Canada-UK Free Trade: Balancing progressive trade policies and economic benefits

  • Eugene Beaulieu University of Calgary
  • Kamala Dawar
  • Lindsey Garner-Knapp

Abstract

Canada and the United Kingdom (UK) have prospered from a productive commercial relationship. Their two-way merchandise trade totaled more than C$25.3 billion in 2016, making the UK Canada’s fifth-largest merchandise trade partner and making Canada the UK’s eighth biggest export market outside the EU. The UK is the second largest source of FDI to Canada and Canada’s second most significant destination for FDI abroad. Although the UK is only Canada’s eighth largest trading partner, it is Canada’s largest trading partner in Europe and was an important part of the success of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). Brexit has made the future of this relationship uncertain. Various trade and financial institutions, such as Export Development Canada (EDC), the Business Development Bank of Canada (BDC), and the Royal Bank of Canada (RBC) note that Brexit may affect Canadian exports and investments. Brexit could make the UK a less attractive destination for Canadian investment due to uncertainty over the UK’s market access to the EU. Further, Brexit could result in Canadian exporters facing the same tariff structure that was in place before the CETA. This would raise the costs of doing business, particularly for exporters of Canadian services.

Crucial to the future of Canada-UK relations is the possibility of a new Canada-UK Free Trade Agreement (FTA).1 CETA will not apply to Canada-UK trade after the UK leaves the EU. Canadian Prime Minister Justin Trudeau and UK Prime Minister Theresa May have said that both countries are working on a Canada-UK FTA for after Brexit. Brexit should be a “wake-up” call for Canadian policymakers to address increased social inequality and avoid isolationist movements that threaten the economic and social benefits of an open economy. Understanding these dynamics represents proactive steps that can be taken to prevent a future breakdown of a Canada-UK trade agreement.

We examine the provisions and negotiating history of NAFTA-USMCA, CETA, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to identify the demands and limits of both business and civil society. For a Canada-UK FTA to be successful in the long-run and provide a clear model for the future UK trade agenda, policymakers must address the challenges created by FTAs and build an economic environment that are perceived to be more widely beneficial.

One option therefore is to maintain the bilateral market access between Canada and the UK gained with the implementation of CETA. This gives rise to the need to design a trade agreement that

supports both business and social interests. Some believe that the UK and EU will end up with a CETA-like trade deal. Is the “progressive” nature of CETA a good fit for a Canada-UK trade deal as well? Or are there more appropriate approaches to take greater account of public concerns about the social and environmental effects of trade agreements? Does a Canada-UK FTA offer the UK an opportunity to forge a new FTA model that can more directly address the concerns of workers and environmentalists in a post-Brexit context?

This paper examines whether and how a Canada-UK trade agreement can bring an early harvest success story to the UK trade agenda post-Brexit and for Canada to push its progressive trade agenda in this new era of aggressive unilateralism in the US. As Canada’s trade agenda has pivoted toward a focus on trade diversification, an agreement with the UK could meet both the diversification and progressive agendas of recent Canadian trade policy.

This briefing note is set out as follows. The first section examines the recent surge in protectionism, as evinced in the UK and Brexit. It presents an overview of the evidence on the impact of Brexit, including global value chains, and its predicted welfare effects. The second section surveys the progressive development of environment and labour provisions in trade agreements. It seeks to identify the limits of regional rules on these sustainable development rules, in terms of their scope and enforceability. The section discusses how a progressive trade agreement between the UK and Canada would build upon the strengths and mitigate the weaknesses of existing approaches. The briefing paper concludes that there is an opportunity for the UK and Canada to create an innovative free trade agreement based on shared progressive and inclusive values that could simultaneously support citizens who have not benefited from globalization while promoting trade and investment.

Published
2019-12-09
Section
Briefing Papers