Canada/Europe--a languishing relationship? Canada-E.U. business ties are strong but experts believe more should be done to keep them so.

In name it's just 14 years old, but the European Union (E.U.) has a 50-year history that has firmly established its importance to Canada and the rest of the world. Over time, the E.U. has emerged as a dynamic and growing force in world trade; for Canada, its importance continues to grow.

For business, it just makes sense: as a single entity, the E.U. has the world's largest economy, with a GDP of US$12,427,413 million. For Canada, the business relationship accounts for $57.3 billion or 7.5% of the total two-year trade, surpassing Japan ($21.4 billion) and China ($20 billion). A total of 5.2% of Canada's goods go to Europe and it's the source for 10.1% of our imports. Seventeen per cent of Canadian services exports are E.U.-bound, and 16% of service imports originate there. The total bilateral economic relationship amounts to almost $100 billion.

"Despite the relatively small size of its economy, Canada holds a steady place among the E.U.'s top 10 trading partners, holding ninth place in 2005 with 1.8% of the E.U.'s external trade," says Aida Viveiros, director of international trade and development, Canadian Manufacturers & Exporters (CME), Canada's largest trade and industry association. "The E.U. is also the second largest investor in Canada (after the U.S.), while Canada is the fourth largest investor in the E.U. (after the U.S., Switzerland and Japan). Two-way investment now accounts for over three times the amount of bilateral trade in goods and services, and is regularly increasing."

Investment trends

A number of agreements have helped nurture the Canada-E.U. business, social and political relationship. These include the 1976 Framework Agreement for Commercial and Economic Cooperation, the Transatlantic Declaration on Canada-E.U. Relations of 1990, the 1995 Canada-European Union Agreement on Scientific and Technological Cooperation and the Joint Political Declaration and Action Plan of 1996. And twice a year, the jurisdictions engage in the Canada-E.U. Summit, a forum for discussion of shared issues.

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According to Export Development Canada's Economics Report for Spring 2006, while global growth is expected to decelerate over the next two years, trade to Europe is expected to remain strong for Canada at about 3% growth, a slight drop from the 5.3% increase in 2005.

But trade is one thing, investment another. And the trend of foreign direct investment (FDI) that began in the 1990s continues to be strong as companies in Europe and North America rely less on selling to each other's market, and more on selling in each other's market. Western Europe is the world's largest outside investor with 61.3 % of investment flows, followed by the U.S. at 20% and Japan at 5%.

FDI from the E.U. to Canada increased from $35 billion in 1992 to $102 billion in 2002, totalling almost 14% of all E.U. inflows in 2002. Canadian FDI in Europe (overwhelmingly the E.U.) grew from $23 billion in 1992 to $120 billion in 2005. Over 30% of total Canadian FDI in 2002 went to the E.U.

Sales in each other's market by wholly-owned affiliates are more than four times the value of exports. While Canada's exports to the E.U. are not large, sales by Canadian affiliates in the E.U. in 2002 totalled $77 billion and, outside of banking, Canadian affiliates currently employ well over 200,000 people in the E.U.

A relationship ignored?

Yet E.U. investment in Canada declined to $91 billion in 2004, reflecting a lack of long-term commitment by E.U. firms operating in Canada, according to the Conference Board of Canada, a not-for-profit Canadian business organization that examines business trends.

For CMEs Viveiros, it means Canadian business must be cautiously optimistic in approaching business deals with the E.U.

"The bottom line is the E.U. is one of Canada's top 10 markets and the opportunities cannot be underestimated, but Canadian business needs to find the best partners in the E.U. as this is a highly competitive and advanced economy to do business in," says Viveiros. "Generally, the business culture in the E.U. (is) easier. Most business people in Europe speak English or French, and legal regulations in the E.U. are similar to North America. Courts in the E.U. uphold signed contracts (and) abide by international patents and intellectual property rights. The E.U. will become increasingly important for Canada in the future, as the region is the largest of the world's market and the world's second largest economic powerhouse."

But the potential for sound two-way economic pat-nerships is being threatened by existing regulatory barriers and diminished attention to the relationship, says the Conference Board.

"Despite more than 50 years of close political ties, the Canada-E.U. economic relationship is drifting and underdeveloped," says Glen Hodgson, the Conference Board of Canada's vice-president and chief economist. "If a full free trade agreement that opens markets on both sides of the Atlantic is too ambitious, Canada and the E.U. should at least aggressively reduce tariff and non-tariff barriers to trade and investment."

In a report entitled Lost over the Atlantic? The Canada-E.U. Trade and Investment Relationship, the board cites a lack of Canadian connection to European business' global supply chains. Current thinking is based on "the idea of having to be in Europe to do business with Europeans," says Hodgson.

Viveiros says that Canada must turn around a current $6.5 billion trade deficit with the E.U.

Barriers to break

Yet despite the deficit, positive prospects remain: according to CME, major initiatives in the next few years will focus on opportunities in Central and Eastern Europe in agribusiness, machinery, transport, advanced manufacturing, new technologies, professional services, and privatization projects. And the European Union's new member states, like the Czech Republic, Hungary, Poland, Slovakia and Slovenia, have strong capacity in areas like automotive production, IT and financial services (all prime joint venture/FDI targets) as well as potential for infrastructure projects in roads, airports and power projects.

Analysts agree that promising results came out of a Canada-European Union Summit in Ottawa in 2004, which created a framework for a new Canada-E.U. Trade and Investment Enhancement Agreement (or TIEA, an agreement designed to move the players beyond traditional market access issues and includes a range of other items, including trade and investment facilitation, mutual recognition of professional qualifications, e-commerce, sustainable development and science and technology). Those talks also engendered a commitment to reach a successful conclusion to the World Trade Organization's (WTO) Doha Development Agenda, a series of negotiations aimed at lowering trade barriers worldwide; called the Doha Round, talks began in 2001 with an aim of reaching conclusions by 2007.

But while it appears that barrier reduction is a hot topic, there was also a decision to forestall TIEA talks while awaiting the outcome of Doha. The third round of TIEA negotiations was held in Ottawa in February 2006; in May, negotiators agreed to pause discussion until after the outcome of the Doha Round.

The TIEA was first conceived in 2002, and "since the TIEA negotiations began, Canada has not anticipated concluding the TIEA before knowing the results of the WTO talks as the latter is of central importance to Canada in reducing E.U. barriers," says Viveiros.

This doesn't sit well with organizations like the Conference Board; Hodgson says that time may be running out.

"Europeans are becoming ambivalent to Canada," he says. "We have to portray ourselves as being part of North America--we have to have almost that bilateral relationship between 'continent and continent,'" and that perceived economic strength of 'Canada + US' will translate into better E.U. deals down the road.

Export Development Canada deputy chief economist Peter Hall agrees that a lack of movement on non-tariff and tariff barriers to trade continue to impede the relationship.

"The Trade and Investment Enhancement Agreement (TIEA) is a positive step forward in addressing non-tariff barriers such as regulations and standards and mobility of personnel," says Hall. "However, there is a perceived lack of political will in moving the initiative from a framework agreement into action. Despite the long history of economic and political cooperation, Canada and the European Union's trade and investment relationship has languished over the last decade with little progress towards deepening economic integration."

Adds Hodgson: "Canada needs to get a lot more serious about engaging in Free Trade talks. You've got to invest in Europe."

John Cooper is a Whitby, Ont.-based freelance writer.