Flimsy CETA declaration leaves public services, water policy vulnerable in Canada-EU deal

After a year of large public demonstrations against Canada-EU free trade, which have—refreshingly—given some European politicians cold feet, the Canadian government and European Commission have been scrambling to make CETA more palatable to EU member states before an important October 18 vote on the deal. Their main weapon is a joint declaration, a near-final version of which leaked last week, intended to allay growing concerns about CETA’s negative impacts, particularly on governments’ ability to regulate in the public interest and to protect and expand public services.

To call the declaration disappointing would be a gross understatement. It does little or nothing to address, let alone fix, the public and political concerns being raised about CETA. There has been much incisive commentary on the declaration’s failings in the areas of investment protection and investor–state dispute settlement (ISDS), now rebranded as the Investment Court System. The basic problem there, which the declaration does nothing to address, is that foreign investors will “still be entitled to sue governments and claim compensation before a special arbitration panel, circumventing the jurisdiction and scrutiny of national courts.”

What follows examines the wording of the declaration related to three other key, but so far less-scrutinized, areas of concern: the right to regulate, public services and water. Italicized text is from the declaration itself, with my comments underneath.

The right to regulate

CETA preserves the ability of the European Union and its Member States and Canada to adopt and apply their own laws and regulations that regulate economic activity in the public interest, to achieve legitimate public policy objectives such as the protection and promotion of public health, social services, public education, safety, the environment, public morals, social or consumer protection and the promotion and protection of cultural diversity.

The critical point missing from this statement is that while the parties retain the right to regulate, they must do so in conformity with their CETA obligations and commitments. This fundamental legal principle has been made repeatedly by trade dispute panels. One of the most well-known instances arose in the U.S. loss in the WTO (GATS) gambling case, where the panel ruled that “Members’ regulatory sovereignty is an essential pillar of the progressive liberalization of trade in services, but this sovereignty ends whenever rights of other Members under the GATS are impaired.”

Likewise, the WTO’s Appellate Body has affirmed that trade agreements “discipline the exercise of each Member’s inherent power to regulate by requiring WTO Members to comply with the obligations that they have assumed thereunder.” Under CETA, foreign investors are given rights to challenge regulatory measures that adversely affect their investments. The decision about whether or not a regulation is legitimate is left to a tribunal under CETA’s Investment Court System. The joint declaration does not change this, and in fact implicitly accepts it.

Public Services

The European Union and its Member States and Canada affirm and recognise the right of governments, at all levels, to provide and support the provision of public services including in areas such as public health and education, social services and housing and the collection, purification and distribution of water.

This statement is framed as an illustrative/open list (“areas such as”), but the highlighted sectors are those where both parties have taken Annex II reservations, the strongest allowed by CETA. The declaration is misleading in that it implies all public services are equally protected when in fact CETA contains a patchwork quilt of reservations that provide varying levels of protection for public services. (See the 2014 CCPA report, Making Sense of CETA, for more about this.)

CETA does not prevent governments from regulating the provision of these services in the public interest.

This is true only if these regulations are consistent with CETA and the parties’ obligations and commitments therein.

CETA will not require governments to privatise any service …

CETA does not force governments to privatize services, but the basic purpose of its investment and trade-in-services provisions is to encourage greater liberalization (i.e., foreign competition and therefore commercialization) of services.

… nor prevent governments from expanding the range of services they supply to the public.

If governments expand public services into areas where foreign investors are already established they will be exposed to claims for compensation from affected foreign investors (and to government-to- government dispute settlement). CETA does not allow any reservations against Article 8.12 (Expropriation) or Article 8.10 (Treatment of investors and covered investments). Therefore, even in areas where Canada or the EU has an Annex II reservation (such as for health care or social services) they could still be targeted with investor–state lawsuits from affected foreign investors. Key decisions about whether any financial compensation was appropriate for private commercial interests adversely affected by the expansion of public services, and the amount of any monetary damages, would be made by CETA investment tribunals, not the domestic courts.

CETA will not prevent governments from providing public services previously supplied by private service suppliers or from bringing back under public control services that governments had chosen to privatise.

CETA’s market access rules (Article 8.4.a.i) prohibit governments, at all levels, from delivering services through monopolies or exclusive service supplier arrangements. Yet many public or essential services in both Europe and Canada are typically provided by these means. CETA’s market access provisions prohibit such forms of numerical limitations even when they apply without discriminating between foreign and domestic investors and service suppliers.

Under CETA’s negative list approach, these market access provisions apply to all investment and services except those governments specifically exclude through Annex I or Annex II reservations.

The EU has taken an Annex II reservation for public utilities. This much-criticized reservation is vaguely worded and applies against only one aspect of the market access provisions—the prohibition of monopolies and exclusive service supplier arrangements. It is conceivable, but far from certain, the joint declaration, as part of the legal context of the treaty, might encourage tribunals to take a more expansive view of the EU public utilities reservation.

Canada has not taken a general reservation comparable to the EU’s public utilities reservation. Instead, it takes a sector-by-sector approach to protecting its policy flexibility in the area of public services.

For example, Canada has taken an Annex II reservation against market access for drinking water services, but has fully covered wastewater services and a range of other environmental services. In those areas (such as wastewater services) where Canada has not taken a reservation against market access, Canadian governments at all levels cannot restore public monopolies or exclusive services supplier arrangements once the sector is opened up to competition. Existing public monopolies and exclusive supplier arrangements at the local government level are protected by an Annex I general reservation, but these are subject to standstill and ratchet.

Contrary to what the declaration asserts, in these instances, once any government chooses to privatize a service, they or future governments cannot bring these services back under public control without violating CETA’s market access obligations.

CETA does not mean that contracting a public service to private providers makes it irreversibly part of the commercial sector.

CETA’s services and investment obligations cover concessions such as those contracting public and essential services to private providers. At the end of the concession, a government could return the service to the public sector, provided they had a reservation against CETA’s market access obligation.

But if a government chose to terminate a concession before the end of its term, or it ended because of a disagreement between the private provider and the public authorities, the party would be exposed to the possibility of an investor–state claim. Disputes over whether the concessionaire had adequately fulfilled the terms of the contract could be decided by investment tribunals, rather than through the domestic courts or according to the dispute resolution provisions specified in the concession agreement.

Water

CETA will not oblige Canada or the European Union and its Member States to permit the commercial use of water if they do not wish to do so. CETA fully preserves their ability to decide how to use and protect water sources. Furthermore, CETA will not prevent the reversal of a decision to allow the commercial use of water.

While it is true that CETA does not force a party to permit the commercial use of water, governments that do so must fully comply with CETA’s obligations. The CETA text is crystal clear on this point. CETA Article 1.9 excludes “water in its natural state” from all provisions of the agreement except chapters twenty-two (Trade and Sustainable Development) and twenty-four (Trade and Environment). Furthermore, Article 1.9 affirms that “Nothing in this Agreement obliges a Party to permit the commercial use of water for any purpose, including its withdrawal, extraction or diversion for export in bulk.” But it goes on to state clearly that “Where a Party permits the commercial use of a specific water source, it shall do so in a manner consistent with the Agree­ment.”

In other words, once water leaves its natural state and en­ters into commerce it is covered by CETA. This means that while a government might be able to reverse a decision to allow the commercial use of water, if it did so it would be fully exposed to a CETA challenge from a foreign investor that was negatively affected. The state would then be potentially liable to pay monetary damages set by an investment tribunal beyond the reach of domestic legislatures or courts. In water policy, as in other important areas, CETA forces governments to “pay to regulate.”

Flimsy political cover for CETA

Even CETA supporters acknowledge this declaration is a political statement rather than a legally enforceable document. Others have dismissed it as condescending public relations spin, with the legal weight of a travel brochure.

Certainly, the declaration is a slap in the face to all who sought last-minute changes to CETA, especially to defang investor–state dispute settlement and better protect public services. It provides only the flimsiest political cover for supporters in Europe, including (disappointingly) many social democratic politicians, trying to ram CETA through the European Council of Ministers and European Parliament on an extremely short timetable.

On the brighter side, CETA is now definitely considered a mixed agreement, requiring country-by-country ratification in Europe. Even if it is approved by European ministers next week, signed on October 27 and rushed to a vote in the European Parliament by the end of this year, CETA will still require ratification votes in 38 European parliaments before it can fully come into effect. At that point, we can expect a much more serious look at what CETA really says, and doesn’t say, in areas of member state jurisdiction.


Scott Sinclair is the director of the CCPA’s Trade and Investment Research Project.

One comment

  1. “CETA does not allow any reservations against Article 8.12 (Expropriation) or Article 8.10 (Treatment of investors and covered investments). Therefore, even in areas where Canada or the EU has an Annex II reservation (such as for health care or social services) they could still be targeted with investor–state lawsuits from affected foreign investors”
    I don’t agree. Read:
    https://www.whitehouse.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questions-and-answers

    Tiffany

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