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Island kingdom backs away from ties binding it to European shores

Britain’s potential departure could mean trouble for Canada-EU trade pact
By Jeff Buckstein
July 15 2016 issue

Britain’s referendum to leave the European Union sent political and financial shock waves through the continent and its ripple effects are expected to be felt in Canada. Above, British Prime Minister David Cameron addressed the media in Brussels in late June following the Brexit vote. [Geert Vanden Wijngaert / The Canadian Press]

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Editor’s note: In a new development at press time, the European Union had abandoned plans to fast-track the Comprehensive Economic and Trade Agreement with Canada approval process. The fast-track plan had involved skirting the national parliaments of the individual EU members to get deal approval. Amid protests, that push had been shelved and the agreement will be put before each national parliament for vetting.

British voters shocked the international community and sent stock markets into a downward spiral by voting 52-48 per cent to leave the European Union in the Brexit referendum. Now, it seems just about everybody is uncertain about what will happen next, or even if the United Kingdom will actually leave the EU on the basis of this advisory, non-legally binding referendum.

From a Canadian standpoint, the main concern is how Brexit might impact the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU that has yet to be approved by either side. 

CETA would not come into effect until all 28 EU countries have ratified it, explained Cyndee Todgham Cherniak, founder of LexSage Professional Corporation, an international trade law and sales tax firm in Toronto.

In the wake of Brexit, she noted, there is a question about whether one or two other countries might, like Britain, also be thinking about exiting the EU, and how they might approach CETA.

“Would they decide not to ratify? Or would leaders of countries think, ‘we might use this as an opportunity to renegotiate a few things?’ ” Todgham Cherniak asked.

Dangers lurk as well to Canadian prospects for remaining on the European radar during the Brexit negotiation period. 

“The other possibility is Britain and the EU countries will be preoccupied with the exit strategy, that they don’t have time for the Canada-EU CETA. It’s just not important enough in comparison to Brexit. And that’s what’s more realistic is it will be ‘back-burnered’ and eventually not be important at all,” asked Todgham Cherniak.

If Britain were to separate from the EU, it would be easy to cut and paste what had already been negotiated between Canada and the EU into a Canada-U.K. free trade agreement. Moreover it would be in the best interests of a post-Brexit U.K. to enter into a free-trade agreement with Canada, because as a result of having left the EU, it would need to impose duties on all goods coming in from their former EU partners at a most favoured nation rate, Todgham Cherniak noted.

“I would think that most people within the U.K. would want to have goods — food, for example, come in and arrive on their tables as cheaply as possible. They don’t want the food costs to double due to the fact there are more inspections and customs duties being imposed. 

“I don’t think they’ve realized how beneficial being part of the EU was from a whole variety of perspectives,” she added.

“So it is a great opportunity for Canada to say ‘let’s enter into a Canada-U.K. free trade agreement based on what was negotiated in the Canada-EU CETA’ and get that implemented so goods that you want to have come in duty-free that you used to get from the continent, you can get from Canada on a duty-free basis,” said Todgham Cherniak.

The big question facing the U.K. once negotiations begin is not so much what would be lost from exiting membership in the EU, but what would be put in its place, and so the emphasis in negotiations would be what the new relationship would look like, said Bernardine Adkins, a partner with the law firm Gowling WLG International Limited, based in Brussels.

“That’s very much an open question. There are…a whole series of different possibilities from best-case scenario a quasi-European Economic Area (EEA) type agreement, which is the arrangement that Norway, Iceland and Liechtenstein currently have with the European Community — to worst-case scenario, nothing at all,” she elaborated.

If the U.K. were to enter into an EEA-type agreement, the U.K. would basically stay within the single market where it would still benefit from the free movement of goods, services, capital and people. But it would also have to reciprocate, plus contribute financially to the EU budget, said Adkins.

The types of issues that need to be negotiated in any future post-Brexit relationship between the EU and U.K. would be things like “what are the trading relationship agreements? What are the freedom of movement agreements? What are the intellectual property agreements?” added Peter Lukasiewicz, chief executive officer of Gowling WLG (Canada) LLP in Toronto.

Lukasiewicz elaborated on the intellectual property implications, noting that the EU had, and was continuing to develop, a uniform intellectual property regime that applied to all member countries. If the U.K. were to pull out of the EU, companies would have to think about taking a different IP approach to Europe.

“For example, with respect to the registration of a trademark, or the registration of a patent, instead of getting protection EU-wide, they will now have to deal with protection in the EU and protection in the U.K., which means developing a strategy for both. Which means more work, but also a more thoughtful approach to the strategy to ensure the best protection,” he said. 

There are a whole host of possible agreements that the parties would have to negotiate.

“And that’s the challenge, because some members of the EU have publicly said that the U.K. cannot expect to get all of the benefits of the EU without taking on or adopting some of the fundamental principles of the EU. And that’s where the negotiating rub is, if I can call it that,” Lukasiewicz added.

“All this uncertainty going forward right now is negative for financial markets, and definitely negative for the economic outlook,” said Jennifer Lee, director and senior economist with BMO Capital Markets in Toronto.

That negative outlook may cause some international firms with branch offices in the U.K. to reconsider their business strategy and locate elsewhere. 

“Now of course, we have the world of Brexit. And understanding what it means is quite substantial in terms of operational considerations, trade considerations, supply chain considerations, finance considerations — mobility in terms of where your staff is located,” said Lian Zerafa, lead partner of KPMG Canada’s national financial services consulting in Toronto. 

The process to trigger a British exit from the EU is governed by Article 50 of the Lisbon Treaty, which requires the representative of any member state wishing to withdraw to serve notice on the European Council of its intention to do so, explained Adkins.

Once this notice has been provided, there is a two-year window in which to negotiate the withdrawal, after which unless there has been an agreement or extension of the period of negotiation, the U.K.’s membership in the EU would fail, said Adkins.

“As the life cycle of Brexit starts moving toward Article 50…you have to look and see what your business is going to look like in two years forward. If that’s sustainable in your current operating model, you need to run operational scenarios to understand what the worst and best cases look like, so you can plan for it,” Zerafa said.

Zerafa recommends prioritizing what needs to be done over the short, medium and long term through what he calls a kind of “2-2-2 approach” that involves determining what needs to be done over the next two weeks, two months and two years. For example, firms right now need to establish a Brexit committee to undertake planning details to cover items like a contingency analysis and determining cash positions.

Zerafa doesn’t expect the financial regulatory apparatus to fundamentally change. The U.K. is fully a part of the international framework, including Basel, and it is a country on the vanguard of reforms affecting the financial services industry, he said.

Markets in wake of Brexit

Despite massive political and economic uncertainty over how, or even if Brexit will eventually take place, its spectre has cast a long shadow over the financial markets. In the days following the Brexit vote, stock markets around the world tanked, and the pound sunk to a 31-year low against the U.S. dollar.

Stock markets, particularly in North America, have since rebounded sharply.

But there are expectations the Bank of England, whose rate is currently 0.5 per cent, will start cutting rates again, said Jennifer Lee, director and senior economist with BMO Capital Markets in Toronto.

She predicted there would be an easing of monetary conditions around the world, which might be good news for consumer spending and for borrowers.

Lee expects the U.S. dollar to continue to be a safe haven, with perhaps other strong currencies, such as the Swiss franc or the yen also benefiting.

“The Canadian dollar will probably be weaker just because [it’s] the flip side of the American dollar. Plus if you’re expecting weaker growth around the world, you’re going to see some dampening impact on commodity prices, which means oil prices are going to slip, and that’s where the Canadian dollar is going to get hit as well,” said Lee.

If need be, the world’s central banks should be able to provide stimulus, even though rates are at historic lows — in some countries having even slipped below zero — and have been for many years since the financial crisis and recession in 2007-08, said Lee.

“Six years ago, whoever thought that we would be talking about negative rates in Europe, for example? So anything is possible. As we are constantly reminded of by these central banks, there are lots of tools at their disposal that they can use, and I’m sure that they can figure out some way to provide the stimulus.

“I think this whole ‘rates low for longer’ theme is going to continue on for at least the next couple of years,” she added.

— Jeff Buckstein

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