Enter Your Target Market

Free trade agreements

Free trade agreements: understanding the role of trade policy in reaching your export and investment goals

Navigating the global trading environment

The global trading environment has become increasingly complex. The World Trade Organization (WTO) has provided an effective foundation for establishing and enforcing global trade and investment rules. In addition to pursuing their interests in WTO forums, WTO member countries have increasingly sought out other tools to generate opportunities and ensure fair treatment for their businesses, as well as create advantages relative to competitors.

There has been a proliferation of trade and investment agreements:

• on a bilateral or regional basis, that is, outside the WTO:
  • free trade agreements (FTAs)
  • foreign investment promotion and protection agreements (FIPAs);
  • air transport agreements (ATAs); and
• sector-specific initiatives within the WTO, including:
  • WTO Agreement on Trade Facilitation (TFA);
  • WTO Agreement on Government Procurement (GPA);
  • Trade in Services Agreement (TISA);
  • WTO Information Technology Agreement and its recent expansion (ITA);
  • WTO Environmental Goods Agreement (EGA), among others.

So what is the trick to finding your way through all these agreements?

• Stay focussed on what you sell and where you want to sell it.
• Identify which barriers and rules could apply to your specific goods or services in these markets.
• Find out if Canada has any agreements in place that might make it easier for you to sell to, or invest in these markets.

Global Affairs Canada provides information on Canada's FTAs and other trade policy initiatives.

Advantages of FTAs

So what are some of the benefits of an FTA to Canadian businesses?

FTAs help our economy by:

• enabling Canadian businesses to better compete with:
  • local firms in the partner country by providing preferential market access, and
  • competitors from other countries that enjoy preferential access to that market.
• improving market access by eliminating or reducing tariff and non-tariff barriers to trade in goods.
• providing fair and equitable treatment, greater predictability and transparency to Canadian exporters, service suppliers, investors and innovators.

Essentially, FTAs enhance Canada's competitiveness and support business' access to global markets.

Look at the North American Free Trade Agreement (NAFTA) as an example.

NAFTA:

• eliminated almost all duties on goods covered by the Agreement;
• established a framework of rules providing fair and equitable treatment, transparency and predictability;
• addressed certain non-tariff barriers to trade; and
• provided formal mechanisms for resolving disputes.

Since NAFTA's implementation in 1994, Canada-U.S. trade has increased nearly 173%. Over $2.4-billion worth of goods and services now cross the border every day, and some 2.5 million jobs in Canada depend on Canada-U.S. trade.

Market access for goods: an FTA's ‘bread and butter'

Parties to an FTA commit to reduce or remove trade barriers for goods.

Not all tariffs are eliminated immediately upon entry into force of an FTA, as countries seek to protect sensitive products or mitigate the effects of tariff elimination by phasing out tariffs over a defined period. The tariff outcome of each FTA is reflected in the parties' tariff schedules. The modalities for tariff elimination are outlined in the National Treatment and Market Access for Goods (NTMA) chapter.

All of Canada's FTAs seek to secure the best possible market access outcome for our producers, manufacturers and exporters, while taking into account Canadian sensitivities. Naturally, our trading partners are seeking to do the same for their stakeholders.

That's why it is important for you to be able to understand the implications of these FTAs for your business.

For example, the existence of an FTA between two countries does not automatically mean that a good exported from one country to the other will not be subject to duties. To take advantage of preferential market access provided in a particular FTA, a good must meet the rules of origin set out in that agreement. Therefore, you need to be aware of:

1. The product's tariff classification under the Harmonized System (HS) Code, which will allow you to identify the applicable tariff rate.
   1. While HS codes are harmonized internationally up to the sub-heading (6-digit) level, each country differs at the domestic nomenclature level. In Canada, the domestic nomenclature is eight digits while other countries may be longer.
   2. The Government of Canada offers a HS database search engine tool to help you find the appropriate six-digit level HS code that best describes your product used anywhere in the world
2. The tariff rate that applies to your products in the countries you are targeting.
   1. It is also useful to know whether your key competitors from other countries benefit from a lower tariff rate.
3. Whether the tariff rate is being reduced or eliminated for Canadian products as part of a free trade agreement between Canada and the country in question.
   1. If so, the staging category for your products will determine if a tariff is being eliminated immediately upon entry into force of an FTA or if it will be reduced or eliminated over a defined period.
4. Whether other tariff treatments apply to your products, such as tariff rate quotas, whereby products within a specified quantity are eligible for a preferential tariff rate.
5. Whether safeguards (a temporary re-imposition of tariffs to protect a local industry against import surges) could be applied to your products.
   1.  Safeguards are typically applied only in exceptional circumstances for certain products as permitted under the WTO or an FTA.
   2. You can contact the country's Customs Authority for more information on any safeguards that are in effect in that country.
6. What Rules of Origin (ROOs) apply-both the general ROOs that appear in the body of an agreement's text, as well as the Product-Specific Rules of Origin (PSROs) in the annex.
   1. If your products do not meet the ROOs, they will not be eligible for the preferential tariff rates from the FTA.
   2. Meeting the ROOs in one of Canada's FTAs does not mean that you meet the ROOs in another. You need to look at the specific provisions of a particular FTA.
7. What are the origin procedures outlined in the FTA (e.g. who can apply for an advance ruling on origin and how).
   1. An advance ruling can be a key tool. It can give you an idea of how your product will be treated by the importing party even before the product has left Canada.

It's not just about tariffs

There are three important trends to note regarding tariffs and global trade:

1. Overall, global tariffs have decreased as a result of unilateral tariff reductions as well as WTO agreements. Bilateral and regional trade agreements also provide for the elimination or reduction of tariffs, but only on a preferential basis (e.g. only for goods originating from each party to the agreement).
2. Because tariffs have generally decreased, there has been an increased focus on non-tariff measures that can affect trade (known as non-tariff barriers). These measures are permitted to meet legitimate public policy objectives, but governments need to ensure that they are the least trade-restrictive option necessary to achieve those objectives. The goal is for regulations to be in place to protect the public, while at the same time allowing trade to flow.
3. Modern FTAs increasingly address not only tariffs, but also non-tariff barriers that are restricting or distorting trade.

• All countries, including Canada, employ regulations and other measures to meet legitimate public policy objectives, such as ensuring the safety of our food supply or preventing the spread of pests or diseases.
• Regulations are also necessary to ensure that products are not harmful to consumers, such as specifications on an infant's crib.
• However, these measures should not be used to unnecessarily restrict trade or discriminate against foreign products. 

Let's get back to the rules

What are some of the shared objectives in strengthening rules around trade and investment in an FTA? Generally, FTAs aim to:

• enhance the predictability and transparency of doing business
• establish an effective framework that will govern how trade and investment is conducted
• address today's common challenges to trade and investment
• level the playing field by seeking to ensure strong labour and environmental standards are upheld as trade is liberalized, as well as provisions on Responsible Business Conduct (RBC) and anti-corruption

We recognize that with increased trade in the digital environment, more extensive global value chains, rapid integration of emerging economies and higher risks associated with intellectual property protection, among other challenges, companies like yours need clear, effective and predictable rules in targeted markets.

It is important for you to be aware of the provisions related to these issues in a trade agreement. Understanding what the rules are and how they can help you, will go a long way in ensuring you maximize the benefits of an agreement.

For example, free trade agreements typically contain provisions related to the following subjects:

National Treatment and Market Access for Goods (NTMA)

• Establishes National Treatment - -i.e. treatment no less favourable than that accorded to domestic goods and import/export restrictions-ensuring that no prohibition or restriction of importing goods is allowed.

Electronic commerce (e-Commerce)

• Provisions for e-commerce focus on addressing tariff and non-tariff impediments faced by consumers and businesses that trade in the electronic environment. A key element for Canada is a commitment to a permanent customs moratorium on digitized products that are delivered electronically.

Specific competition issues, such as state-owned enterprises (SOEs)

• May establish rules that require greater transparency in the operation of SOEs, or preclude the provision of subsidies to SOEs competing with private sector entities.

Investment

• May include measures to protect Canadian investments abroad. In the event of an expropriation, measures may require that expropriations be restricted to those for a public purpose, be accompanied by due process and non-discrimination, and have prompt, adequate and effective compensation.

Customs administration and/or trade facilitation

• Intended to make it easier and less-costly for exporters to get their products across foreign borders.

Cross-border trade in services

• Intended to promote non-discrimination, as well as greater predictability, stability and transparency for service businesses.

Temporary entry of business persons

• Intended to facilitate the entry of certain categories of business persons and address certain types of restrictions, such as labour market tests and quotas.

Intellectual property (IP)

• May establish rules and cooperation-based activities that set a minimum standard for the protection and enforcement of IP rights.

What else do you need to know?

Exceptions and reservations

Just as you need to familiarize yourself with the market access benefits associated with free trade agreements, you also need to be aware of the exceptions and reservations-in other words, what is not covered by an agreement.

• Exceptions are typically laid out in an agreement's Non-Conforming Measures (NCMs) and other annexes that contain exclusions from the obligations of the text.
• Exceptions may take the form of specific entities or may refer more broadly to a type of good, service or sector (e.g. health and public education).
• Reservations and exceptions preserve policy space for the government in potentially sensitive areas (e.g. national security).

There are also issues that are beyond the scope of trade agreements, such as visa requirements, immigration and permanent employment.

Recognizing the limitations of an agreement can be just as important as being aware of the new market access the agreement affords.

Administration of the agreement

• The provisions in an agreement will also provide guidelines when there is more than one agreement in place in a market (e.g. a trading partner is covered by both a bilateral agreement and a plurilateral or regional agreement).
• Typically, agreements will operate on the basis of "co-existence," whereby exporters can continue to use the rules that are the most appropriate and most trade-facilitating in a particular situation.

Information on how an agreement's rules will intersect with those of other agreements (i.e. the agreement's relation to other agreements) is typically contained in an agreement's Initial Provisions and General Definitions section. This section, along with any preambular language, is a good starting point for understanding the overall objectives of the agreement, as well as familiarizing yourself with the terminology used in the text.

What can you do if you believe your business is facing unjustified barriers to trade or investment?

Report the issue to your Trade Commissioner in market, providing as many details as possible.