World Economy

Belgian region blocks EU-Canada trade deal: All you need to know

Karol Serewis | Gallo Images Poland | Getty Images

After seven years of negotiations, a trade partnership between the European Union and Canada is in danger of never seeing the light of day.

A small Belgian region is currently blocking the so-called Comprehensive Economic and Trade Agreement (CETA) agreement, fearing its impact on the agricultural sector and welfare standards. This is preventing Belgium and the other 27 EU member states from giving a final green light to the deal, which is due to be officially signed by both sides this Thursday.

More broadly, freezing the approval of the trade deal is also questioning the EU's ability to carry out any commercial partnerships, including with the U.S.

What's CETA?

The EU and Canada started negotiating a trade agreement in 2009 and concluded the text in 2014. The accord, which is available here, aims to cut 98 percent of custom duties since day one of its application, and save EU exporters nearly $550 million, according to data from the European Commission.

The European Commission, which is the EU body responsible for negotiating trade deals on behalf of the 28 member states, says CETA is the most modern agreement conducted until now. It includes a new "investment court system", dissipating some public fears that such a deal would favor multinationals over small businesses.

"In fact it's the best (agreement) the EU has ever negotiated," Cecilia Malmstrom, the EU's commissioner for trade, said at the Federal Chamber of Representatives of Belgium last month. She also argued that the deal is "highly effective" from an economic point of view.

Is Belgium really to blame?

"This time the commission decided under pressure, from especially Germany, with the tacit support of other countries, that national parliaments should also decide," Fredrik Erixon, director of the European Center for International Political Economy, told CNBC in an email.

"It was a move by Sigmar Gabriel (Germany's economy minister) in order to appease critics in his own party that wanted the SPD (The Social Democratic Party of Germany) to block CETA … Wallonia (the Belgium region) has just ended up in this fight because Gabriel thought he could solve an internal party problem and that other countries would not have troubles supporting CETA. Now it turns out he was not informed about Wallonian politics," he added.

What are the implications?

Martin Wimmer | E+ | Getty Images

"The main impact is on TTIP (transatlantic trade investment and partnership)," Andre Sapir, a senior fellow at the Brussels-based think tank Bruegel, told CNBC over the phone.

Sapir explained that there are three possible outcomes: CETA goes through with some modifications, meaning it will be fully approved but at a later stage; CETA goes through but without some of the parts that are deemed more sensitive; or "the least probable scenario" that the whole agreement is scrapped.

The first case would be "good news", because the EU would still be able to take CETA as a template in the current trade negotiations with the U.S., and without being forced to make concessions. The other two options would damage the EU's reputation as a trade partner even further and weakening its negotiating power.

TTIP, which began to be negotiated in 2013, is far from reaching initial hopes that a "skeleton" of an agreement would be done before U.S. President Barack Obama leaves office at the end of 2016.

Meanwhile, Chystia Freeland, the Canadian minister for trade, said last week that the EU was "not capable" of signing a trade deal and that her country was "disappointed."

"It seems evident for me and for Canada that the European Union is not now capable of having an international accord even with a country that has values as European as Canada," Freeland said.

What about an EU-UK trade deal?

Several media reports have begun questioning the EU's ability to negotiate and reach a consensus over its future trade relationship with the U.K., following the Brexit vote in June.

"No one is keen to negotiate with and give concessions to a trade partner they can't rely will ratify the final agreement. I would expect it would put the entire EU trade policy into hibernation," Erixon said.

However, Sapir finds such comments on a future EU-U.K. trade deal "exaggerated". The most controversial items in CETA, such as the investor dispute settlement, would not need to feature in such accord, he said.

Justin Trudeau
Jonathan Ernst | Reuters

Justin Trudeau, the Canadian prime minister, would be travelling to Europe this Thursday. It is not yet known if he will be making the trip as the impasse continues.

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