An analysis of the benefits and critique between the free trade agreements NAFTA and CETA in a historical comparison

Master's Thesis, 2018

72 Pages, Grade: 1,9


Table of Contents:

1 List of figures

2 Index of abbreviations

3 Introduction
3.1 The course of work

4 Distinction of CETA and NAFTA
4.1 Emergence of the free trade agreements
4.2 Tariff-related aspects of CETA and NAFTA
4.3 Non-tariff-related aspects of CETA and NAFTA

5 Critical comparison between CETA and NAFTA
5.1 Non-transparent negotiations
5.2 Dissent regarding investment protection
5.3 Harmonization of standards

6 Economic effects of CETA and NAFTA
6.1 Employment
6.2 Trade volume
6.3 Economic growth

7 Conclusion and outlook

8 References

1 List of figures

Figure 1: Development of the U.S.-Mexican trade of goods within NAFTA, 1994-2017

Figure 2: Development of the U.S.-Canadian trade of goods within NAFTA, 1994-2017

Figure 3: Development of gross domestic products of NAFTA members, 1994-2016

Figure 4: Development of gross domestic products of Mexico and Canada, 1994-2016

2 Index of abbreviations

illustration not visible in this excerpt

3 Introduction

3.1 The course of work

The following paper refers to the potential of international free trade agreements to create interconnected economic markets, which require a common trade policy of the contracting countries. The difficulty in this approach is to ensure an economic integration of both countries on the basis of bilateral treaties, despite differing cultural, social and economic attitudes. As an effect of the continuing globalization and the increased international interconnectedness, there is generally a rising number of international free trade agreements among countries with the intention to achieve economic growth and welfare that on the other hand simultaneously led to an increased amount of criticism arising from non-governmental organizations, consumer protection organizations or environmental groups. This oppositeness has received a lot of attention during the recent negotiations and implementation of the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada. Similar to the Transatlantic Trade and Investment Partnership (TTIP), which is a foreseen free trade agreement between the European Union and the United States that has been temporarily suspended due to huge protests, both agreements have in common that they bear more criticism that than any other free trade agreement ever before. This is why it is interesting to know to which degree there is a correlation of similarities and differences between a modern free trade agreement such as the CETA and an already established treaty like the North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada. According to the title, there will be “An analysis of the benefits and critique between the free trade agreements NAFTA and CETA in a historical comparison” with the purpose of figuring out whether a certain contracting country is benefiting from the NAFTA or the CETA or if it is experiencing any social, environmental, cultural, economic or other disadvantages. In the following segments these aspects will be examined, contrasted and evaluated with the support of studies and current data to provide meaningful findings and to give a final recommendation for action at the end of the paper.

To understand the background of both free trade agreements and how they have developed, the paper will initially highlight the emergence and negotiation process in an introductory comparison. After the historical classification, the CETA and the NAFTA will be examined according to its contents, each distinguished by its negotiated tariff-related and non-tariff-related aspects. The main part of the paper will focus on a critical distinction of both free trade agreements, starting with a major debate that aroused attention, especially during the course of the CETA negotiations as they were accused by of being non-transparent. Thereafter the paper continues with a comprehensive analysis of the different applied investment dispute settlement procedures of NAFTA and CETA which have received much public attention and critique from consumers, scientists and non-governmental organizations. Then, the paper addresses the most important non-tariff-related aspects in terms of standards, norms and regulations that are constituting trade barriers among the countries as they are handled differently but are mostly intended to be harmonized within a free trade agreement as for instance food-, health-, environmental-, cultural-, labour- or social standards. The second main body of the paper refers to the quantitative analysis of the key economic figures on trade volume, employment and the economic growth that are induced by NAFTA and CETA. Lastly the paper outlines a recap of the effects of the free trade agreements and potential implications by referring to the most relevant benefits and downsides for correspondingly giving a reasonable recommendation for action. On that basis there will be a final update on the latest developments and occurrences of both free trade agreements in order to provide a meaningful future prospect.

4 Distinction of CETA and NAFTA

4.1 Emergence of the free trade agreements

First of all CETA and NAFTA are considerably different agreements, especially when taking into account the time that NAFTA was first negotiated in 1991. At this time the United States and Canada had already signed a bilateral free trade agreement referred to as CUSFTA, that did not consider Mexico as a potential partner. By including Mexico, each party was optimistic in benefiting from the Mexican contribution in terms of mutual economic growth opportunities through an increased trade and investment (CFR, 2018). From a Mexican perspective, the free trade agreement was seen as an opportunity to transform its economy into a first world nation with a modernized and more efficient export industry and a general market opening for foreign direct investments as stated by the Mexican President Carlos Salinas de Gortiari. For the United States and Canada the new trading partner was seen as an opportunity of benefiting from a lower cost investment location and a potential new export market that could strengthen the competitiveness of U.S. and Canadian companies (CRS, 2018, p. 4). Another important reason for the creation of NAFTA was the opportunity to build up an economic block which allows its members to compete at a global scale against other international free trade agreements (Amadeo, 2018b). These facts led to the intention of Mexico, Canada and the United States to take legal steps towards a common free trade area, which was primarily negotiated by the Republican President George H. W. Bush in 1992 (CRS, 2018, p. 1). Negotiations continued with the successive Democratic President Bill Clinton, who additionally campaigned for two side agreements on environmental and labour protection and finally signed the treaty by the end of 1993, following its passage in Congress (Greenberg, 2016). After all the North American Free Trade Agreement (NAFTA) was enacted on January 1st, 1994, but already at that time it had received criticism as for instance the widespread worries among critics that Mexico and Canada might increase their dependency on the U.S. American deregulation strategy as a consequence of a higher competition (Eisenmann, 2016).

In comparison, the negotiation process of the Comprehensive Economic and Trade Agreement (CETA), began in 2009 for the mutual purpose of creating new economic growth opportunities in a comprehensive free trade agreement between Canada and the European Union (EC, 2018a). Based on its modern structure the CETA is seen as a role model for further free trade agreements as for instance for the intended Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States whose negotiations are currently suspended (CCPA, 2018a, p. 13). The CETA treaty was negotiated by representatives of the European Commission and the Canadian government, who stated in 2013 that they agreed upon the key points. Due to the fact that the CETA exceeds the competence of the European Union in many fields, it will legally constitute as a mixed agreement that has to been signed by the European Parliament and every of the 28 EU member states within the ratification process (Ifo, 2018, p. 1). The technical negotiations finally concluded in August 2014 followed by a common declaration until the end of the CETA negotiations by the former Canadian Prime Minister, Stephen Harper, the former EU Council President, Herman Van Rompuy, and the former President of the European Commission, José Manuel Barroso (BMWi, 2018a), (EC, 2018b). In the following years CETA has been subject to a myriad of criticisms which has led the representatives to renegotiate and improve certain aspects of the treaty, so that the European Commission published the final version of CETA in February 2016 (BMWi, 2018b). In October 2016, representatives of the Canadian Government and the European Union signed CETA, followed by the approval of the European Parliament in February 2017 (BMWi, 2018a). Lastly, the European Commission President Jean-Claude Juncker, together with the Canadian Prime Minister Justin Trudeau, agreed upon provisionally implementing CETA on 21 September 2017, although it has not yet officially been concluded, and it has yet to be ratified by the Parliaments of the 28 European member states (Hamburg Chamber of Commerce, 2018).

4.2 Tariff-related aspects of CETA and NAFTA

Generally, the contents of both free trade agreements have to be differentiated between tariff-related trade barriers and non-tariff trade barriers although the regulation of both protectionist measures should contribute to general market standardization. Regarding the tariff-related trade barriers, CETA and NAFTA are focusing on a reduction or elimination of import duties, protective duties or other trade restrictions as export subsidies that restrict the free movement of goods among the contracting parties (HWWI, 2018, p. 9). With respect to CETA, although there are nowadays only low tariff-related burdens between most of the United States and Canada, the free trade agreement will remove 99% of the existing tariffs immediately or within a time span of the next eight years. Currently there are higher tariffs on European exports amounting to 2,56% as compared to the tariffs that are imposed by the European Union on Canadian exports in the amount of 1% (CCPA, 2018a, p. 66-67). Through the dismantling of tariffs, the European Commission predicts cost savings of initially 400 million Euro up to 500 million Euro in the later stages of CETA. Thus, there might be a reciprocal lowering of prices resulting in increased competition within the European and Canadian markets, but also offers some new opportunities for companies to import cheaper components or preliminary products from the contracting partner (EC, 2018c). Very important sectors that are affected by the elimination of tariff-related trade barriers are the agricultural sector and the fisheries in particular. In the latter case, CETA will enable simplified access to the Canadian fish for the European processing industry and ensure a more sustainable fishery by monitoring and controlling illegal fishing (EC, 2018d).

Compared to the modern CETA that was rather focused on non-tariff-related aspects as the harmonization of standards between the European Union and Canada since there have been already low tariffs levies between the contracting parties, the measures of NAFTA members was rather concentrated on the elimination of tariff-related aspects as there were still high trade barriers among the countries in those days. In 1993, the Mexican tariffs on U.S. American exports amounted to 10% on average, which is much higher than the duties that were imposed by the United States on Mexican imports in the amount of 2,07%. Comparatively the Canadian tariffs on all imports amounted to only 0,37% in 1993. According to the relative high Mexican tariff level, it was estimated that the U.S. exports were more likely to expand than the Mexican exports to the United States (CRS, 2018, p. 5). The most important sectors that experienced a dismantling of trade barriers within the NAFTA were the agriculture, textiles, apparel and automobile manufacturing sectors (CFR, 2018). Whereas NAFTA suspended every duty within the textiles and apparel industry, and the contract required the automotive industry to adhere to a rule of origin principle that prescribed a 62,5% content for North American cars, light trucks, engines and transmissions and 60% for all other automotive components and vehicles. In the agricultural sector, NAFTA scheduled bilateral agreements on tariffs with Mexico and Canada and Mexico and the United States in each case.

4.3 Non-tariff-related aspects of CETA and NAFTA

Besides the reduction of tariff-related obstacles, both free trade agreements were dedicated to the establishment of a number of rules and commitments that each contracting party should comply with in order to improve collaboration, protect certain intellectual property rights and enable a greater market access for each other as for instance in terms of foreign direct investments (CRS, 2018, p. 6-8). Initially, NAFTA members mainly concentrated on setting up a dispute resolution mechanism and provisions on intellectual property rights, but later on agreed upon implementing two side agreements on environmental and labour issues as a consequence of much criticism received by non-governmental and environmental groups (CFR, 2018). Due to the fact that NAFTA largely aimed to minimize tariff-related trade barriers, there were only a few non-tariff-related measures that were taken up, including standards on land transportation, telecommunication, automotive, and labelling of textile and apparel good standards, but NAFTA generally advises its members to follow the guidelines of relevant international standards (Giermanski, 1994, p. 2-3).

With regard to CETA, which is principally focusing on the elimination of non-tariff trade barriers, the primary goal is to remove unnecessary bureaucratic burdens and to find common regulations, norms and provisions between the European Union and Canada that could be harmonized with the process of time. Thereby CETA also seeks to simplify processes and procedures by adjusting technical regulations and consolidating the regulatory cooperation on the basis of a mutual recognition and higher transparency in provisions (Ifo, 2018, p. 1-2). Thus, CETA provides a framework of comprehensive regulations involving the compliance with social and environmental standards and the commitment of both parties to consider nature conservation and labour rights in their economic decisions. Additionally, it stipulates the creation of an arbitration court in order to solve investment disputes between a foreign investor and the host country. This option, and the fact that foreign investors are equipped with enhanced rights, led to a major wave of criticism in the recent past. Another major part of the free trade agreement includes the protection of intellectual property rights, especially in terms of vulnerable or traditional food products, which have been elaborated in a list of geographical indications that are guaranteed of being protected within CETA. These protective measures have also been taken for other intellectual property rights such as trademarks or other content distributed by originators whose rights should be preserved by a more strict copyright law. From an economic perspective, CETA offers new opportunities for European companies to get access to public procurement in Canada and further thematises the possibility to relocate and outsource employees to promote the movement of services across borders. In this field, CETA seeks to reciprocally recognize professional qualifications of each other´s employees to set standards for an interchangeable common labour market. This is mainly by reason of the differing requirements of freelancers as architects, engineers or auditors, especially with regard to the performance of cross-border services. Lastly, CETA strives to adjust and harmonize standards, norms and conformity assessment procedures as this would contribute to a more simplified trade and reduction of bureaucratic burdens, especially as the automotive industry would benefit when taking into account that Canada is currently approving European norms on cars (EC, 2018d).

5 Critical comparison between CETA and NAFTA

5.1 Non-transparent negotiations

During CETA negotiations, the European Commission and the Canadian Government received a lot of criticism as its emissaries were holding their meetings in secret. Since the start of negotiations in 2009, there has neither been public involvement nor public disclosure of any reliable and tangible information concerning the free trade agreement with the exception of a few details as the dismantling of tariffs, the protection of intellectual property including geographical indications and the possibility for European Companies to gain access to public tenders in Canada (Salzburger Nachrichten, 2014a, p. 2), (EC, 2018e). This non-transparent process continued until the German public-service broadcaster ARD leaked the whole consolidated text (comprising around 519 pages) of CETA treaty in August 2014 (ARD, 2018). Thereafter, the European Commission published the final version of CETA in September 2014 after the negotiations concluded (EC, 2018f). The German Institute for Economic Research criticizes and classifies the overall document with its amount of nested clauses and references as being relatively complex making it difficult to evaluate and review (Ifo, 2018, p. 4). For this reason, and based on the fact that the contracting parties had an interest in keeping the negotiations confidential without any involvement of organizations representing the citizens, CETA aroused a public debate within the European Union by questioning its credibility. This is why the regional Walloon Parliament of Belgium has vetoed the provisional application of CETA also in due consideration that national parliaments of the European Union are not involved in European related issues of the agreement. This position of secretiveness by the European Commission caused mistrust among the European Parliaments and the European population but the provisional application of CETA has been widely accepted yet (Joly, De Masi and Maurel, 2016, p. 1).

NAFTA, in comparison, did not receive as much broad rejection and criticism as CETA experienced, but there were always critical voices regarding the non-transparency in certain areas regarding the investment chapter of the treaty (Barnes, 2001). As the North American Free Trade Agreement was universally desired and pledged to bring positive effects to the contracting countries, the major part of the object of negotiations were not really concealed for the public. Nevertheless, some non-governmental organizations, such as environmental groups and trade unions, expressed their concerns regarding the agreement, but they obtained the possibility to express their standpoints by the help of Congressmen (Lange, 1998, p. 225-226).

5.2 Dissent regarding investment protection

One of the most controversial parts of both free trade agreements is the procedure regarding the investment protection that should primarily guarantee foreign investors special property rights for its investments in the host country. Due to increased international interrelations and the continuing globalization process which was fostered by the end of the cold war, investors were allowed the possibility to invest in new markets. Furthermore, the investment protection with special property rights upon the investor´s capital investment is seen as beneficial for the host country as it stimulates economic growth (BMWi, 2018c). The application of investment protection clauses as a preventive measure should protect the investor from the risk of expropriation and should facilitate a comprehensive trade liberalization. The policy of the investment protection states that the investor possess the possibility to sue a contracting host country in which he made an investment, in case he sees an infringement upon his property rights. This issue mainly occurs when the company´s scope of decision-making is restricted by governmental laws of taxes or by environmental standards. In this case the investor has the right to take action to compensate for loss of profits against the host country before an investor-state dispute settlement, which mostly intends courts of arbitration as the primary decision-making body (BT, 2018, p. 5). The courts of arbitration are non-governmental institutions with a legally supranational body that do not have to make a detour over the national legal systems. In case of an investment dispute both parties can each select its own preferred arbitrator and another jointly decided independent business lawyer. The resulting arbitrament is binding for both Parties under international law and cannot be contested as compared to the decisions of national court systems (HWWI, 2018, p. 10-11). The compensation payments often run into the millions, which are ultimately the burden of the tax payers of the host country. Additionally both Parties can agree that the arbitration remains undisclosed, so that the tax payer remains uninformed (ÖGfE, 2018, p. 4).

Currently there are more than 3.300 regional and bilateral agreements worldwide, accordingly there has been a significant increase in the number of claims for indemnity which can be estimated to a total of roughly 600 complaints in 2014 (Eisenmann, 2016, p. 1). Thus, the investor-state dispute settlement instrument has been frequently used by NAFTA over the past decades and has led to millions in indemnity. These private arbitral tribunal proceedings that negotiate and decide by non-democratic means, with a high level of opacity earned great criticism in the early beginning of NAFTA by labour unions and consumer protection organizations in Canada and the United States.

Among others critics show scepticism towards the main court of arbitration the “International Centre for Settlement of Investment Disputes” (ICSID) that is located in Washington and belongs to the World Bank (Eisenmann, 2016, p. 3). Hence many critics bring up their apprehension that the arbitrators have a close relation to economic lobbyist groups that might have an influence on the final judgement. There are further concerns that the sovereignty of the national judicial system is endangered due to the influence of major corporations that can exert their intentions though this arbitral jurisdiction (Kolev, 2014, p. 22-25). A study of the anti-lobbying organization Corporate Europe Observatory and the Think Tank for progressive politics, Transnational Institute, refers to the revolving door effect in which trade related positions within the government and courts of arbitration easily exchange their personnel, so as some NAFTA negotiators switched to the arbitration panel. Due to the fact that it is possible that a single arbitrator passes a non-contestable judgment inside of a non-transparent court proceeding amounting to millions of dollars, in some circumstances this might have restricting implications on the national legislation for example on environmental protection (Eisenmann, 2016, p. 2-3). With reference to chapter 11 provisions of the NAFTA agreement concerning the investment dispute settlement clauses, there are plenty of examples in which companies sued states because the governmental laws are restricting the investor´s expected profits (NAFTA Secretariat, 2018).

One of the most known investor dispute settlement procedures is the claim of the Canadian oil and gas corporation Lone Pine Resources against its own Canadian Government in Quebec. This was only possible because the company was able to sue the Canadian Government through its American subsidiary. Lone Pine alleges that Canada has hurt the Chapter 11 provisions of the NAFTA agreement by declaring a moratorium on fracking in the area of the Canadian Anticosti Island. Therefore the company is claiming damages in the amount of $250 million since Lone Pine sees a restriction due to the environmental regulation and a resulting loss of an economic resource that could have been used for fracking (Van Praet, 2012, p. 1). Another major incident occurred as the energy companies Exxon Mobil and Murphy Oil claimed damages amounting to $60 million against Canada due to the fact that the Canadian Government dictates energy providers to invest in a fund for research and development. This investment fund has a background of giving back to the poorer Canadian provinces in the form of monetary support in exchange for a proportion of the profits energy providers receive from exploiting the Canadian natural resources. Exxon Mobil and Murphy Oil referred to Chapter 11 of the NAFTA treaty and won out the dispute settlement procedure before a court of arbitration. According to estimates of a Public Citizen study, there are currently more than 12,4 billion US-Dollar pending in investment dispute settlement procedures within the NAFTA (Eisenmann, 2016, p. 2-3). Proponents of the investor-state dispute settlement argue that the extensive protective rights, including the protection against expropriation or nationalization, are promoting the general investment activity resulting in an improvement of the profitability of companies. Thus thanks to the legal situation companies are not obligated to concentrate their efforts towards an improvement of consumer protection, data privacy or the conservation of the environment since they can voluntarily decide to which degree they are engaged with its corporate social responsibility (LPB, 2018).

Taking into account these developments in NAFTA there has been a wave of criticism of CETA as well as critics see the likelihood of actions for damages by virtue of loss of profits as relatively high, since there is basically an impairment of profits through existing environmental laws. As the past shows, the trend towards investor-state dispute settlements through arbitration panels has been steadily increasing over the years (Kolev, 2014, p. 24). With regard to CETA, critical voices have been raised concerning similar issues that have been mentioned with respect to NAFTA, including the fact that arbitrators were holding their sessions in secret and without any opportunity to repeal before an appeals committee (Schäfer, 2014, p. 1). The claims were brought against the possibility to apply the rules of the UNCITRAL on Transparency in Treaty-based Investor-state Arbitration that ensure public hearing and grant the public access to arbitration proceedings (Kary, 2014, p. 1). Moreover, critics mention concerns regarding the parallel justice allowing investors to sue national states before arbitration panels while obtaining a free ride to circumvent national jurisdiction and levering out national laws (ARD, 2018). This argument is additionally supported by the trade and economic ministers of the German SPD Party, which fear an insufficient protection of cultural, environmental and human right standards (SPD, 2018). As a consequence of the failure of TTIP and the vast amount of criticism arising from politicians, civil society and non-governmental organizations imploring for a more democratic, fair and independent decision-making body in the arbitration proceedings and the misleading and fuzzy definition of the right to regulate in the investment chapter “Recognizing that the provisions of this Agreement preserve the right to regulate […]” reinforced the scepticism among critics that corporations can easily exert pressure on national governments and undermine European legislation by threaten with actions for damages (CCPA, 2018a, p. 14-15). A study of the Heinrich-Böckler-Foundation reveals that free trade agreements containing private investment dispute settlement procedures as is conducted within NAFTA are operating unconstitutionally and could not be implemented within the European Union (HBS, 2018). These deficiencies and the heavy criticism prompted the European Commission to revise the existing document jointly with Canada and renegotiating it in order to receive a more advanced and effective mechanism of investor-state dispute settlements (EC, 2018d).

By the end of February 2016, the European Commission finally declared that they arrived at an agreement with the Canadian Government to replace the existing private arbitration panels with institutionalized international courts of arbitration that enable both parties the option to appear before an appeal panel. EU Trade Commissioner, Cecilia Malmström, said “CETA takes on board our new approach on investment and its dispute settlement. By making the system work like an international court, these changes will ensure that citizens can trust it to deliver fair and objective judgements. We can confidently say that we’ve met the expectations of both the Member States and the European Parliament.” Each individual case will be checked and reworked within the appeal panel according to its reasonableness as well as weighing its economic and ecologic impacts (EC, 2018g). Besides the establishment of an international permanent court deployed with 15 arbitrators, whom are appointed in advance by the Canadian and European Government, the new judges will only be charge of a single case in a dispute settlement, thus prohibiting a simultaneous occupation in national courts as a way to guarantee their independence (Krüger, 2016, p. 1), (Ziegeler and Stürzenhofecker, 2016, p. 4). Additionally, the arbitrators are obligated to comply a strict code of ethics and code of conduct, while the proceedings are linked to the rules of the UNCITRAL on transparency to ensure a democratic and public trial with the possibility to review the documents on the website of the United Nations on the basis of plausibility (EC, 2018h).

Another major amendment of the revised CETA investment chapter of February 2016, is a stronger language on the right to regulate the statement of an assurance that new governmental laws on environment or consumer protection can be adopted even if it harms the profits of an investing foreign corporation (Ziegeler and Stürzenhofecker, 2016, p. 4). In the final version of article 8.9 of the investment chapter provisions it says, „Governments can change their laws, including in a way that affects investors’ expectations of profit and that the application of EU’s state aid law does not constitute a breach of investment protection standards.“ (EC, 2018h, p. 2). According to a more precise and specific definition of the provisions in the investment chapter, these adjustments provide public authorities with greater security when adopting new legal provisions by simultaneously restricting the wiggle room for investors in looking for potential to sue the government for damages (EC, 2018c).

On the other hand, the non-governmental organization PowerShift has criticized the changes from February 2016, claiming that they are predominantly superficial and vague, and can be seen as a rectification of the existing investor-state dispute settlement procedure (PowerShift, 2018). While the organization acknowledges some improvements in general, it is still unclear to what extent the investment protection is ensured and to which instances it can be applied. Likewise, the imprecise definition of the right to regulate could grant foreign investors comprehensive rights, thus resulting in preferential treatment and discrimination of domestic investors, says Buschke, an expert of the Federation of German Consumer Organizations (Ziegeler and Stürzenhofecker, 2016, p. 4). This is endorsed by the Federation of German Trade Unions, which states that the current formulation of the investment protection chapter allows room for interpretation, and arbitrators still have the means to conceal the dialogues between both conflicting parties (DGB, 2018). Some critics see the general problem regarding transparency and democracy in the application of arbitration panels, and recommend an abstainment from the courts of arbitration (Ifo, 2018, p. 29). As well as the law professor, Fischer-Lescano, head of the Center for European Legal Policy at the University of Bremen, who proposed that special Human Rights Courts provide both contractual parties with protection of their property (LTO, 2015, p. 1). The German Association of Judges indicate that both countries already possess working legal systems and that there is no need for a continuing utilization of the investor-state dispute settlement. Instead, the judges have pressed for the inclusion and consultation of the European Court of Justice for the purpose of preventing misuse of the intended ISDS system. According to the Judges Federation, there is still leeway for corruption or conflict of interests since arbitrators are paid according to the duration of the proceedings. In addition, they are very often not aware of the national legal systems although they have the power to facilitate the foreign investor´s market entry by passing a judgement that circumvents national law and allows the foreign investors privileged access to national resources as opposed to the domestic investor (Joly, De Masi and Maurel, 2016, p. 3).

Another highly debated issue among European critics, is dealing with the concern that US-American companies could use CETA as a springboard to enter the European market (Salzburger Nachrichten, 2015b, p. 13). The consumer protection organization Foodwatch expresses concerns due to the fact that American shell companies might be able to sue the European Union with the help of the investment protection clauses before arbitration panels. Especially in regards to the failure of the Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States, American companies now see a loophole for their Canadian subsidiaries in order to take advantage of the benefits of CETA. The German Federation of Wholesale and Foreign Trade opposes this notion and claims that it is prohibited to utilize an American shell company or subsidiary of claims for damages against the European Union; referring to the regulation in the investment chapter of the CETA agreement (Ziegeler and Stürzenhofecker, 2016, p. 4). In the case of claims for damages, CETA would be the first agreement in which the whole European Union would be liable for individual political acts of its member countries, meaning that single European member states do not have a legal liability. Consequently, political risks of certain European member states could attract foreign investors in search of possible legislative loopholes. Critics mention that this communitization of the liability within the European Union might be a misplaced incentive for foreign investors. The German Institute for Economic Research recommends that the investment chapter of CETA should focus on direct investments instead of reshaping the European Union to a Union whose liability is communitized (Ifo, 2018, p. 29).

Despite the mutual efforts of the European Union and Canada regarding the revised investment chapter of CETA, there is still scepticism towards the future role of arbitration panels and to which degree they adhere to the investment protection clauses. As shown in NAFTA, arbitrations can simply overrule national jurisdiction, resulting in large sums of compensation paid by the host governments. Even though the judges are committed to the rules of UNCITRAL on transparency, it cannot be excluded that arbitrators are involved in lobbying activities and act according to the interest of economic corporations. The fundamental improvements of establishing an appeal panel within the CETA agreement can be supported compared to NAFTA, where the decisions of private arbitration panels cannot be contested . Nonetheless, according to the vague definition, the exact extent of the investment protection clause and the right to regulate on the other hand leaves ample room for interpretation. This is due to the fact that it cannot be estimated yet, whether it entails more benefits for foreign investors, but it seems that NAFTA is more relaxed in its dealings with investment policies.

There is generally still a widespread dissent between the EU member states regarding the investment chapter of CETA, which has been fueled by critical statements of non-governmental organizations, think tanks, economic institutions, foundations and consumer protection organizations. This is why the European Commission declared to postpone the implementation of the investment chapter within the CETA agreement until every member state of the European Union has concluded their national ratification process. Thus, the European Commission receives extended time in order to deepen the consultations with Canada about the modern ISDS system, including a warranty for small and medium-sized enterprises to be able to use the courts of arbitration and the new appeal system as well as the selection of judges (EC, 2018c). However, it would be useful to consider advice from the European Court of Justice so as to avoid any errors that may occur after the application of CETA. This negotiation phase of the investment chapter could last as long as each European member state ratifies the treaty. In the meantime, renegotiation agreements or modifications of single investment chapters may be possible until the final version is achieved.

The so-called “chilling effect” is the consequence of an unequal distribution of power in which the courts of arbitration hold a dominant position through an economic hegemony over the state government that restrict political decisions with respect to the adoption of environmental or social laws. Critics mention at this point a threat to the rule of law for the contracting states that could lead to a kind of heteronomy in politics taking into consideration that even with threats of actions for damages, governments can be intimidated (Schipper, 2014, p. 1). These measures could cause a preventive reserved government that is restricted in its field of action while simultaneously enabling lobbying groups to assert their company interests as outlined by the Economic Policy Institute in Washington (EPI, 2018a). This phenomenon was observed in NAFTA, especially within the labour unions in which American companies threatened the closing of plants in order to prevent union organizing (Palley, 1998, p. 170). The past shows several instances that occurred where governments were confronted with large sums of claims for damages because they intended to pass a law that might have an influence on the company´s profits. For example the Tobacco Company Philip Morris was threatening the country Uruguay in advance as the Uruguayan government planned to tighten its anti-smoking law. Therefore the company sued the host government before an arbitration court for the reason of obtaining compensation for its estimated loss of profits according to an expected sharp drop in demand within the Uruguayan market (Bode, 2015, p. 83-84). Although it is difficult to measure to what extent the governments feel pressure by intimidation attempts made by large corporations, this problem has now led to a renewed discussion within the European Union concerning CETA (Mehr Demokratie, 2018). Currently there might be an unknown hidden number of cases within NAFTA in which large corporations exert power to stop governments from adopting new laws, but so far also the Canadian financial service negotiators expressed their concerns regarding CETA, mentioning this would have negative implications for the whole economy of the country (CCPA, 2018a, p. 18).

5.3 Harmonization of standards

In addition to the promotion of direct investments through an extensive investment protection agreement, the Comprehensive Economic and Trade Agreement comprises the intention of a rapprochement, even unification in certain sectors, of European and Canadian standards. This should be achieved by the elimination of non-tariff trade barriers that would contribute to an increased mutual interdependence of cultural, social, economic and ecologic dimensions. An intended conformity of technical regulations, norms, provisions and assessment procedures between the contracting parties would result in a lowering of costs for companies due to a simplification of formalities in trade of goods and services. Furthermore, proponents argue that this would also have positive impacts on consumers in terms of a greater choice of goods since it further allows a more effective and rapid flow of goods according to an equivalent assessment procedure in both countries (EC, 2018d).

On the other hand, critics worry about the eventuality that this could result in a lowering of European standards as for instance the high European consumer protection standard. A mutual recognition and harmonization of standards often means that both contracting parties agree upon a lower standard for the purpose of simultaneously benefiting from a homogeneous market development (Joly, De Masi and Maurel, 2016, p. 1), (HWWI, 2018, p. 12-13). The Canadian Trade Commissioner Chrystia Freeland and the European Trade Commissioner Cecilia Malmström contradict these allegations and talk about a general improvement of standards which consist of positive side effects such as the creation of new jobs (Joly, De Masi and Maurel, 2016, p. 1). In order to uphold the high standards, Cecilia Malmström stresses that both countries are obligated to ship only those goods that comply with each other´s domestic standards for example product safety (EC, 2018i). Critics conversely mention that bilateral free trade agreements like CETA, that strive to align and harmonize the country´s mutual standards, pose a risk in undermining democracy, hence the desired harmonization can also be accomplished by following the industry standards of the International Organization for Standardization (ISO) (Joly, De Masi and Maurel, 2016, p. 1). CETA already contains a Board of Regulators intended to bring together the representatives of the Canadian Government and the European Commission to search for common norms and standards to simplify and facilitate the further liberalization of commerce and the development and harmonization of standards, but the German Institute for Economic Research recommends the participation of members outside the CETA party to ensure a democratic procedure with the possibility to obtain an international acceptability of the decided standards (Ifo, 2018, p. 29). Another aspect relating to the harmonization of standards is criticized by the non-governmental organization, Compact, that points out the so-called ratchet-clauses which contains provisions that restrict countries from bringing privatisations back into public control (Campact, 2018). Once these liberalisation measures have gone into action, they cannot be made undone, meaning that even if certain measures including the market access for foreign investors is facilitated, and it turns out that this was a mistake, there is no possibility for the parliament to change the law again because a treaty under international law is legally superior (BWB, 2018). The European Commission narrows the extent of the ratchet-clauses stating that theses clauses cannot be imposed on critical or sensitive sectors as for instance public transportation (EC, 2018j).

While the Canadian Government and the European Commission strive for convergence in their standards within CETA, the United States, Mexico and Canada decided to govern their trade relationship within NAFTA in accordance with the international standards of the World Trade Organization (WTO) (Bredahl and Holleran, n.d., p. 74). Critics allege that NAFTA members failed in defining any standard-related measures at an early stage of the agreement which could have prevented some serious crises as the spate of potato wart in 2001 or the spread of the bovine spongiform encephalopathy (BSE) disease in 2003 (GPF, 2018). NAFTA members later on intensified their regulatory cooperation, including the introduction of technical regulations as the ISO 9000 that involves a voluntary standard for the purpose of maintaining a certain level of quality within the field of health, safety, or environment that is accepted worldwide (Bredahl and Holleran, n.d., p. 71). The main principle of the NAFTA agreement regarding equivalent standards constitutes that every contracting party can adopt any laws or provisions that support the health, safety, environment or consumer interests as long as they do not represent an unnecessary barrier to trade. Thus, each member´s governmental measures should include provisions that foster the trade liberalization of the member states, though NAFTA members are allowed to introduce different standards with the exception that product approval procedures and domestic standards should be equally practised (Dentons, 2018). Nevertheless, the commitment of NAFTA countries regarding the protection of health, the environment or consumer interest remains on a voluntary basis and is not part of a deeper integration or harmonization between the member states, making it even more unlikely that governments pass provisions on for instance environmental concerns when taking into account that these provisions are not allowed to be trade restrictive (Condon, 2002, p. 42). Compared to NAFTA, CETA has a more collective approach with regard to the alignment of each other´s non-tariff barriers including standards and provisions intended to reduce unnecessary bureaucratic burdens and foster the exchange of goods and services within a common Canadian and European market. Moreover, the CETA treaty contains chapters covering sustainable development provisions binding both parties to environmental and labour considerations including explicit requirements to comply with the rules of the International Labour Organization (ILO) and to respect and implement the regulations of the multilateral environmental agreements (EP, 2018a, p. 4).

With regard to the treatment of divergent food standards within the European Union and Canada, CETA has faced a lot of criticism by virtue of the different handling of food safety and protection standards that, according to critics, could harm or lower European food standards. European critics were especially afraid about the possibility of a Canadian market opening that could result in the transition to biotechnology products within the EU as Canadian farmers are allowed to inject their cattle with growth hormones which is currently strictly forbidden within the EU (Braune, 2013). Thereupon the European Commission reacted and declared that there will be no imports of hormone-treated beef as well as no use of hormones in beef production inside the European Union (CCPA, 2018a, p. 88). The debate was ignited as a result of a rising consumer mistrust against genetically modified food and vast protests by European farmers that were concerned about new Canadian agricultural enterprises competing on the European market with genetically modified food and price dumping (Ziegeler and Stürzenhofecker, 2016, p. 3). The European Commission stated that the European safety regulations on food standards is not affected and that there will not be any further negotiations regarding biotechnology including genetically modified food and hormone-treated beef (EC, 2018c). Nevertheless, European farmers express their doubts in relation to the European market opening towards Canada since they feel not adequately protected against the Canadian food corporations. Besides a heavily increased competition within the European territory, European domestic producers criticize that a market opening with Canada would only constitute an advantage for exporting European producers but not for those selling their products only within the European Union (Joly, De Masi and Maurel, 2016, p. 2). However, the European Commission on the contrary argues that for some foodstuffs, especially for sensitive goods as dairy products, beef, pork and sweetcorn, there will be limited contingents and a general import ban for poultry and eggs in order to protect the domestic food variety (EC, 2018c). It further announces that even if CETA provides both trading partners an accelerated and simplified approval process, and even if there is a higher amount of traded goods, the Canadian products still have to go through the European approval process that intends to comply with the high standards in sanitation and phytosanitation. Together with the Canadian Food Inspection Agency, the European Food Safety Authority is dedicated to renew and improve the approval process by implementing fast-track procedures to realize cost reduction while simultaneously respecting each other´s preferences and priorities in traded food to achieve benefits for exporters on both sides (EC, 2018i). Furthermore, according to the European Commission CETA will generate new import opportunities since agricultural food products and processed products can be imported duty-free as for instance the possibility to receive Canadian fish much easier. Same duty-free conditions shall be applied to the exporting European farmers and food industry, in particular those exporting wines and spirits, fruits and vegetables, cheese, processed goods and traditional European specialties known as geographical indications (EC, 2018c). These geographical indications are European high quality products that are based on their tradition and uniqueness of great cultural importance for the European citizen, hence the EU Trade Commissioner Malmström negotiated with the Canadian Government to protect on the Canadian market from being counterfeited (EC, 2018i). With 173 European food names that are currently protected by the CETA agreement, the European Commission seems to be obviously satisfied as a leaked statement reveals “Another very positive result is the outcome on Geographical Indications (GIs).


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An analysis of the benefits and critique between the free trade agreements NAFTA and CETA in a historical comparison
Cologne Business School Köln
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CETA, NAFTA, free trade agreement, comparison, benefits, critique, trade volume, tariffs, trade barriers, negotiations, investment protection, standards, employment, economic growth, gross domestic product, non-tariff related aspects, Council on Foreign Relations, European Commission, Economic Policy Institute, Canadian Centre for Policy Alternatives, Bundesministerium für Wirtschaft und Energie, European Parliament, Congressional Research Service, Carnegie Endowment for International Peace, Comprehensive Economic and Trade Agreement, Canada–United States Free Trade Agreement
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Paul Petersen (Author), 2018, An analysis of the benefits and critique between the free trade agreements NAFTA and CETA in a historical comparison, Munich, GRIN Verlag,


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