6 potential stumbling blocks to Canada-EU trade deal

Negotiators from the federal and provincial governments are spending a second week in Brussels for intensive negotiations toward a Canada-European Union Free Trade Agreement.

The Canada-EU talks were originally supposed to wrap up by the end of 2011. That timeline was extended by a year as negotiators on both sides said talks were progressing, albeit more slowly than hoped. In the last few months of 2012, Prime Minister Stephen Harper has repeatedly said he hoped to see talks conclude before the end of the year.

The impetus to conclude the talks for the EU is to show the Americans they are willing to make reasonable compromises in future talks when it comes to agriculture.

For Canada, beyond boosting international trade by as much as 20 per cent and diversifying its economy away from reliance on the U.S., Harper wants to show critics and other trading partners that Canada can negotiate a comprehensive trade agreement while leaving intact Canada's supply management system for dairy, poultry and eggs.

Despite the delays, sources familiar with the negotiations say they believe a deal is within reach in the coming weeks, but at the outset of the latest talks, six key points remained unresolved:

1. Automobiles

The sticking point on this issue is "origin of content" regulations for vehicles.

Due to the integrated nature of the North American manufacturing sector, many of the components of a car assembled in Canada are from the U.S. or Mexico. Sources familiar with the negotiations say the Europeans estimate a "made in Canada" car could contain as little as 25 per cent Canadian content.

Sources say Europe is offering an escalating quota — the greater Canadian content in a line of vehicles, the more would be allowed into Europe tariff-free. Canada is said to have balked at the initial offer as being too low.

Another compromise Europe is offering, according to sources, is a commitment to count U.S.-made parts as Canadian when or if the U.S. and EU conclude their own trade agreement.

2. Agriculture

This has been a difficult issue from the beginning. Europe wants greater access to the Canadian market for dairy and poultry products and Canada wants to ship more beef to Europe.

The Europeans are said to be satisfied with modest increases to its quota share in Canada, but Ireland and France, in particular, are objecting to losing market share to Canadian beef and pork.

3. Intellectual property for pharmaceutical products

Also a long-standing issue in the talks, it remains unresolved. Europe wants Canada to extend its copyright protections for brand name drugs by two years before generic companies could start producing cheaper versions. Some suggest both sides are looking at splitting the difference, with Canada extending its protection by one year.

4. Financial services

Europeans want their banks to be able to operate more freely in Canada. Some reports have suggested the dispute is over capitalization rules and other regulations. But sources in the industry dispute that, noting both Canada and Europe have agreed to the Basel III regulations, and they don't see any desire to water down such rules in the wake of the global financial crisis.

5. Sub-national — read 'provincial' — procurement

From the outset, this is what was meant to set this deal apart from others, such as NAFTA.

For the first time, Canadian provinces, territories and municipalities would not be able to exclude foreign companies from bidding on projects such as mass transit, infrastructure and utilities. This has been saved for last because a) it's arguably the most difficult, and b) provinces want to see how they will be affected by the rest of the deal before negotiating this point.

In particular, there are concerns that should Canada agree to EU demands on pharmaceutical intellectual property, then the provinces could be on the hook for billions of dollars in additional annual health-care costs, as they would have to wait longer before switching to generic drugs.

6. The Canada Investment Act

Sources familiar with the negotiations say Europe is asking for an exemption from the now-famous "net-benefit test." The same sources say this is something that has changed the dynamics of the negotiations in the later stages of the talks.

After U.S. President Barak Obama announced his country was launching its own free trade talks with the EU, many worried the Europeans would start playing hardball with Canada, now that they had another avenue to enter the North American market. But Canada is saving this issue for last and is said to only be willing to consider an exemption if it is satisfied with the compromises reached on the other points.