectors, all that remains is the one-way street of deregulation.

The standstill and ratchet clause apply specifically to market access: all sectors and subsectors will be liberalized, except for those that are expressly ruled out.

It is interesting to note that the standstill and ratchet clauses regarding the free movement of people is restricted to the category of "key personnel" (such as senior managers and CEOs) and highly qualified temporary workers. On the other hand, the contracting parties may rescind the freedom of movement of less qualified people – thereby favouring or enabling "multi-speed migration."
It will only be possible to gauge the full extent of changes expected from CETA when it becomes clear how much will be automatically regulated, unless excluded by means of reservations. The cross-border sale of medicaments, for example, will be regulated under relevant CETA chapters, even if it is currently subject to restrictions. It is worth recalling that under the GATS, the EU did not accept such a commitment because the trade in medicaments was regulated by means of a positive list.

Lastly, it is also interesting that the standstill and ratchet clauses exist only in the trade agreements. This contrasts with agreements on the environment, labour and human rights, or on data or consumer protection, where contracting parties may at any time roll back advances in national legislation. They can, for example, eliminate capital punishment or reintroduce it without incurring any risk of sanctions or lawsuits by individual persons or organizations.
Canadian bank could legally challenge EU regulations

Another alarming aspect of CETA is that an "investor" – which may be a natural person or an enterprise – can bring an action against a state. The prerequisite for such an Investor–State Dispute Settlement (ISDS) action is the allegation that the investor has suffered damage as a result of the non-application of CETA. This mainly concerns alleged national preferential treatment, breaches of the most-favoured-nation clause or of equal treatment provisions or in the event of indirect expropriation. We recall the suit filed by the Swedish energy multinational Vattenfall against Germany over its decision to phase out nuclear energy. On the basis of the Energy Charter Treaty, Vattenfall is seeking US$ 4.7 billion in compensation. We also recall the suit filed by Philip Morris against Uruguay. The world's most renowned cigarette manufacturer, headquartered in Switzerland, is irked by Uruguay's new anti-tobacco legislation and sees it as a form of indirect expropriation within the meaning of the investment protection agreement between Switzerland and Uruguay. The action is being brought specifically against the article of law prohibiting the sale of more than one brand (i.e. Marlboro red, gold and green) and stipulating that 80 per cent of a cigarette package must be covered by the warning against the misuse of tobacco. Uruguay is being sued for US$ 25 million and the ruling is expected this year.

Moreover, CETA contains no exceptions in social and labour matters. Only the most inadequate exceptions are being taken over from the GATS.

A substantial new element on the other hand is that ISDS arbitration is applicable not only under the chapter on investment but also under that on financial services. It is conceivable that a Canadian financial institution could challenge any new regulation of financial services by the EU.

CETA thus contains a series of commitments into which the EU and its Member States intend to enter for the first time. And they are not just individual far-reaching clauses; they are numerous and are all expected to enter into force as a package.

CETA: the Trojan horse amongst the new agreements

The impact of CETA is potentially explosive owing to the system of negative lists, the standstill and ratchet clauses and the question of the ISDS dispute settlement mechanism. One may well fear that EU Member States are not yet aware of the fuller implications of the agreement. CETA is paving the way for TISA, which admittedly is to be limited to services and may not contain any ISDS arrangements. And it is preparing the way for TTIP, where the inclusion of the ISDS mechanism has now been put on hold because of civil society protests. ISDS is a serious threat to the sovereignty of states: it is much easier for an investor to file a suit directly against a state than to persuade its country of origin to launch a costly action against another state. This is current practice in the WTO and is expected to be adopted under TISA as well.

Even though Switzerland is not directly concerned, CETA does represent an alarming development. Berne and Ottawa are considering adding some clauses to the existing free trade agreement and CETA could serve as the template. That would be a major paradigm shift for Switzerland, which has never ever implemented standstill and ratchet clauses and has no investment protection or ISDS arrangements with industrialized countries. Switzerland does have investment promotion and protection agreements with developing countries, and they include a very clear definition of investment.

CETA is breaking dangerous new ground. The EU Member States and the EU Parliament should refuse to ratify it.