What would a Canada-style trade deal with the UK look like?
Despite Boris Johnson’s enthusiasm, this is not a recipe for frictionless trade.
By Barbara Moens and Eleni Courea
1/31/20, 4:53 PM CET
Updated 2/3/20, 4:53 AM CET
Boris Johnson has long made clear that he wants to strike a post-Brexit deal similar to the one the EU has with Canada.
In a speech in London on Monday, the prime minister is expected to map out his demands for the upcoming negotiations with Brussels and confirm he is seeking to mirror the Canada free-trade agreement, according to the Times.
POLITICO guides you through the main questions surrounding such a deal.
Why didn’t anyone think of this before?
They did. On the European side, EU Brexit chief negotiator Michel Barnier offered Canada as a scenario in the now-famous “Barnier slides” of 2017. When all the options that transgressed Britain's red lines (e.g. free movement) were put aside, Canada was pretty much the only model left.
Johnson has stressed several times that he’s looking for a "super Canada-plus" agreement with the EU rather than a closer economic partnership. “When they say Canada, they don’t mean literally Canada. They mean an equivalent balance of access and obligation,” Sam Lowe, a senior research fellow at the Centre for European Reform, said.
What would this mean for trade in goods?
The access that comes with the EU’s deal with Canada – which is in the same ballpark as its deals with Japan and South Korea – allows for almost tariff-free trade in goods. More precisely, CETA removes duties on 98 percent of products that the EU trades with Canada. Customs duties for almost all goods will be removed within seven years. But although it slashes tariffs, the export of food is still restricted by quotas and phytosanitary controls. Also, this kind of free-trade deal would create a whole new set of costs, paperwork and border checks for companies wishing to trade under such an agreement. This is not "frictionless" trade.
Both the EU and the U.K. sides have already said that they want a future trade deal with “zero tariffs, zero quota.” However, the EU has added “zero dumping” to this line, stressing that it wants a level playing field. If Britain wants a sweeping deal, the EU wants some kind of regulatory convergence.
What would this mean for trade in services?
In services, CETA is one of the most far-reaching agreements the EU has concluded and takes into account sectors ranging from telecoms to tourism. It also has a special chapter on financial services that creates a financial services committee to supervise and regulate the sector.
“Largely what this financial chapter does in the agreements with Canada or Japan is set up a framework through which regulators can have dialogue so as to avoid creating unnecessary new barriers in the future,” said Lowe. “So just to keep them talking. You can imagine something like that being in there, but it doesn't do much at all when it comes to market access. We're not talking about creating market access or keeping the source of access we have now.”
For example, the EU-Canada deal stops way short of allowing the so-called passporting that U.K. financial firms are keen to retain to enable them to operate throughout the single market having only registered in one EU member country.
“A free-trade agreement, such as the EU-Canada deal, is going to push up a lot of challenges for the U.K.” said David Henig, a former British government trade official and director of the European Centre for International Political Economy. “It doesn’t do a lot for services compared with the rules of the World Trade Organization.”
Given how economically important and politically sensitive the financial services sector in London is, that might change in a deal with the U.K.
When asked about the Canada model, a spokesperson for TheCityUK, a financial services lobby group, said this negotiation is a different one. “What is unique about the future relationship discussion between the U.K. and the EU is that it starts with a shared rule book already in place. EU regulations in financial services have been written with the U.K. around the table and often holding the pen, since it is the largest financial center in Europe,” he said.
The U.K. government wants to strike a comprehensive agreement on services too, however, given that they are a major part of the British economy. “We've been clear that we are looking for services to be included and I believe the Political Declaration also includes that,” Johnson’s spokesman said on Friday. EU trade chief Phil Hogan already suggested that financial services access might be one of the trade-offs at the end of the negotiations, for example for fishing rights.
Is such a deal possible in less than a year?
Johnson said he does not want an extension of negotiations beyond December 2020. That raises eyebrows with trade experts.
“It’s very difficult to negotiate even a Canada-style agreement in less than 10 months,” Henig said. “It took several years to complete the trade deal with Canada. And the start of these negotiations isn’t going very well. The EU and the U.K. are not speaking the same language, which makes it extra difficult.”
On the other hand, there is political will. While the EU has stressed the risks of the brutal timeframe, both sides want to avoid a catastrophic cliff edge of tariffs and trade barriers from January 2021. A lot will depend on the degree of regulatory alignment the U.K. is ready to accept as a price for its access to the EU market. One of the chief fears of the EU is that Britain could emerge as a light-regulation competitor to the EU after Brexit.
Didn’t the EU-Canada agreement take forever to ratify?
Yes. The agreement was signed in 2016 and provisionally entered into force in 2017 but is still not ratified by parliaments in all EU countries. “Don’t underestimate the difficulty of ratification,” Barnier has warned, referring to the EU-Canada trade deal almost scotched by lawmakers in the assembly in Wallonia, the French-speaking part of Belgium.
The legal architecture of the future deal with the U.K. is not clear yet. Depending on how ambitious the deal ends up being, it may touch on certain sectors, such as transport or the environment, where the EU needs to involve some 40 national parliaments in the ratification process. In briefings for EU diplomats, the European Commission said it was not yet sure whether the Brexit deal would be such a “mixed” agreement, as was the case with Canada.
Will the EU accept this?
The key sticking point is that there is no “off-the-shelf” version of the Canada deal available. The EU has made it clear that it expects the U.K. to sign up to a level playing field in areas including workers’ rights and environmental protections, so as to avoid the U.K. undercutting the EU. The EU-Canada trade deal has far less ambitious provisions in these sectors, and its dispute settlement mechanism to enforce these provisions is far from the “robust” policing tools that the EU wants to establish in its U.K. deal to avoid “competitive undercutting or free-riding."
“We’re bigger and closer than Canada, and we do a hell of a lot more trade [with the EU],” said Anand Menon, director of think tank U.K. in a Changing Europe. “As far as the EU are concerned we’re far more of a potential competitive threat for them.”
Lowe concurs that the issue is that the U.K. is “big and near” to the EU. “The difficulty is that the EU is putting preconditions in place. This is where we end up talking about level playing field and access to fishing waters. That’s what most of the negotiation is about.”