When Canadian and European Union officials signed the final draft of the Comprehensive Economic and Trade Agreement (CETA), they provided a potential boost to several industries on both sides of the pond – including the securities industry.
Although CETA must still be approved by the European Council, the European Parliament and individual nation states before becoming effective in 2016, this agreement is the largest and most comprehensive trade agreement Canada has ever signed. CETA goes far beyond reducing tariffs; it covers commercial interactions, services and the flow of money between companies in the signatory nations.
The reasons for striking the trade deal with Europe – Canada’s second-largest export destination and our second-largest source of direct investment flows next to the U.S. – are obvious: Canada will benefit in increased exports and improved access to European capital to expand businesses and create job opportunities in Canada. In fact, the trade deal is expected to add one-half of one percentage point to real economic growth and add 80,000 new jobs in this country, thereby boosting tepid growth in the Canadian economy.
Resources companies will lead the way, building on traditional markets; but Canadian companies in railways and aerospace products, machinery and equipment, medical devices and scientific equipment all have significant European beachheads.
Moreover, CETA will benefit a beleaguered securities industry. Strategic corporate positioning will throw up opportunities to arrange financings for expanded investment and advice on corporate acquisitions for Canadian companies projecting business into Europe and for European companies seeking investment opportunities in Canada.
Direct investment in Canada from Europe has increased steadily over the past 10 years, with the pace of investment accelerating since the global financial crisis. With the signing of CETA, this upward trend in direct investment is anticipated to continue.
To begin with, improved market access will enable Canadian companies to expand export markets and European companies to expand operations in Canada. At the same time, European acquisitions of Canadian businesses valued at less than $1.5 billion will not be subjected to Investment Canada’s “net benefit” test.
European businesses will look to Canadian investment dealers to identify potential acquisitions in the Canadian corporate sector and finance their purchase and expansion. The investment-banking operations of the mid-tier boutiques will find similar opportunities, with mandates to identify and finance smaller-sized business acquisitions. As a matter of fact, several Canadian bank-owned and independent investment dealers have built up their banking operations in London, U.K., to penetrate local markets and compete for business flowing from CETA.
As markets for Canadian products and services expand in Europe, Canadian investment dealers will have opportunities to arrange debt and equity offerings for Canadian companies to finance expansion in plant and equipment.
The large, full-service investment dealers have built up European wealth-management businesses through acquisition and internal expansion. Canadian firms have a solid reputation for good management, a competitive range of sophisticated products and services, as well as strong branding, reflecting the ability to withstand the shock of the financial crisis in 2008 and avoid the post-crisis financial scandals in Europe.
CETA will enable Canadian investment dealers to penetrate Europe’s financial markets more easily, as the trade agreement mandates national treatment in securities regulation (or home jurisdiction regulation) and sets clear guidelines for a robust and well-defined prudential carve-out that protects “reasonable measures” from being interpreted as prudential reasons to avoid frivolous claims.
In the event of a dispute, CETA has the most efficient and innovative state-to-state dispute-settlement mechanism of any free-trade deal that Canada has signed – and the procedure is shorter than the World Trade Organization’s dispute-resolution process.
Economic theory since the time of British economist David Ricardo holds that by eliminating trade barriers, countries can exploit their comparative economic advantage to mutual benefit with their trading partners and achieve faster rates of growth and job creation than otherwise.
Canada’s prosperity throughout its history can largely be traced to buoyant export markets, inflows of direct investment and access to external capital. CETA builds on these traditions, as well as on past trade agreements. This agreement will improve prospects for renewing Canadian economic growth and reinvigorate both small and large securities firms.
Ian Russell is president and CEO of the Investment Industry Association of Canada in Toronto and chairman of the International Council of Securities Associations.
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