The Government of Canada announced the Canada-United Kingdom Trade Continuity Agreement (“Canada-UK TCA”) on November 21, 2020. This interim transitional deal comes just before the end of the UK’s transition period with the European Union (“EU”) on December 31, 2020, after which date the UK will no longer be bound by the Canada-EU Comprehensive Economic and Trade Agreement (“CETA”).
The Canada-UK TCA is a significant deal for Canada. The UK is Canada’s fifth largest trading partner, with two-way merchandise trade with the UK totalling $29 billion in 2019. It was also Canada’s largest merchandise export market in Europe in 2019, third largest market worldwide, and a key source of foreign direct investment, and science and technology partnerships. The Canada-UK TCA aims to ensure continuity for the Canada-UK trade on preferential terms once the two countries no longer enjoy the trade benefits extended by CETA.
Even so, much remains uncertain about whether Canadian trade to the UK will be subject to the same rules as those under CETA and how any interim or final bilateral trade agreement between the two countries will impact businesses with trade exposure to the UK.
The Current Transition Period ending December 31, 2020
The UK’s exit (“Brexit”) is governed by a withdrawal agreement negotiated between the UK and the EU, pursuant to which the UK is in a transition period with the EU until December 31, 2020. For the duration of the 11-month transition period, the UK is largely being treated as an EU member state, in that, it can benefit from EU trade agreements with third countries such as Canada. As such, until December 31, 2020, trade between Canada and the UK is governed by the terms of the CETA. To learn about the other immediate commercial impacts of Brexit and what the transition period means for Canada, see our bulletin here.
Post – December 31, 2020: No Agreement
When the transition period ends on December 31, 2020, the UK will no longer be bound by the EU’s trade agreements. This means that, unless a new agreement is ratified, trade between Canada and the UK will lose the preferential terms of the CETA. Rather, such trade would be based on World Trade Organization rules, including most-favoured nation tariffs on goods. This could result in more expensive prices and more restrictions on trade between the two countries than currently exist under CETA. For example, Canadian food products such as maple syrup, biscuits and salmon could face taxes of up to 8% when entering the UK under the UK Global Tariff.
Post – December 31, 2020: the Canada-UK TCA
Alternatively, if the Canada-UK TCA is ratified before the transition period ends, impact on trade between Canada and the UK will be less drastic. Such trade will be governed by this interim transitional agreement, which, as discussed below, replicates many of the terms in the CETA.
While the legal text of the agreement is still under review and has yet to be published, the Government of Canada indicated that the Canada-UK TCA rollovers a majority of the trade arrangements in CETA to the Canada-UK trade relationship, including, but not limited to:
• eliminating 98 per cent of tariffs on Canadian products exported to the UK, such as seafood (including lobsters, salmon, shrimps, prawns and scallops exports to the UK valued at $131 million last year to Canadian companies), wheat and cereal, among other items; and
• inclusion of provisions regarding labour, the environment, regulatory cooperation, and dispute settlement.
At this time, the Canadian Government has not indicated that any new market access will be provided to Canada’s supply-managed products system – such as Canada’s dairy or cheese market - in the interim agreement.
Although not yet announced, early indications are that the interim agreement may contain new provisions that are specific to Canada-UK trade, including, but not limited to:
• changes to the rules of origin that define which goods qualify as goods produced domestically and therefore eligible for preferential tariffs;
• changes to the tariff-rate quota limits for certain products.
There is still much that that the two countries plan to negotiate beyond what is contained in the Canada-UK TCA. For example, a final, comprehensive, bilateral agreement will likely address market access and government obligations in the areas of digital trade, the environment and women’s economic empowerment. Further, certain measures that are already laid out in the CETA may need to be renegotiated for a UK-only deal, including, but not limited to sanitary regulations, procurement rules and investment regulations. Other issues that might be raised in negotiating a final agreement may include liberalizing trade in services not covered by CETA, such as financial services, and issues pertaining to the countries’ immigrations policies such as the temporary entry of businesspeople for business purposes.
What does the Canada-UK TCA mean for Canada?
Although only an interim agreement, the Canada-UK TCA’s must be ratified, a process which takes at minimum 21 days. Further, implementing legislation is also required and will be reviewed and passed by Parliament in order to receive royal assent. It will be a tight deadline for Canada to meet to implement legislation and ratify the Canada-UK TCA prior to January 1, 2021 when the UK’s inclusion in the CETA expires.
Negotiations are expected to continue between the two countries over the next year until the terms of a more comprehensive and permanent Canada-UK bilateral agreement are finalized. This final agreement will be subject to the same ratification process.
Canadian businesses should closely review their supply chains and investment strategies with the UK and determine how the Canada-UK TCA will affect their endeavors. Given the looming Brexit deadline, greater clarity by Canada and the UK of the details of the rollover agreement and timelines to ratification will be helpful to prepare for this new free trade agreement.