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  • Writer's pictureILA Canada

What Does Brexit Mean for Canada? A Lot, Unfortunately

– By : Armand de Mestral –

The Ides of March have come and gone. With a hand-delivered letter to Brussels, Prime Minister Theresa May has served notice under article 50 of the Treaty on European Union (TEU) of Britain’s intention to withdraw. “Thank you and goodbye” was the simple reply of Donald Tusk, the president of the European Council who received the historic missive and will now convene a summit of EU leaders on April 29 to adopt guidelines for Brexit negotiations that are expected to last up to two years.

The Dutch elections with their ugly increase in support for an anti-immigrant party were held on the Ides of March. France will vote on April 24 and May 7. The Germans will vote on September 24. To make another Shakespearean analogy: “The sword is drawn and all is on the hazard.” The European Union is at risk. The single market is at risk. The right of free movement of EU citizens is at risk. Democracy itself, as practised over the last 50 years in a number of EU countries, is at risk. To add to the general disquiet, the US Secretary of Commerce has called for the renegotiation of NAFTA and respect for the European Union appears to be very low in the US administration.

What does this all mean for Canada? Unfortunately, a great deal. Potentially, many of the basic tenets of global economic governance on which Canada has relied are under challenge and may be upset.

It goes without saying that Canada–US relations are fundamental to Canada’s economic security. But the relationship with Europe matters very much as well. If the foundations of the European Union are shaken, or even if only the UK-EU relationship is seriously upset, there could be serious consequences for Canada.

Ottawa has just signed the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and it will shortly be in force. CETA is a major achievement for Canada. One of the most ambitious regional trade agreements ever signed between two parties, it lowers tariffs and other non-tariff barriers on a very wide range of Canadian goods. CETA also opens doors that were previously shut to Canadian services in the European Union. Canada has made reciprocal commitments to European goods and services in our markets, which will be to the advantage of Canadian consumers. CETA also contains extensive provisions on the development of common approaches to regulatory harmonization and cooperation, while also containing broader protections of the right of each party to regulate their economies while protecting labour standards, public health, the environment and human rights. Intellectual property protections are also, and sometimes controversially, subject to further protection. The chapter on foreign investment protection contains some of the most extensive guarantees of the right to regulate by rewriting many of the traditional substantive standards of treatment and adding many new procedural guarantees, including the substitution of a standing tribunal for traditional arbitration.

Yet CETA will only come into force on a provisional basis. The opposition of agricultural interests and fears of investor protections in a wider group in Belgium and possibly in other EU countries led to the political decision to treat CETA as a “mixed agreement” requiring the formal ratification of all 28 EU members — a process that will take several years. At least some politicians in Belgium are on record as believing that they can stop the process of long-term entry into force by refusing to ratify CETA. Whether this view is shared by the 27 other members is unknown but it should be a cause for concern in Ottawa.

More pressing still for Canada is the potential fallout from Brexit: the withdrawal of the United Kingdom from the European Union. Apart from its obvious historical and constitutional ties, Canada still has a close economic relationship with the United Kingdom, which is Canada’s largest single export market in the European Union and our second import partner in the European Union after Germany. If the United Kingdom is actually leaving the European Union, both parties have to prepare for the event very carefully in order to preserve these close economic ties. Currently, the government of Prime Minister May appears committed to a so-called “hard” Brexit, which will involve the United Kingdom not just formally quitting the European Union but also abandoning the formal guarantees of free movement of goods, persons, services and capital that comprise the essence of the “internal market.” If Britain no longer enjoys these guarantees to the internal EU market, its position as a source and destination for Canadian goods and services will have to be reconsidered by Canada. Britain outside the internal market may be a less interesting place with which to do business. Fortunately, at this point nothing is certain; many matters are merely the subject of speculation and the UK government is certainly committed to seeking a new and positive relationship with the European Union. But neither Canada nor Britain can ignore this potential change of status.

In preparation for UK withdrawal from the European Union, the Canadian and UK governments must review all existing legal relationships and rebuild those that will no longer exist after Brexit. Many of the treaty relationships that used to exist between Canada and the United Kingdom no longer exist and have been replaced by agreements made by the European Union. If the UK government follows the positions set out in the White Paper on Brexit, issued in February 2017, it will have to redefine its position in vast areas of international trade law. The United Kingdom does not have a customs tariff. This will have to be negotiated, first with the European Union, but also with Canada and the rest of the world at the World Trade Organization (WTO).

What kind of tariff the United Kingdom wants and what the United Kingdom can agree with others like Canada remain to be determined. This negotiation alone is an immense task. The United Kingdom will not inherit the 60 trade agreements concluded with other countries by the European Union — such as CETA with Canada. These too will all have to be negotiated. Doing so takes time, effort and political will and could be very contentious. Will Canada be content to simply recast a new CETA with the United Kingdom or will substantial changes be required by both sides?

The European Union has been responsible for many areas of regulation in areas such as treatment of goods and a large range of services, environmental protection, consumer protection, air, road, water transport, communications and telecommunications, agriculture and so on. The United Kingdom will have to rebuild its international ties involving these building blocks of global governance in its own image, while at the same time maintaining rules that the European Union will recognize as equivalent to ensure access to the EU market, which takes 44 percent of the United Kingdom’s exports. This will be no small achievement. The European Union has been responsible for international relations in many areas such as trade, fisheries, air transport, environmental protection, to name but a few.

The United Kingdom will have to negotiate new agreements with the European Union and other countries such as Canada to replace the EU agreements. In most cases, a cut-and-paste replacement will not be sufficient. Political interests in the United Kingdom, the European Union and other countries will see to that.

Perhaps most troubling of all, the February White Paper announced that the UK would be withdrawing from the treaty that established the European Atomic Energy Community (EURATOM), stating that the EURATOM Treaty “provides the legal framework for civil nuclear power generation and radioactive waste management for members of the Euratom Community, all of whom are EU Member States” and acknowledging that Britain’s “precise relationship with Euratom, and the means by which we cooperate on nuclear matters, will be a matter for the negotiations.”

As a major supplier of uranium to the EURATOM consortium, Canada will only be able to supply the UK if it is in full compliance with international nuclear non-proliferation rules, which up to now have been guaranteed by EURATOM.

Where should Canada and the United Kingdom and the European Union be directing their efforts in the immediate future? The Canada-EU relationship is hopefully set for the immediate future. But the EU-UK relationship is fraught with uncertainty. Now that London has given notice of its intention to withdraw under the TEU article 50, the United Kingdom will be embarking on a difficult and uncertain process, which will consume immense energy for at least two years and quite possibly more, if the other 27 EU members agree to extend the deadline. Until it ceases to be an EU member, the United Kingdom is formally prohibited from negotiating trade treaties with other states. But at some point a degree of flexibility will have to be agreed with the other EU members, or the United Kingdom will emerge from the Brexit process with no other international trade arrangements in place apart from a new agreement with the European Union. In particular, the United Kingdom has to begin discussions with the 160 WTO members in order to establish and bind its customs tariff and bind commitments respecting services.

Ottawa has to review CETA and its schedules of goods and services concessions with the European Union to determine the extent to which it would be suitable to propose that the Canadian and EU schedules can simply be continued with the United Kingdom. For all but agricultural goods this may not be difficult. But agricultural quotas will pose particular problems, because Canada may not wish to enlarge its quotas and the UK agricultural industry may be opposed to the entry of Canadian products. The assessment of service commitments, as well as rules governing subsidies and government procurement, will be harder to make. But by doing all this, Ottawa can prepare the ground for a rapid negotiation that will facilitate the position of exporters and importers in Canada and the United Kingdom. It would be prudent for Canada to undertake the same process with respect to air transport services, where an agreement must be in place to allow commercial air service between the two countries. Both countries have pursued a fairly liberal “open skies” stance and should be able to reach agreement. A double taxation agreement is currently in place but it would be prudent to conduct a thorough review to determine its continued suitability.

Brexit supporters have affirmed, apparently without irony, that once out of the European Union — their major trading partner — they wish “to make the UK the great trading nation that it once was.” The May government has indicated its desire and intention to base its future trade policy largely on a network of bilateral agreements independently of the European Union. An agreement with Canada is clearly one envisaged by the United Kingdom, as are agreements with the United States, Australia, New Zealand, India and China, and tentative contacts have been made with the governments of these countries. The May government is emboldened by the support it has received from US President Donald Trump and his evident preference for bilateral trading arrangements over multilateral agreements.

Are bilateral agreements the new panacea? Will bilateral trade agreements provide the security and stability needed to provide a continued solid foundation for international trade? Arguably not. In the first place, the optimum trade agreements remain those concluded under the aegis of the WTO. No bilateral trade agreement can substitute for the advantages of agreements binding upon 160 WTO members. Furthermore, bilateral trade agreements are subject to the limits set by General Agreement on Tariffs and Trade article XXIV and the procedures under the WTO Transparency Mechanism, which, inter alia, prevent states from concluding bilateral sectoral arrangements. In recent years there has been a movement away from simple bilateral arrangements toward so called mega-regional trade agreements involving many states. Negotiating one-off bilateral agreements is a time-consuming process involving many teams of negotiators, as President Trump and Prime Minister May will discover.

Even the most well-endowed state cannot negotiate more than a few bilaterals at the same time. The Trans-Pacific Partnership (TPP) may be in abeyance after the political decision made by the White House not to ratify it. But a mega-regional agreement is a much more efficient way to deal with a group of trade partners than a bilateral negotiation, and while there are over 600 regional trade agreements in force at the present there has been a movement toward negotiation among larger groups of states. Large-scale trading groups such as the European Union, the Association of Southeast Asian Nations, MERCOSUR, the North American Free Trade Agreement, CETA and the Eurasian Economic Union are the rule in every part of the world today and are unlikely to disappear at the behest of President Trump and Prime Minister May.

One multilateral trading area that will serve the interests of North America and Europe is an Atlantic Free Trade Agreement (AFTA). This idea has been mooted for a considerable number of years. Canada and the European Union have laid the cornerstone. The European Union and the United States have been involved in the negotiation of the Transatlantic Trade and Investment Partnership (TTIP) for a number of years. The EU is currently renegotiating its bilateral agreement with Mexico. The United Kingdom is openly planning for a free trade agreement with the United States. The outlines of an AFTA are clear: it only remains to untangle the complex web of distrust and nationalism currently in vogue to put together the most significant regional free trade agreement in history.

Canada has CETA, the United Kingdom has hopes of a bilateral trade agreement with the United States — why press matters further? The answer should be obvious: the immense common interest of the European Union and the United States to work together. An AFTA linking North America and Europe would be the single most important free trade agreement in history. It must always be remembered that the trade agreements that provide the greatest and most rapid returns are those between neighbours having similar economies. This is precisely the case for North America and Europe. At a time when Asian economies are steadily increasing in strength and sophistication and when they are capable of offering ever more intense competition to the economies of the United States and the European Union, the fact of bringing the European Union and the United States into a single free trade area would guarantee that the AFTA countries would continue to exercise their position of commercial world leadership.

China will soon have a middle class of 500 million people, capable of sustaining the investments necessary to launch any new product or service, and it may be that in the near future such products can only be launched in China, even by Silicon Valley. But if the United States and Europe unite in an AFTA to create a single market of 850 million people, the AFTA parties will be able to maintain the position of economic leadership that they currently hold in the world. AFTA would not only consolidate an extraordinary market for goods and services, but it would also enable the parties to cooperate in the area of regulation and the setting of common standards for goods and services. A well-functioning AFTA would not only be able to set technical standards for the world but would also be able to provide leadership on issues such as labour standards, environmental and public health protection and the maintenance of human rights.

Is AFTA possible? Clearly, yes. The technical legal and economic analysis has already been done. The arguments in favour of further tariff reductions on goods are clear, and the same can be said for further cautious opening of service and government procurement markets. The standards of protection of foreign investments and intellectual property are generally shared. Agricultural trade will continue to create stumbling blocks, as may investor state arbitration and names of origin. The groundwork exists already in CETA and the many negotiating texts of the TTIP. The political difficulties are daunting but not insuperable. We live in an age of increased nationalism and latent protectionism. Many in Europe fear the United States, and the new political leadership in Washington appears to prefer protectionism and bilateralism over multilateralism. But Canada and the European Union have shown that a major new trade agreement is possible. The United Kingdom desperately needs a big new idea to promote their economic security outside but in close association with the European Union.

AFTA is, in fact, in the interests of all the countries of North America and Europe. It will probably not be politically achievable unless governments show to their doubting populations that trade agreements do indeed serve the common interest. Canada and the European Union have just done this. More needs to be done in Europe and the United States to ensure that there is a safety net for workers whose industries are affected by trade agreements as well as technological change. These workers have too long been neglected, and half-hearted efforts at providing “adjustment assistance” will have to both be improved and seen to be improved. But North America and Europe should not shrink from the challenge. In the long run, failure to do so will be far more injurious to the average worker than any possible trade agreement.

Copyright 2017 the Center for International Governance Innovation. This article was first published by the Centre for International Governance Innovation and is reproduced here with permission.

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