UK - Brexit update 1st May 2019

by Jeffries Briginshaw, Transatlantic Business Britain


The UK had been due to leave on 29 March 2019, two years after it started the exit process by invoking Article 50 of the EU's Lisbon Treaty. But the withdrawal agreement reached between the EU and UK has been rejected three times by UK MPs. Having granted an initial extension of the Article 50 process until 12 April 2019, EU leaders have now backed a six-month extension until 31 October 2019. However, the UK will leave before this date if the withdrawal agreement is ratified by the UK and the EU before then.


So is Brexit definitely happening? What are the chances it won’t happen at all now?

As things now stand, the UK is due to leave the European Union at 23:00 GMT on 31 October 2019. If the UK and EU ratify the withdrawal agreement before then, the UK will leave on the first day of the following month. Theresa May has said she wants the UK to leave the EU as soon as possible, if possible by 22 May, so the UK will not have to take part in the European Parliament elections taking place across Europe that month. The EU has said the Brexit process should not be extended again beyond 31 October 2019, but legally speaking another extension could happen if all EU countries, including the UK, agree to it.


At time of writing most commentators are discounting prospects for a short term political breakthrough to create any decisive new parliamentary arithmetic. In that context the chances of the ‘Brexit can’ being ‘kicked down the road’ indefinitely have increased. With an economy that is generally showing more resilience than expected, the balance of probability still favours some kind of definitive Brexit, likely of the ‘softer’ kind signalling a closer economic relationship between the UK and the EU than earlier imagined. This has significant implications for the scope of trade competence that the UK government will eventually repatriate, and we will return to that in a future commentary.


Canada UK Trade

UK Canada trade has since October 2017 been covered by the provisions of the EU Canada Comprehensive Economic and Trade Agreement. As a highlight tariffs payable at customs were eliminated on 98% of all goods traded between the two countries. While the UK remains in the EU, bilateral trade will be subject to CETA’s provisions. The draft Withdrawal Agreement also envisages the UK being subject to the obligations of the EU’s trade agreements during the transitional (or implementation period). After that, the Government is seeking to roll over the EU’s existing trade agreements with third countries into equivalent UK agreements.


A look at the balance of interest in trade between Canada and the UK shows that while the UK enjoys a services trade surplus with Canada – with services access not directly covered in CETA – Canada has a goods surplus. So, securing the tariff elimination elements of CETA into a UK Canada bilateral certainly would be important to Canadian goods exporters and a reason for the Canadian government to prioritise the more political need of the UK to show that it can do deals.


According to a diplomatic note reported by The Times in March Michel Barnier, the EU’s lead Brexit negotiator, told European envoys in March that Britain was about to ‘sign a free trade agreement with Canada’. Indeed, it is reasonable to expect that some form of transposition into a bilateral UK Canada agreement will happen, with the ‘when’ and ‘if’ completely subject to Brexit developments. However, as the Switzerland/UK trade transposition shows the devil is also in the detail on things like rules of origin, so don’t be surprised if any actual agreement throws up short term complexity.


Practical conclusions

Uncertainty will continue to prevail at least until May and likely through into fall 2019 and beyond.


For Canadian exporters to the UK this all means that CETA continues to be in effect vis a vis the UK so Canadian companies preparing invoicing should continue to apply existing invoicing classifications and hold any contingency documentation in readiness. In practice anyway that contingency documentation is likely either to be on a transposed CETA basis or a pre CETA (WTO) basis, so within the scope of recent experiences pre CETA. For Canadian investors in the UK guidance to companies for example as provided by DIT continues to offer contingency planning insights and scenarios based either on contents of the Withdrawal Agreement of November 2018 (eg transitional provisions) or on what would happen in a no deal scenario.


Note

UK exports to Canada were worth £9.0 billion in 2017 while imports amounted to £7.4 billion. Services accounted for around 42% of UK exports to Canada while UK imports were predominantly goods. The UK had an overall trade surplus with Canada of £1.6 billion in 2017. A surplus of £1.9 billion on trade in services was offset by a deficit of £0.3 billion on trade in goods.


The UK’s trade surplus is driven by an increase in UK service exports to Canada. Over this period the UK has continuously exported more in services than imported from Canada. In 2016, UK exports to Canada were £4.9bn (59%) in goods and £3.4bn (41%) in services. In comparison, UK imports from Canada in 2016 were £5.4bn (75%) in goods and £1.7bn (25%) in services.


When looking at the breakdown of UK businesses by industry, the service sector had the most number of firms exporting and importing to Canada in 2016. Around 6,400 UK businesses in the service sector exported to Canada and around 5,800 of UK businesses imported services from Canada.

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