After almost half a century as an European Union (“EU”) member, the UK left the EU on January 31, 2020 (“Brexit”). With the UK’s exit, much remains uncertain and yet to be negotiated. Depending on the outcome of these negotiations, Brexit may have a major impact on businesses invested in and reliant upon a predictable and certain Canada-EU trade relationship.

This bulletin highlights the immediate commercial impact of Brexit and what changes can be expected in the coming months, including the possibility of a new trade agreement with Canada.

The Transition Period

The UK’s exit is governed by a withdrawal agreement negotiated between the UK and the EU (the “Withdrawal Agreement”). Part Four governs the transition period during which the UK remains part of the EU’s single market and customs union. This allows the UK to also benefit from EU trade agreements. However, the UK will not be able to vote on or negotiate changes to existing or new EU rules. The transition period expires on December 31, 2020 pursuant to Article 126 of the Withdrawal Agreement (“Transition Period”) following which the UK will trade with the EU based on the World Trade Organization (“WTO”) rules absent a new agreement.

The UK will use the Transition Period to try to avoid WTO tariffs through the settlement of a new trade and investment agreement with the EU, as well as other countries. Prime Minister Johnson has said that the UK wants to negotiate a CETA-like agreement with the EU, which eliminated 98% of tariff lines, increased certain quota limits, and provided for mutual recognition of certain technical assessment bodies in each of Canada and the EU. The UK has also been suggesting that it could accept an agreement similar to the EU’s Partnership Framework with Australia, which includes recognition of product standards but does not address tariffs or quotas.

What the Transition Period Means for Canada

Article 129 of the Withdrawal Agreement states that during the transition period, the UK will continue to be bound by its obligations under the CETA. Canada has agreed to the UK remaining a party to the CETA during the Transition Period even though the UK is no longer a member of the EU.

Canada and the UK likely will try to negotiate a new free trade agreement during the Transition Period. Although no official statements have been made by either country, it seems likely that the two countries will negotiate an agreement based on the CETA.

Expiry of the Transition Period

Article 132 of the Withdrawal Agreement permits the Joint Committee, which consists of a ministerial-level representative of the UK government and a member of the European Commission, to agree to a single extension of this period for up to two years if notice is given prior to July 1, 2020. However, the UK has implemented the European Union (Withdrawal Agreement) Act 2020 that prohibits the UK representative on the Joint Committee from agreeing to such an extension. Unless the UK legislation is amended, the Transition Period will likely expire on December 31, 2020.

What Happens Once the Transition Period Expires

Relationship between Canada and the UK (excluding Northern Ireland):

The CETA applies between Canada and countries of the European Union. Consequently, absent any agreement between Canada, the EU and the UK during the Transition Period allowing the UK to remain in the CETA, the CETA will no longer apply between the UK and Canada on January 1, 2021. Unless a bilateral trade agreement has been negotiated between the two countries, WTO trading rules will apply between Canada and the UK as of this date.

The CETA will continue to apply between Canada and the EU.

Relationship between Canada and Northern Ireland:

Articles 4 and 7 of the Protocol on Ireland/Northern Ireland state that Northern Ireland will be part of the UK customs territory, but will also be part of the EU single market. Although part of the UK customs territory, the Protocol provides that goods considered “at risk” of entering the Republic of Ireland from Northern Ireland will be subject to EU tariffs. Goods imported from Canada (or any other non-EU country) to Northern Ireland will be considered “at risk” unless the good is to be commercially processed in Northern Ireland and fulfills additional criteria that will be negotiated during the transition period. For Canada, goods not deemed “at risk” of entering the EU will be subject to tariff rates under a trade agreement negotiated between the UK and Canada. In the absence of an agreement, the UK’s WTO tariff commitments will apply.

Goods from Canada into Northern Ireland will remain subject to the EU’s technical regulations including those on agrifood and manufactured goods, and the EU VAT and excise rules.

Four years after the end of the transition period, the Northern Ireland Assembly may vote on whether to remain in the EU single market.

Concluding Observations: How to Work Through the Uncertainty

Canadian businesses may have to significantly examine their existing supply chains and investment strategies in and with the UK. This is a period of high uncertainty as Canadian trade to the UK, including Northern Ireland, may no longer be subject to the same rules that currently exist under the CETA. The new rules may result in more restricted market access into the UK for Canadian products, greater limitations on mobility for business persons, lesser protections for investment or access to procurements and generally potentially greater costs in conducting business. All the more reason for businesses to closely follow the negotiations between Canada and the UK and the UK and the EU, be aware of the likely outcomes of negotiations and to understand in detail what is ultimately negotiated.