Apr 29, 2024

The Power of Canada’s Free Trade Agreements

Most Canadian business executives are aware of the United States-Mexico-Canada Free Trade Agreement ("USMCA"). However, fewer executives are aware that Canada has entered into similar free trade agreements with the 27 countries of the European Union and, through the CPTPP, ten other countries around the Pacific Rim plus the United Kingdom. Canada also has individual free trade agreements with the United Kingdom, Chile, Colombia, Costa Rica, Honduras, Israel, Jordan, South Korea, Panama, Peru and Ukraine and a goods-only agreement with the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland). These agreements collectively give Canada significantly more international trading power than the United States.

United States-Mexico-Canada Agreement (USMCA)

The USMCA, which became effective in July 2020, is the successor to the Canada-US Free Trade Agreement and NAFTA, which opened the American and Mexican markets to Canadian businesses (and vice versa) in 1989 and 1994, respectively. The detailed procedures for determining whether goods manufactured or produced collectively in the three member countries satisfy the Rules of Origin under the USMCA are set out in this article.

Agreement with the European Union (CETA)

Canada's free trade agreement with the European Union (EU) came into force on September 21, 2017. The agreement is formally known as the Comprehensive Economic and Trade Agreement (CETA). For goods that satisfy CETA’s Rules of Origin, 99% of the tariff lines are now duty free.

The European Union (EU) is a customs union of 27 member countries: Germany, France, Italy, Spain, the Netherlands, Austria, Belgium, Ireland, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, Slovakia, Slovenia and Sweden.

All member countries of the EU share the same tariff schedule. Once a good has been imported into one, it may be moved freely into the other 26.

Trans-Pacific Partnership (CPTPP)

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into force in 2018 between Canada, Australia, New Zealand, Mexico, Japan and  Singapore. The participation of Vietnam, Chile, Peru, Malaysia and Brunei came into force between 2019 and 2023. The United Kingdom became a party to the Agreement in 2023, with its participation expected to come into force in the latter part of 2024.

Under the CPTPP, approximately 86% of the tariff lines for all countries collectively become duty free on entry into force. A further 13% of tariff lines become duty free on various schedules ending at various times over the succeeding 15 years. Tariffs will remain for approximately 1% of tariff lines. Each country has its own tariff reduction schedule.

Basic Provisions of a Free Trade Agreement

The essence of a free trade agreement is that it removes tariffs on substantially all goods traded between the participating countries, and makes it easier for companies in one country to provide services in another. However, obtaining duty free access for goods that would otherwise be subject to tariffs requires time and effort, especially for the producer in the exporting country. The producer is usually the person who must ensure that the goods satisfy the Rules of Origin, which are often complex, and maintain documentary evidence to support its conclusions.

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