Brexit: what has changed and what is the impact on Canada?
By Christian Sivière, International Trade Consultant and Trainor, Solimpex.
Brexit has taken place on January 1st 2021, with the United Kingdom leaving the European Union after 47 years. The results of the 23 June 2016 referendum initiated by then Prime Minister David Cameron had surprised everyone, with the Leave side obtaining 51.9% of the vote. England and Wales voted to Leave, but Scotland and Northern Ireland voted to Remain in the EU.
Teresa May, who replaced Cameron, couldn’t find an exit agreement with the EU and was replaced by Boris Johnson in July 2019. An exit agreement was eventually found at the eleventh hour on 24 December 2020, with an effectiveness date of 1 January 2021, giving no time to prepare for the post-Brexit world. With this, the UK has left the European Single Market, the EU Customs Union, the Common Agricultural Policy and the Common Fishery Policy, and is no longer bound by EU Laws, Regulations, Directives nor by the European Court of Justice. The terms of the new relationship are covered by the EU-UK Trade and Cooperation Agreement (TCA), which although it was a very last-minute deal, prevented the worse-case scenario of a ‘’no-deal’’ exit. Such a scenario would have introduced tariffs on products and substantially increased costs, as UK exports to the EU represent 45% of total UK exports and UK imports from the EU account for half of UK imports.
The EU-UK TCA is essentially a Free Trade Agreement but a rather narrow one, as it only applies to goods and not to services. Since a border between the UK and the EU was re-introduced, goods must now go through Customs and other regulatory clearances, requiring additional paperwork, creating delays and extra costs. For example, many UK exports to the EU now require an Export Health Certificates. The cost for such a certificate is reported to be GBP180. Exporters must ensure that their goods meet Product-Specific Rules of Origin and provide an Origin Certification to Customs. The Regional Value Content required for most products is 50%.
Under the TCA, Northern Ireland has a special status. The UK is effectively split in two, with Northern Ireland remaining in the EU single market while England, Scotland and Wales are out. The purpose of this arrangement was to avoid introducing a hard border between Northern Ireland (part of the UK) and the Republic of Ireland (a full EU member) to respect the Good Friday Agreement of April 1998, which ended the violence between Unionists and Separatists. Under its Northern Ireland Protocol, the Brexit TCA therefore leaves an open border between Northern Ireland and the Republic of Ireland. As a result, there is now an unofficial “border” between Northern Ireland and the UK, with import-export controls in both directions. Although part of the UK, Northern Ireland has to follow EU Customs rules, with special rules applying for trade, as NI remains in the EU Single Market.
Meantime, Canada and the UK have signed a Memorandum of Understanding which mirrors the CETA Free Trade Agreement we enjoyed with the EU since September 2017. It transfers the CETA provisions to Canada-UK trade on an interim basis, so it can continue to flow without tariffs. So it’s essentially “business as usual” for Canadian and UK exporters and importers. A new Trade Agreement between Canada and the UK is in the pipeline and the Canadian Government has recently launched a public consultation on that topic. A three-year window is foreseen for a new Agreement to be found. The MOU replicates the CETA rules of origin and allows for accumulation with the EU on a transitional basis: materials sourced from the EU used in production of goods in Canada or in the UK, will continue to count as originating goods for 3 years.
It was important for Canada and the UK to come to an interim agreement as the UK is Canada’s first export market and our third supplier in Europe. The vast majority of Canada’s exports to the UK (precious metals and aircraft) are duty-free anyway. Brexit does complicate things for Canadian exporters: it is no longer efficient to serve the whole of Europe through a single base and companies doing business in both markets have to rethink their distribution strategies. Customs border complications, delays and costs are not the only issues: product standards are now different (UKCA in the UK and CE in the EU), IP protection follows two channels (UKIPO and EUIPO) and there are changes for the VAT. There are also several challenges regarding direct shipment rules. In a nutshell, companies now need to treat these two markets separately and establish distribution channels both in the EU and in the UK.
Are we going to see what was promised by Boris Johnson, i.e. frictionless trade and a new era of prosperity for the UK: the future will tell! Meanwhile, 2021 didn’t begin very well, as UK exports of goods fell by £5.3 billion (19.3%) in January, mainly because of a £5.6 billion (40.7%) fall in exports to the EU. And UK imports fell by £8.9 billion (21.6%), driven by a £6.6 billion (28.8%) fall in imports from the EU. The January 2021 fall in UK goods imports and exports was the largest monthly fall since records began in January 1997. And with new violence erupting in Northern Ireland plus the prospect of a Scottish independence referendum, my current Brexit assessment is: what a mess!
© Christian Sivière, International Trade Consultant and Trainor, Solimpex