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10 July 2017

Member States that want to regulate public services may face lawsuits under CETA.

A detailed analysis shows that public services are not adequately protected in the agreement, contrary to claims made by the European Commission

Rikard Allvin Policy Advisor on Trade, Swedish Greens

The content of this article is a summary of the conclusions presented in the study ”In the shadow of TTIP – CETA and potential risks for environment, workers and public services”(1), published by the trade-union think tank Katalys and available in Swedish. A later study by the Swedish authority Kommerskollegium (National Board of Trade) has confirmed many of these conclusions.

The controversial CETA agreement got the green light from the European Parliament earlier this year and ratification is now under way on Member State level. Member States interested in protecting public services would however do well to scrutinise the deal further, as any effort to regulate public services could result in a lawsuit from Canadian investors. A detailed analysis shows that public services are, contrary to claims made by the European Commission, not adequately protected in the agreement. In practice, CETA presents a one way street to the liberalisation of public services, effectively limiting both policy space and efforts to retake failed privatisation into public control.

In international trade, there are two main ways to make commitments about liberalisation of trade in services, using either a positive or a negative list. In a positive list, only those sectors which are actively listed in the agreement are subject to the liberalisation provisions. Thus, all sectors not listed are excluded by default. With a negative list, the opposite is true. All sectors are by default included, and only excluded by specific reservations. The negative commitment approach obviously has a stronger liberalisation effect, as liberalisation is the rule and not the exception (2).

CETA uses a fully negative list, an entirely new thing for the EU. The latest comprehensive EU trade agreement with South Korea uses a positive list. Even though it is, in theory, possible to reach the same level of commitments using either a positive or negative list, this is rarely the case. Trade agreements using a negative list, like NAFTA, tends to result in increased liberalisation compared to agreements (ex. GATS) using a positive list (3).

Locking in privatisation 

What this means is that all provisions in CETA regarding market access, national treatment and most favoured nation (MFN) is applied to all service sectors by default. In order to protect public services, both the EU and specific Member States have included several general and sector specific reservations in the agreement. Some reservations regards existing non-conforming measures (Annex I), and some is intended to reserve policy space for future measures (Annex II). These reservations have to be carefully drafted in order to fulfil its purpose. According to several studies, the EU reservations on health, education and other public services is far from adequate to provide a sufficient protection (4)

This might not seem like a huge problem at first, since several Member States already have public health and education systems without any comprehensive liberalisation and CETA is in no way forcing Member states to privatise these areas. However, a ratchet clause is included in CETA. What this means is that any further voluntary liberalisation by one party is incorporated into the agreement. In practice, this means that if a government decides to privatise public services, this privatisation becomes a part of CETA, making it very hard to reverse it in the future. 

As an example, Sweden has a government monopoly on retail sales of liquor, wine and beer and has made an Annex I reservation (existing measures) in CETA to this end. However, if Sweden were to liberalise trade and remove the monopoly, the reservation becomes null due to the ratchet clause. Sweden could not reintroduce the monopoly without violating commitments made in CETA (Sweden has never violated a liberalisation commitment made in an international agreement). 

This would seem to be problematic enough, but it gets even worse. Way worse. Because none of the reservations made in CETA excludes the central provisions on investment protection (fair and equitable treatment and indirect expropriation). In practice, this means that any effort to renationalise an essential public service could still be hampered by costly litigation by investors with a substantial business activity in Canada, even in the case where an Annex II reservation for future measures has been made. Member States could thus be subject to billion dollar lawsuits despite having made reservations on future policy space for public services in CETA. With the investment protections in CETA vague and open for interpretation, foreign investors are handed a powerful tool to challenge public policy measures, a conclusion recently highlighted by the Swedish Environmental Protection Agency, a government body (5).

When you put the risks CETA poses in context with the barely measurable benefits (0,03 % GDP growth and no employment effects in ambitious scenarios), Member States would be right to subject their ratification procedures to extensive analysis. Its not too late to stop CETA, and there are plenty of reasons why doing so would be a very good idea. 

(1) https://www.katalys.org/publikation/katalys-no-33/

(2) European Parliament Research Service (2015) – ”TTIP and regulation of financial markets – Regulatory autonomy versus fragmentation”, p. 7 http://www.europarl.europa.eu/RegData/etudes/IDAN/2015/559494/EPRS_IDA(2015)559494_EN.pdf

(3) Houde, M. et al (2007) – ”The interaction between investment and services chapters in selected Regional Trade Agreements: Key findings”, OECD Trade Policy Working Paper No.55, 2007 https://www.oecd.org/investment/internationalinvestmentagreements/40471729.pdf

(4) See for example;
Krajewski (2016) - ”Model clauses for the exclusion of public services from trade and investment agreements” http://www.epsu.org/sites/default/files/article/files/Study%20M%20Krajewski_Model%20clauses%20for%20the%20exclusion%20of%20public%20services_2016.pdf
Nettesheim, Martin (2016) - ”Die Auswirkungen von CETA auf den politischen Gestaltungsspielraum von Ländern und Gemeinden  https://stm.baden-wuerttemberg.de/fileadmin/redaktion/dateien/PDF/160524_Nettesheim-CETA-Gutachten.pdf

(5) http://www.kommers.se/Documents/dokumentarkiv/publikationer/2017/Publ-Analys-av-frihandelsavtalet-CETA-Webb.pdf  (page 198, Swedish)

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