BREXIT: Friend or Foe?

By Samukele Ncube (Intern, Dawson Strategic)

April 10, 2017

Britain’s decision to exit the European Union (EU), dubbed “BREXIT”, sent shockwaves throughout the international community, following the referendum of 23 June 2016. As no other country has ever attempted to leave the EU throughout the bloc’s 24 years of existence, there is no precedent of how Britain, the EU or the rest of the world will fare in the face of this change. With Prime Minister, Theresa May having triggered Article 50 on the 29th of March 2017, the clock has started ticking for Britain to formally leave the EU within two years of negotiations. May’s decision to trigger Article 50 sooner rather than later has created an atmosphere of uncertainty in global markets, particularly casting a shadow over Canada’s future relations with both Britain and the EU.

Present Relations

Currently, the United Kingdom (UK) is Canada’s most important trading partner in Europe, ranking third amongst Canada’s top global trading partners behind the United States and China. The two nations share a strong history, with mutually beneficial economic and commercial relations. In 2010, bilateral trade between Canada and the UK totaled over CDN$27.1 billion, with the UK being Canada’s second largest export market over the past five years.

On the other hand, Canada has recently strengthened its ties with the EU. After seven years of negotiations, Canada and the European Union finalized the Comprehensive Economic and Trade Agreement (CETA), on the 30th of October 2016. This agreement is expected to boost trade and investment flows between Canada and the EU, and is predicted to come into force by the 1st of July 2017. This agreement presents a great opportunity as it will grant Canada preferential access to the 28 member states, representing over 500 million Europeans in terms of exports, movement of goods, and job creation among other benefits. This mutually advantageous trade agreement will eliminate 98% of trade barriers between Canada and the EU and is projected to boost the EU economy by €12bn a year and Canada’s by CA$12. You can read more about CETA here – http://dawsonstrat.com/2016/11/04/ceta-matters/.

In light of this unprecedented development, there is a variety of implications that will emerge as a result of BREXIT.

The Good

Given the UK’s vulnerable position after having opted to leave the EU, the country’s leaders have indicated that they would be open to discussing bilateral free-trade agreements with various countries across the world. Howard Drake, Britain’s High Commissioner, has stated that the UK “will be looking to make trade deals with other countries around the world, including Canada.” The Commonwealth of Nations – the organization comprised of 53 former British territories and colonies – is also expected to play a greater role in shaping UK’s post-BREXIT foreign policy. While Canada will have access to the EU market through CETA, by negotiating a bilateral FTA with the UK, Canada would continue to benefit from free trade with its highest value European partner, the UK.

The bad

However, PM Theresa May has chosen the “hard” Brexit approach, which involves not only leaving the EU politically, but also leaving its common market and customs union. This means that once the UK is out of the EU, they will have to renegotiate trade agreements with countries across the world, including Canada. While this presents a platform for Canada and the UK to come to an agreement that will be in the best interests for both countries, it will take a long time to finalize a Canada-UK FTA. In addition, although the UK is free to have conversations with various countries over post-BREXIT trade agreements, until the split is finalized two years from now, the UK may not have any formal negotiations with anyone, including Canada. Until then, the EU has legal authority over all of the UK’s trade relations.

 The Ugly

This raises the question as to where trade relations between Canada and the UK would stand post-BREXIT in the absence of a Canada-UK FTA. Would trade barriers reappear in the interim? Although the UK is a member of the World Trade Organization (WTO), its independent terms of trade have not been determined as yet. Canada could also experience a decline in trade with the UK due to BREXIT as studies suggest that the UK’s economy is expected to experience significant decline, especially within its financial services sector.

The Verdict

Although there is room for trade to grow between Canada and the UK, BREXIT has created an air of uncertainty around the future of trade between the two countries. There is the possibility of negotiating a bilateral FTA, however, this process will be lengthy and the UK would need to conclude its exit from the EU before the commencement of any formal negotiations. Despite the uncertainty, Canada remains committed to enforcing CETA as soon as possible.

 

Sources:

Amanda Devlin, David Hughes and Jon Lockett. “Theresa May has triggered the Brexit process – but what is Article 50?” The Sun. April 27, 2017. Accessed April 28, 2017. https://www.thesun.co.uk/news/1900423/article-50-brexit-theresa-may-eu/.

Farrell, Sean. “EU and Canada sign Ceta free trade deal.” The Guardian. October 30, 2016. Accessed April 28, 2017. https://www.theguardian.com/business/2016/oct/30/eu-canada-sign-ceta-free-trade-deal-trudeau-juncker.

Government of Canada.” Commercial and Economic Relations. November 17, 2011. Accessed April 28, 2017. http://www.canadainternational.gc.ca/united_kingdom-royaume_uni/bilateral_relations_bilaterales/commercial-commerciales.aspx?lang=eng.

McGregor, Janyce. “‘It’s becoming real now’: Canada-EU trade changes to arrive before summer.” CBCnews. March 27, 2017. Accessed April 28, 2017. http://www.cbc.ca/news/politics/ceta-implementation-malmstrom-canada-1.4039484.

McGregor, Janyce. “Here comes ‘hard Brexit’: What can Canadians expect on trade rules?” CBCnews. March 29, 2017. Accessed April 28, 2017. http://www.cbc.ca/news/politics/brexit-canada-impact-article-50-1.4043926.

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