Brexit means Brexit

This week, Theresa May, the Prime Minister of the United Kingdom of Great Britain and Northern Ireland (UK) and Leader of the Conservative Party, gave a speech providing the greatest clarity yet on the British Government's objectives and strategy for leaving the European Union (EU). She made clear that:

  • The UK will leave the European Single Market, but will strive for EU-wide tariff-free trade;
  • 'Global Britain' will be outward looking and seek to negotiate free trade agreements with the rest of the world;
  • A transitional or interim arrangement with the EU will be viewed favourably in order to soften the impact of any proposed changes on business; and
  • Both Houses of Parliament will have a vote on any EU agreement reached.

The implications of the UK's exit from the EU are profound, particularly after Ms. May confirmed that the UK was not seeking:

'partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out, [nor adopting] a model already enjoyed by other countries.'

In other words, the UK is not looking to adopt a 'Swiss model', a 'Norwegian model', nor any other existing template; rather, the UK plans to negotiate in its own interests and to secure a bespoke and favourable deal … or not.

It is widely believed that any such deal will take years to negotiate with even Greenland's 1985 EU exit taking three years to settle, where far fewer economic and political complexities arose in comparison to that of the UK's intended exit. Pending the UK's withdrawal from the EU, it is widely anticipated that several economic and political challenges will emerge, including the following:

  • The UK economy will face the unenviable forces of inflation (due to a weakened currency) and diminished growth, as predicted by the Bank of England and the Office for Budget Responsibility;
  • Scotland (pro-EU) is likely to seek a second referendum on independence, which may result in an improvement on its devolved powers or a separate application to join the EU, albeit the latter outcome will be emphatically resisted by Spain;
  • Northern Ireland (pro-EU) may become the subject of a larger political battle with Seinn Féin pushing for a post-Brexit political union (or joint custody arrangement) with Ireland, the early seeds of which may have been sown in January's decision by the Deputy First Minister (of Sinn Féin) to resign, thereby suspending the devolved administration of Northern Ireland (due to the terms of a power-sharing arrangement with the Democratic Unionist Party);
  • Wales (pro-Brexit) is likely to experience considerable regret and political turmoil as it begins to suffer a loss of structural funding investment from the EU, which the UK will struggle to match; and
  • London (pro-EU) may suffer a net loss to its financial services sector as some banking operations are relocated to Paris, Frankfurt or Dublin, such as their euro-clearance trading platforms.

For Canadians, the British decision to leave the EU is somewhat akin to Canada leaving the North American Free Trade Agreement (NAFTA) – whereas 78% of Canadian exports are sent to the US and 77% of its imports come from the US, 44% of British exports are sent to other EU countries with 53% of the UK's imports coming from the EU. Nevertheless, it is fair to say that the EU, as a trading partner of the UK, is merely very important, rather than vital (contrasting US trade with Canada); moreover, EU trade has been falling as a percentage of British exports over time.

Canadian Trade with Britain

Short Term

Significant business opportunities may be missed if Canadian companies take a passive view of the UK market until the Article 50 Brexit negotiations are concluded. First and foremost, it is important to note that large parts of CETA will apply to the UK immediately upon the European Parliament giving its consent to CETA (expected in 2017). The Financial Times has estimated that 98% of the CETA provisions ought to operate upon this approval, although commentators differ on the point.

Accordingly, Canadian companies ought to be examining opportunities under CETA today. Those opportunities include:

  • lowering supply chain costs or increasing revenues as a result of tariff reductions;
  • shifting personnel to the UK under more liberal labour movement provisions;
  • understanding new procurement and tendering opportunities with British government and industry.

With respect to the movement of personnel, CETA will introduce special rules permitting so-called Temporary Entry for personnel. Temporary Entries may be used for intra-corporate transferees that will facilitate the activities of professionals and investors, such as managers, lawyers, engineers and accountants. Furthermore, both Canada and the EU undertake to allow companies to post their intra-corporate transferees to the other's jurisdiction for periods of up to three (3) years regardless of their sector of activity. In addition, the agreement guarantees for the first time that intra-corporate transferees may be accompanied by their spouses and families when temporarily assigned to subsidiaries abroad.

Medium and Longer Term

In the medium term, the benefits of CETA may no longer be available for trade between Canada and the UK, unless a new free trade agreement is negotiated between them or, alternatively, the EU and Canada agree to some form of 'equivalency' treatment (for the UK) under CETA. Canada has invested substantially in CETA and the EU is too important a market for Canada to jeopardize with concurrent British negotiations that might serve only to irritate the EU.

That said, the UK is the most important European trading partner for Canada and, in our view, will not be disregarded by an "outward looking" Canada, once CETA is fully ratified and in force. The UK currently ranks as Canada's third-largest export destination and Canada's sixth-largest source of imports. Similarly, Canada has been ranked by the UK as one of the top countries with which to conclude a trade deal.

If a new free trade agreement between the two countries is necessary, we would anticipate CETA being used as the foundation stone on which such negotiations are built. Under CETA, the UK has already agreed to open up its services market, limit restrictions on investment, and increase access to bidding on procurement contracts.

Conclusion

We therefore recommend that Canadian businesses with international activities, particularly those with operations in, exports to, or imports from the UK, familiarize themselves with CETA and the timing of its phased implementation. Understanding the opportunities available to Canadian businesses, whether in the services industry, procurement contracts, the movement of personnel or the recognition of professional qualifications, may be crucial to entrenching competitive advantage in the years to come.