Canada-Honduras Free Trade Agreement

Final Strategic Environmental Assessment Report

October 2013

Table of Content

• Introduction
• The Environmental Assessment Process
• Updated Economic Analysis
  • Table 1a: Canada - Honduras Top 5 Imports
  • Table 1b: Canada - Honduras Top 5 Exports
• Update to Initial Environmental Assessment Findings
  • Expected Economic Impact
    • Merchandise Trade
      • Industrial products
      • Agricultural products
    • Trade in Services
    • Investment and Foreign Subsidiaries
    • Other areas
  • Likely Environmental Impact and Significance of Expected Economic Changes
    • Merchandise trade
      • Higher value-added paper products
      • Structural steel and furniture
      • Auto parts and plastics
    • Trade in Services:
    • Investment
    • Other areas:
  • Enhancement and Mitigation Options
  • Environmental Provisions in the Canada-Honduras FTA and Parallel Agreement on Environmental Cooperation
  • Conclusion
• Statistical Appendix
  • Table 2: Canada’s Merchandise Trade with Honduras (C$ Millions)
  • Table 3: Top Canadian Merchandise Exports to Honduras (C$ Millions)
  • Table 4: Top Canadian Merchandise Imports from Honduras (C$ Millions )
  • Table 5: Canadian Trade in Services with Honduras (C$ millions)

Introduction

On November 21, 2001, Canada launched free trade negotiations with El Salvador, Guatemala, Honduras and Nicaragua with the intent of establishing the Canada–Central America Four (Canada–CA-4) Free Trade Agreement (FTA). Negotiations between Canada and the CA4 countries reached an impasse in 2010, after almost nine years of negotiations, due to significant differences between the parties. As Canada and Honduras were closest in terms of concluding an agreement, it was decided to pursue bilateral negotiations, which were successfully concluded in August 2011. Parallel agreements on labour and environmental cooperation were also negotiated. The side agreements are intended to help ensure that trade liberalisation is not achieved at the expense of good labour or environmental practices. No date of entry into force for the Canada-Honduras FTA has yet been set. Once in force, some of the FTA’s provisions will be phased in over a period of up to 15 years.

The Environmental Assessment Process

FTA negotiations are subject to the 2001 Framework for Conducting Environmental Assessments of Trade Negotiations. This process focuses on the likely economic effects of trade negotiations, as well as their likely environmental impacts in Canada. Three phases are involved: the initial environmental assessment (EA), the draft EA, and the final EA. The middle phase, known as the draft EA, is not undertaken if the FTA is not expected to result in significant environmental impacts in Canada. Accordingly, in the case of the Canada-Honduras FTA negotiations, a draft EA was not carried out.

An initial EA of the Canada–CA4 FTA negotiations was completed in 2003 and helped inform the negotiations. The Canada-Honduras negotiations were an extension of the broader Canada-CA4 negotiations. The findings of the initial EA of the Canada-CA4 negotiations were considered to be accurate and valid as they applied to Honduras. Therefore an initial EA of the Canada-Honduras FTA negotiations was not conducted. An interdepartmental committee was established to draft and review the initial CA4 EA. The committee was comprised of representatives from the Canadian Environmental Assessment Agency and Environment Canada, as well as officials from other federal government departments and agencies participating in the negotiations. Officials from the Department of Foreign Affairs and International Trade Canada (DFAIT) who were responsible for negotiating the FTA were directly involved in the drafting of the initial EA. Throughout the drafting, review, and consultations phases of the development of the initial EA, environmental issues were raised, discussed, and considered. As a result, Canadian negotiators received input throughout the process. This approach facilitated informed policy development and decision making throughout the negotiating process. Consultations have been and will continue to be an integral part of the EA process.

The Initial EA report is available online at: http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/honduras/initialea-CA4-eeinitiale.aspx

This report updates the findings of the initial EA phase and documents how the environment was considered in the negotiating process. The latest data available at the time of drafting (2012) has been used as a baseline for the economic analysis.

Updated Economic Analysis

While Canada’s trading relationship with Honduras is modest in absolute terms, it has been growing. Canada’s two-way merchandise trade with Honduras grew 46.0% from $176.2 million in 2007 to $257.2 million in 2012. Canadian merchandise exports averaged $50.6 million over the 2007-2012 period and imports averaged $161.9 million.

Canada’s main export items to Honduras include fertilizers, machinery, miscellaneous chemicals, tanning and dyes, and pharmaceutical products. Canada’s top imports from Honduras include apparel, fruits and nuts, coffee, electrical and electronic machinery and fish and seafood. The following table outlines Canada’s 2012 top 5 imports and exports vis-a-vis Honduras.

In 2010, Canada exported $15 million worth of services to Honduras, and imported $8 million. While trade in services is not subject to a tariff charge per se, non-tariff or regulatory barriers still exist and their removal or reduction is one of the objectives of the FTA, once in force. Some of these restrictions involve citizenship or residency requirements, Honduran ownership or management controls or rights to access requirements with local business (e.g. use of existing telecommunications infrastructure).

With respect to investment, in March 1998, Canada signed a Memorandum of Understanding on Trade and Investment with Central America to enhance our economic relations with the region. The FTA includes substantive investment rules and, once implemented, will provide more certainty and predictability as well as better protection for Canadian investors. Figures for Canadian direct investment in Honduras, as well as Honduran direct investments in Canada are unavailable, as they are classified as confidential by Statistics Canada.

The FTA will eliminate tariffs on key Canadian exports and otherwise secure preferential access for Canadian businesses to the Honduran market. It also includes substantive provisions in the areas of services and investment. The agreement will help level the playing field for Canadian businesses vis-à-vis their competitors from the United States (U.S.) (the U.S. concluded an FTA with Honduras in 2006). It is therefore expected that the Canada-Honduras FTA will enhance the trade and economic ties between the two countries. In addition, the agreement will build upon Canada’s significant development role in Honduras and strengthen the country’s economy through a more predictable and stable business climate and healthier environment. This, in part, contributes to Canada’s over-arching policy objectives in the Americas including to encourage civil stability and democratic principles.

Update to Initial Environmental Assessment Findings

Expected Economic Impact

Three distinct areas of trade between Canada and Honduras could be affected once the FTA is in force: merchandise trade, investment, and trade in services.

Merchandise Trade

The majority of Canada’s merchandise exports to Honduras are in industrial goods. Close to 70% of Canada’s exports to Honduras consists of fertilizer, machinery, miscellaneous chemical products, electrical and electronic machinery, tanning, dye, paint and pharmaceutical products. The bulk (over 90%) of Canada’s imports from Honduras consists of knit apparel, fruits and nuts, coffee tea and spices, electrical and electronic machinery, fish and seafood and woven apparel.

With regard to trade in goods, a way to predict where there might be a change in economic activity as a result of a free trade agreement is to examine the current tariffs between the trading partners. The bulk of the top import and export items currently traded between Canada and Honduras are subject to low tariffs (less than 5%) . However, Canada does maintain high tariffs on apparel imports. Apparel is an important component of Honduran exports to Canada. While the bulk of Canada’s primary import and export items already flowing between Canada and Honduras are subject to low tariffs, there is the potential for an increase in apparel exports to Canada from Honduras once the FTA is in force. However, given that current trade volumes are moderate, any increase in trade would have a low environmental impact.

Industrial products

The gradual elimination of tariff barriers between Canada and Honduras may result in new trade opportunities. However, any increase in trade between Canada and Honduras would likely be modest and would result in moderate increases in Canadian or Honduran manufacturing output. This analysis did not identify any Honduran industrial import products that would engender a change in economic activity that might have domestic environmental implications for Canada. Similarly, this analysis did not identify any Canadian industrial products whose production level would change in amounts that would have a significant impact on the Canadian environment.

Agricultural products:

Canada imports a number of agricultural products from Honduras, including spices, coffee and teas, edible fruit and fish and seafood. Canada does not currently export significant amounts of agricultural products to Honduras. Once the FTA is implemented, and the remaining tariff barriers are reduced or removed, the potential for greater agricultural trade does exist. Nevertheless, due to the relatively small size of the Honduran market, any change to Canadian production patterns would likely to be modest and the corresponding impact on Canadian resources would be commensurate.

Non-tariff barriers, such as non-automatic import licensing, quantitative restrictions or other duties and charges, also impede trade between countries. Unfortunately, such limitations are not easily identifiable. The effects of a particular barrier may differ from country to country and product to product, making assessment difficult to quantify.

Trade in Services:

The three primary service sectors of export interest to Canada in Honduras are professional, telecommunications and financial services. Additional opportunities may exist in terms of environmental service exports to Honduras, particularly in water and waste management. Canada’s objective in the FTA is to remove existing barriers to its trade in services to Honduras. It is, however, unlikely that Honduran exports of services to Canada will significantly increase in the short- to medium-term as a result of the FTA.

Investment and Foreign Subsidiaries:

As previously noted, statistics on the level of Canadian direct investment in Honduras are not publically available. However, the presence of Canadian subsidiaries in Honduras is modest. Two sectors of particular interest for Canadian investors are apparel manufacturing and extractive industries. Investment from Honduras into Canada is negligible.

The FTA establishes a clearly defined set of rules for investments and procedures for dispute resolution. These rules are designed to provide investors with a more predictable and secure environment for their investments. However, it is expected that there will be little or no change to Honduran investments in Canada as a result of the FTA and thus any use of these rules and procedures by Honduran investors in Canada is expected to be minimal.

Other areas

The FTA contains provisions on competition policy, sanitary and phytosanitary measures, technical barriers to trade, institutional arrangements and dispute settlement to provide a transparent and predictable set of principles

As Canada will not be taking on any commitments that would require changes to its domestic policy, it is expected that provisions in the FTA in these areas will not have a significant economic impact in Canada.

The FTA provides enhanced market access and transparency in government procurement. While trade is likely to increase in specific product and service areas of interest to Canadian suppliers, the overall increase in trade is expected to be modest.

Likely Environmental Impact and Significance of Expected Economic Changes

The economic effects of the FTA have been identified in the previous section. In this section, the likely environmental impacts of such changes and their significance are approximated and assessed as to their significance. Significance is determined by such factors as frequency, duration, scope and magnitude of the impact. Affected sectors and the environmental significance of those sectors are assessed, among other criteria.

For the purpose of strategic EAs, “environment” refers to the components of the Earth, including land, water, air, including all layers of the atmosphere, all organic and inorganic matter and living organisms and the interacting natural systems that include components of the foregoing. This section is intended to highlight the anticipated incremental environmental impacts in Canada only as a result of the Canada-Honduras FTA.

As noted above, Canada’s total bilateral merchandise trade with Honduras is modest, in comparison to Canada’s overall trade. Therefore, even if trade flows were to increase substantially as a result of the FTA (in relative terms), the absolute volume and resulting economic impact would still likely be low. As a result, any environmental impacts are expected to be on a similar scale. For example, fertilizers are one of Canada’s main exports to Honduras. While the FTA may result in greater exports of fertilizer to Honduras, the overall increase of such exports would be modest, managed within existing production chains and would have a low potential environmental impact.

Merchandise Trade:

Canadian exports to Honduras of the following products are generally low to negligible. However, there exists the possibility that, as a result of the FTA, new trade opportunities in these sectors will materialize.

Higher value-added paper products:

The relative economic impact on Canada’s forest sector is anticipated to be minimal and any environmental impact resulting from new trade would be minimized through Canada’s forest management practices, which are based not on product demand, but on provincial and territorial laws and regulations that ensure sustainable forest management practices. For example, the allowable annual cut is based on an assessment of how much can be harvested on a sustainable basis. Harvest limits will not be increased to accommodate additional exports resulting from further trade liberalization.

Structural steel and furniture:

The manufacturing of steel has environmental consequences through the burning of coal and the use of heavy metals throughout the smelting process. The steel industry responded to environmental concerns and is now more proactive in addressing the environmental problems associated with its production processes. The volume and type of products that constitute our current exports to Honduras, and which could be subject to increases in exports, are such that incremental environmental impacts are considered unlikely.

Auto parts and plastics:

Due to the wide range of products within both of these industry categorizations, the environmental implications associated with the manufacturing of various products will differ. Virtually all Canadian production of cars/vehicles and parts is for the North American market. A reduction of tariffs under the FTA with Honduras is unlikely to stimulate substantial new vehicle assembly in Canada for export to that market. The Honduran market is primarily supplied by U.S. and Asian manufacturers. Any increase in auto and auto parts exports to Honduras would not require the construction of new production facilities and would likely be small enough that it would have minimal impact on the environment. For higher value-added plastic products, environmental implications would also be minimal as volumes are such that no additional production facilities would be built specifically for these markets.

No significant environmental implications, either positive or negative, can be identified as directly arising from the potential increase in the liberalized merchandise trade that could be generated by the FTA. Therefore, no further assessment of the significance of potential environmental impacts is considered necessary.

Trade in Services:

The expected economic change within Canada with respect to trade in services is not significant and therefore, no consequential environmental impact is expected. Any potential growth in services exports from Honduras to Canada would only take place in the medium- to long-term, and would remain small in proportion to the size of these industries in Canada.

Any environmental impacts in Canada from an increased presence in the Honduran services market are highly unlikely. No further assessment of potential impacts is necessary.

Investment:

Honduran investment in Canada is almost non-existent and no significant increase in investment flows from Honduras into Canada is expected to result from the FTA. Any potential increase would be small and would have limited impact on any Canadian industries where the increase could take place. Therefore, no environmental impact would result from the investment provisions of the FTA and no further assessment of the significance of the potential environmental impacts is necessary.

Other areas:

Canada did not take on any commitments in the areas of competition policy, sanitary and phytosanitary measures, technical barriers to trade, institutional arrangements and dispute settlement that would require changes to its domestic policy. It is expected that these provisions in the FTA will therefore not have any environmental impact on Canada.

The enhanced market access provisions in the area of government procurement are expected to generate some additional opportunities for Canadian companies. These are likely to be modest in proportionate terms, and since Canada did not take on any procedural or regulatory commitments that are different from current federal government practice, it is expected that commitments on government procurement with Honduras will not have any environmental impacts.

Enhancement and Mitigation Options

Previous sections of this analysis have assessed likely and significant environmental impacts on Canada of the FTA. This stage of the framework is intended to identify the policy options or actions to mitigate negative impacts and to enhance positive impacts.

While increased trade between Canada and Honduras would lead to increased transportation activity, it is expected that the majority of these impacts would be offset by a variety of mitigating factors. For example, increased efficiencies as a result of the FTA as well as Canada’s strong regulatory system would help offset any negative impacts of increased transportation activity.

With the potential for increased imports from Honduras, Canada must maintain its vigilance regarding the prevention of invasive alien species and diseases that could threaten sectors that closely interact with the environment, such as the agricultural sector. For more information on Canada’s invasive alien species strategy and partnership program, please refer to the following website (http://www.ec.gc.ca/eee-ias/Default.asp?lang=En&n=C4637128-1).

In instances when an FTA results in lower tariffs for agricultural goods, there may be concern that increased trade could lead to increased exposure to agricultural chemicals. Health Canada and the Canadian Food Inspection Agency (CFIA) share responsibility for regulating the food industry to ensure that Canada's food supply is safe. Health Canada registers and regulates agricultural chemicals, including pest control products, veterinary drugs, and food additives. The CFIA is responsible for the monitoring, surveillance, and compliance of chemical hazards including chemical residues in foods and their adherence to the respective legislative framework. The primary responsibility for food safety rests with the food industry. For more information on CFIA’s surveillance program for chemical/microbiological residues in food, please refer to the following website (http://inspection.gc.ca/food/chemical-residues-microbiology/eng/1331960432334/1331962151945)

Finally, an increase in global economic integration and investment may have an impact on Canada’s domestic Federal Sustainable Development Strategy (FSDS) goals and targets. The FSDS is the government’s overall sustainable development strategy. The environmental assessment of this trade negotiation takes into account FSDS goals and targets. For more information on the FSDS, please refer to the following website (http://www.ec.gc.ca/dd-sd/default.asp?lang=En&n=F93CD795-1) .

Environmental Provisions in the Canada-Honduras FTA and Parallel Agreement on Environmental Cooperation

With a view to ensuring that trade liberalization does not lead to environmental degradation, the Canada-Honduras FTA contains several trade-related environmental provisions, and a principles-based Environment Chapter. There is also a separate, parallel Agreement on Environmental Cooperation. Provisions in both these agreements are consistent with those found in other Canadian FTAs and parallel agreements on the environment.

The Canada-Honduras FTA includes several key trade-related environmental provisions that:

• recognize the need to implement the FTA in a manner consistent with environmental protection and to promote sustainable development;
• set out the relationship between certain multilateral environment agreements and the FTA; and,
• allow the Parties to take certain necessary measures to protect human, animal or plant life or health which may be inconsistent with the trade or investment obligations.

The Environment Chapter within the FTA includes environmental objectives and summarizes the obligations set out in the parallel Environment Agreement on Environmental Cooperation.

The parallel Agreement on Environmental Cooperation sets out mutual environmental obligations that address, inter alia:

• the establishment of high levels of environmental protection;
• the commitment not to waive or derogate from domestic environmental laws to encourage trade or investment;
• compliance with and the enforcement of environmental laws;
• accountability, transparency and public participation on environmental matters; and
• the assessment of the environmental impacts of proposed projects.

The parallel Agreement on Environmental Cooperation also includes a bilateral consultations mechanism, as well as a framework to undertake potential environmental cooperation activities to support the overall objectives of the parallel Agreement.

Conclusion

Canada’s bilateral merchandise trade flows with Honduras are modest. In addition, trade between Canada and Honduras primarily consists of 4 to 6 primary products that are traded relatively free of barriers. This report concludes that, while there may be some increase in the trade of higher value-added paper products and structural steel, significant environmental impacts on Canada are not expected as these increased exports could be met within existing production runs with marginal increases in inputs used and with marginal changes to the environmental impact of those existing operating production facilities.

An investment chapter is likely to facilitate Canadian investment in Honduras by creating certainty and reducing the risk for investors, but it is unlikely to significantly increase Honduran investment in Canada. Similarly, trade in services is currently modest and is not likely to increase in a significant manner, in absolute terms, as a result of the FTA. Therefore, it is unlikely that there will be any significant environmental impact in Canada as a result of the chapters on services or investment.

Provisions in other areas, such as competition policy, technical barriers to trade, sanitary and phytosanitary measures, institutional arrangements, government procurement and dispute settlement are not expected to have a significant, direct impact on economic activity in Canada. The inclusion of such chapters is therefore unlikely to have a significant environmental impact on Canada.

Undertaking EAs is an effective way to address potential problems and to protect the environment by improving overall policy coherence at the national level and by assisting decision-makers in understanding environmental implications of trade policy. This EA concludes that there are no likely and significant environmental impacts on Canada that can be anticipated resulting from the implementation of the Canada-Honduras FTA.

Feedback on the final Environmental Assessment of the Canada-Honduras FTA can be submitted by email, mail, or fax to:

Any comments received will be circulated to the lead negotiator and the Government of Canada’s EA secretariat so as to inform future EAs of trade negotiations and other related policy development and decision-making processes.

Statistical Appendix