Brexit: What Next?

Updated: Jun 27, 2019

by Adam Steinhouse

The Brexit start date of March 29, 2019 – the day the United Kingdom leaves the European Union – is fast approaching. What will happen in the next few months, and what will be the economic consequences of the British departure from the EU for the rest of the world, especially Canada?

Public opinion has changed very little since the referendum in June 2016, when 52% of British voters opted to leave the EU. Some 700,000 people marched in London on October 20, 2018 demanding another vote on any eventual deal between the UK and the EU. There were many light-hearted signs (“more breakfast, less Brexit”) but little sense of any upcoming change in policy or national mood. In my London borough, which voted almost 80% to remain in the EU, I met a citizen who disagreed with the prospect of another referendum, saying that it would render the 2016 result meaningless and turn the UK into a “banana republic.”

The key question is whether any withdrawal agreement between the UK and the EU can be agreed and ratified by the departure date. The outcome of the vote in the British Parliament, in January 2019, is currently on a knife-edge: the government, led by Conservative Prime Minister Theresa May, does not have a majority in the House of Commons and relies on the support of Northern Ireland’s Democratic Unionist Party. What makes the result of the ratification vote difficult to predict is the extent of a possible rebellion by backbench Conservative MPs who are opposed to what they see as too many concessions being made to the EU by the UK government. For example, the deal will likely propose a lengthy transition period, perhaps until the end of 2021, during which the UK would continue to abide by EU rules but play no official part in making policy decisions in Brussels. The Prime Minister and her cabinet will force any opponents to the deal to accept these compromises or to vote “no” – a high-risk strategy with potentially serious economic consequences.

If the British Parliament rejects a withdrawal agreement and there are no further discussions with the EU about mitigating the impacts of a No-Deal Brexit, then the UK would leave the EU on March 29 on the terms of the World Trade Organisation (WTO): the EU would have to treat the UK the same way it treats all other WTO members, with the same level of tariffs. Since the rest of the EU currently accounts for 43% of UK exports, the short-term results would be catastrophic, causing severe supply chain disruption. On a recent Eurotunnel trip to France, I saw the following sign: “Because just-in-time is key for the supply chain.”

If the UK and the EU ratify the agreement before the deadline, and the UK exits in an orderly manner at 11 pm GMT / midnight in Brussels on March 29, 2019, then the transition period will begin, as will the next negotiations on a comprehensive free trade treaty between the two sides, perhaps modelled on the Comprehensive Economic and Trade Agreement (CETA), the agreement between Canada and the EU. (See my article “Brexit and Canada” in Forces Magazine 193, Spring 2018.)

The impact of these negotiations on the future economic relationship between the UK and the EU will also determine relations between the UK and many other countries, including Canada. The Royal Bank of Canada’s October 2017 Brexit report stated, “Canadian firms that have invested in the UK as a gateway to Europe will be subject to whatever trade agreement the UK and EU can work out. [...] Any loss of access to the EU’s single market would make the UK a less enticing investment opportunity.”

In April 2018, Prime Minister Justin Trudeau said that Brexit would allow Canada and the UK to forge a larger and “more impactful” trade relationship than the current Canada-EU trade agreement (CETA), which Canada would use as the starting point for negotiations with the UK. In June 2018, UK Secretary of State for International Trade Liam Fox reported to the UK House of Commons that “CETA should form the basis of a bilateral agreement between the UK and Canada as we leave. However, we will have greater leeway to look at what additional elements we might want to include when we are no longer tied to the EU.” Thus, relations with Canada will typify the UK desire to base its post-Brexit trade policy on a series of bilateral trade agreements separate from its relations with the EU.

However, there are many non-trade agreements between Canada and the EU which will also have to be renegotiated by the UK. WTO rules, for example, do not cover data, airline access, fisheries, financial services, customs cooperation, and other areas which are all dealt with in bilateral agreements or “side deals.” The EU-Canada Air Transport Agreement is a typical example of a deal which the UK will have to renegotiate after Brexit, either immediately on March 30, 2019 in the event of no deal, or during a finite transition period. I have been teaching UK diplomats about these EU third country agreements; there are some 80 countries with agreements that need to be transitioned. The Institute for Government, a UK think tank, noted in a recent report, Brexit: Six months to go, that “when it comes to agreements with third countries, the UK will be running to stand still for a while yet, putting most of its efforts into ensuring that existing deals do not fall away. [...] Any new deals... will likely have to come later – and well after the future relationship with the EU is clear.”

From the perspective of Canada and the rest of the world, it will be safer to await the details of the future relationship between the UK and the EU before embarking on a new trade agreement with the UK. Even if the UK and the EU can finalise a withdrawal agreement, which is far from certain, the UK will then have the demanding task of maintaining frictionless trade with the EU, i.e., trade without customs checks and regulatory barriers. If these negotiations with the EU are unsuccessful, the UK will be forced to rely on a series of bilateral accords where its partners might well have the upper hand.

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