In this Q & A-style interview¸ Daniel Benatuil, EDC’s Economist for Europe, shares his insight about the pros and cons of the new CETA agreement. This article, the second in a 3-part series, builds on CETA: A New Era in Trade, which outlines the opportunities, and is followed by two companies’ experiences in part 3, CETA: Be Export-Ready for Business in the EU.
Below, you will learn the answers to:
With uncertainty in the U.S. and other markets, and the emerging threat of protectionism, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) will create opportunities for growth. We asked Daniel Benatuil, EDC’s Economist for Europe, to talk about the pros and cons of the new CETA agreement.
What is the overall economic outlook for Canada once CETA is in force?
The economic outlook for Canada is improving. It’s important to remember that Canada is a trading nation, which is why agreements such as CETA are important. Given that the Canadian consumer is burdened with high debt, the potential for a boost to economic growth coming from domestic consumption is expected to be somewhat limited. So Canada’s economy is in dire need of the export-investment nexus to take the baton from consumers as the engines of growth going forward. We need to keep focusing on diversifying our export markets and we’ve had some success in that. A few years ago, close to 84% of our goods and services went to the U.S. It’s still very high at 72%, but the trend is moving in the right direction. And a larger portion of Canadians understand the importance of trade to our economic growth. We need that geographic and industrial diversification. And that means innovation and productivity. Services is an area where Canada has some key sectors we can really grow.
What are your projections for economic growth in the EU?
It’s also good to note that many Eastern European members of the EU—such as Poland, Czech Republic, Romania and Hungary — are growing at 3 to 4% There’s probably an underexposure of Canadian companies in those markets. While opportunities aren’t the same across the EU, even at modest growth you’re still looking at a huge market and one that Canadian exporters will be able to tap into thanks to CETA.
What are your projections for growth by industry?
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What opportunities do you see for Canadian companies in the EU?
What challenges will CETA pose for Canadian companies? For example, diversification is a medium- to long-term strategy, if companies are not already in EU. And CETA also doesn’t help exporters overcome language and cultural challenges and compliance.
In terms of challenges, if Canadian companies do make the commitment to go into the EU, it’ll take time and hard work in developing the strategy. It’s a long-term play. But the other side is that if you’re bidding on a government contract in Canada, you’ll soon see German, Dutch and U.K. companies bidding on them, too. There will also be more goods and services coming in from the EU. If you’re a small producer of auto parts, there’s potential for increased competition from European suppliers. It’s two-way and this is inherent in all free-trade agreements.
When you look at GDP growth, there are direct and second-order effects. While free trade supports a growing export base, the lift to GDP growth from higher export trade is often at least partly offset by higher import demand, because sectors use imported products in their production process to varying degrees. That is why it is important to account for second-order effects. We know that businesses that export become more productive and achieve higher scale than those that operate mostly in the domestic market. When businesses grow faster, they also create more jobs and generate higher incomes that can support increased domestic consumption and investments. If you have a growing international sector, they will feel the pressure to become more competitive in order to go, grow and succeed abroad. It means faster growth. It’s not immediate, but it makes those companies more experienced and adaptable. In short, they become better traders.