A 'hard Brexit' creates uncertainty for Canada on what's next for trade

As the United Kingdom triggers divorce negotiations with the European Union, Canadians are watching closely to see if this split can be amicable.

If it's adversarial, and the Brexit terms are harsh, businesses may need to bail quickly or risk getting burned.

"This is a question all of our trading partners are asking themselves. And it's an unfortunate effect of them choosing to leave us," said the EU's trade commissioner, Cecilia Malmstrom, in an interview with CBC News last week.

• 'We are ready': Canada-Europe trade deal set to kick in, mostly, by July 1

Canada is on the cusp of consummating its new Comprehensive and Economic Trade Agreement (CETA) this summer — one of 38 trade agreements the European Union has with countries now left wondering what happens next.

After British Prime Minister Theresa May triggers Article 50 today, it starts a two-year countdown toward a date when the terms of this sparkling new CETA no longer apply to Canada's highest-value European trading partner.

Duty-free treatment and other gains will not simply carry on. Businesses that have expanded across the Atlantic, or were considering growing to capitalize on CETA, could be forgiven for not keeping calm.

Conservatives in the U.K. — and some of their ideological cousins in Canada, too — suggested this would all be mitigated if Canada swiftly negotiated a bilateral free trade deal with the British, or shared its negotiating expertise, even.

• Canada asked to both help and negotiate with U.K. amid 1st Commonwealth trade talks

"Premature," pronounced the office of Canada's International Trade Minister François-Philippe Champagne.

"It's not possible to negotiate an exit and a new free trade agreement at the same time," agreed Malmstrom. "It's just not feasible human resource-wise, and also we need to know the terms of [Brexit] before we can negotiate a free trade agreement."

"The U.K. is allowed to have any conversations they want," she said. But until Brexit is official two years from now and the EU no longer has legal authority over U.K. trade relations, "they can't formally negotiate with Canada or any other country."

'Co-operative' vs. 'adversarial' Brexit?

This first things first approach sets up the possibility of a troubling gap for those doing business in the U.K.

What happens when old (favourable) rules cease, if new ones haven't been negotiated yet? Would tariffs slap back on? Would hard-fought markets close again?

Britain is a member of the World Trade Organization, but the terms of its independent trade haven't been worked out.

An isolationist U.K. is a worst-case scenario.- David Kleimann

May has chosen the "hard" Brexit approach — leaving the EU politically while also leaving its common market and customs union.

David Kleimann, a trade law researcher with the European University Institute, says the key to how disruptive Brexit will be is whether negotiations result in a "co-operative" hard Brexit, or an "adversarial" hard Brexit. 

The EU wants to negotiate the terms of exit separately from any future trade arrangements. The U.K. may have no choice but to agree, particularly if the EU offers an additional five to seven years under current trade arrangements until new agreements can be negotiated.

"One can imagine there would be transition periods before everyone is settled," Malmstrom told CBC. "Nobody wants to create more damage than needed, but they have chosen to leave."

A transition period buys time for partners like Canada, too.

But simply "grandfathering" CETA isn't really an option, Kleimann said. That's an idea "generated in haste and panic."

CETA can't be applied to a single country. But some language may be a good starting point to speed up future talks.

"They will need five years, minimum, to sort things out," Kleimann said.

The degree to which there's free trade after Brexit "depends much on the spirit of negotiations," he said. The U.K. will have a massive incentive to land a deal so it doesn't lose foreign investment, he said.

And Brexit extends beyond trade. While the EU can't afford to make it too easy for any member country to leave, the divorcing parties need to keep working together on foreign relations.

"There's an incentive for the EU to push them away in the short term, and guide them back into their yard in the mid-term," he said. "An isolationist U.K. is a worst-case scenario for both."

'Challenging' for supply chains 

Brian Kingston, the vice-president of policy and international issues for the Business Council of Canada, agrees an acrimonious split would be mutually damaging.

Do shipping containers need to reroute to a continental port? Will sales offices move out of London?

Studies suggest the U.K. economy — Canada's third-largest export market — appears poised for a significant decline, particularly in its financial services sector. "This is very concerning," he said. "It creates a lot of questions."

"There are many Canadian companies that use the U.K. essentially as a platform into the European market," he said.

"Because of the level of integration that Europe has gone through over the years, supply chains criss-cross the Continent," he said. "Trying to pull that apart will be extremely challenging."

Uncertainty is a big barrier to investment. But this uncertainty may last a while.

"These negotiations always take longer than originally anticipated, and given the complexity of this negotiation, I find it hard to believe that you could make all of these decisions and close all the various chapters within two years."

Reports over the weekend suggested the EU may make its negotiating position public so member countries, as well as other trading partners, know what's on the table.

"I think it will be clearer in a couple of months," Malmstrom said last week. "Just be a little bit patient."