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Brexit Blog: Canada-Style or Australian Terms – On or off at the Brexit table?

AUTHORs: Michael Jackson Services: Brexit, Brexit Forum DATE: 09/11/2020

UK Prime Minister Boris Johnson recently lamented the diminished prospects of a Canada-style deal within the ongoing Brexit negotiations, saying that: “after 45 years of membership they are not willing….. to offer this country the same terms as Canada. And so with high hearts and complete confidence we will prepare to embrace the alternative”. In his current Brexit Blog, Matheson Managing Partner, Michael Jackson, looks at why the UK has continued to identify a Canada-style deal as the preferred outcome from the trade talks; how this measures up to the status quo of EU membership; and what is the ‘Australian alternative’ which the UK has said it is ready to embrace in lieu of the Canada model.

Background

The ongoing talks on an EU-UK trade deal have resumed in London today, following a phone call between European Commission President Ursula von der Leyen and Prime Minister Boris Johnson on Saturday for a ‘stock take’ on the negotiations.  While Ms von der Leyen noted that some progress had been made, she said that large differences remained especially on level playing field and fisheries. Speaking with the BBC on Sunday, Boris Johnson said of a deal that “it’s there to be done”. But cautioned “there are some difficult issues that need to be fixed”.

There is currently an upward tilt in the mood surrounding the talks in what has been, and may yet become again, a roller coaster ride. Three of the major issues of principle outstanding between the parties include dispute resolution, the level playing field, and fisheries. Time (which is rapidly running out),  COVID-19 (which creates a political and economic backdrop few foresaw earlier in the year) and the US election results (with Mr Biden being regarded by some as more likely to demand the implementation of the Northern Ireland protocol) are three significant external factors which may influence the willingness of both sides to make concessions.

As time tightens and the negotiating agenda focuses on key issues, the ultimate political choices loom closer. One possible choice is for either side to walk away because what is on offer is politically unpalatable. Another is to agree a limited deal, and move on regardless. In repeating calls for a ‘Canada-style’ arrangement the UK appears to be accepting that a limited deal is the best that can be achieved and signalling the terms which would be largely acceptable to it. Understanding what the Comprehensive Economic and Trade Agreement between the EU and Canada (CETA) involves is therefore increasingly important for critiquing and understanding the negotiations. It will also be a critical political comparison for any deal that is either accepted or rejected.

The UK Perspective

Looked at through the lens of the UK negotiators, it is easy to understand why CETA is a potentially attractive model for the UK’s future relationship with the EU. Historical evidence shows that trade deals take somewhere between four and nine years to finalise. Insufficient real progress on the details of a trade deal appears to have been made to date. CETA is ‘ready made’ and using it as a template reduces the likely negotiating time and increases the chances of being able to claim that the negotiating stance adopted had produced an acceptable agreement. In the eyes of the UK negotiators, the EU’s ability  to object to issues on grounds of principle where it has previously agreed a compromise with Canada is also reduced if CETA is the template. A CETA-type deal also has alluring elements from the UK perspective, loosening, as it would, the UK’s ties to Brussels and ridding the UK of the perceived binds of free movement, financial contributions, EU law, and restrictions on its pursuit of an independent trade policy.

As far as free trade agreements (FTAs) go, CETA is impressive, eliminating almost all tariffs on traded goods (98%) with most remaining tariffs being abolished over a seven year period. Only a few tariff lines in sensitive areas, such as agriculture, remain. In also targeting non-tariff barriers to trade, CETA has been described as a ‘second generation FTA’.

Augmenting this is an innovative state-to-state dispute resolution mechanism perhaps more in harmony with the sentiments of those objecting to the jurisdiction of the European Court of Justice (ECJ). CETA creates an automatic right of access to an independent third party adjudication system, sitting on the scale between an ad hoc tribunal model and a quasi-judicial model. CETA also introduced an Investment Court System, novel in an FTA, in place of the Investor-State Dispute Settlement mechanism and whose compatibility with EU law was confirmed by the ECJ in April 2019.

The EU Perspective

This view of CETA as providing the possible answers contrasts with the EU perspective that even the most comprehensive multi-sectoral Canada-plus style agreement could not compete with what was on offer to a pre-Brexit UK. The EU’s position is that the proximity of Britain to the EU in comparison to Canada and the comparative levels of trade between them mean that expecting similar FTA terms to Canada is unrealistic, and would not be in the long term interests of the EU or its member states. Canada has nothing like the volume of business with the EU which, taken as a whole, is the UK's largest trading partner. About 10% of Canadian trade is with the EU and that trade falls along quite specific lines. An effective EU-UK trade deal would require agreements on many areas not even contemplated in CETA. The argument that CETA is ‘ready made’ and that a similar deal could be quickly ratified also ignores the fact that while most of CETA has been provisionally in force since 2017, the journey to full member state ratification has been slow (and at times beset by theatrical delays brought about by national or even regional interests).  Given the tone and nature of the EU-UK negotiations to date, there is little to suggest that an equivalent deal involving a larger, geographically closer trading partner which has expressed a desire to compete more aggressively with the EU in other markets would be quickly or easily ratified.

Analysis

Whatever one’s own political or economic perspective, what is clear is that CETA terms would not, in fact, resolve many of the issues of concern to those hoping for continued frictionless trade. The reasons for this are many and varied, but the following are some of the more noteworthy points of dissonance:

  • Some keynotes of the single market, including free movement of labour and data transfer rules, are notably absent from CETA. While CETA aimed to dismantle existing trade barriers between the EU and Canada, Brexit involves challenging some of the core principles of the single market and, by extension from an EU perspective, erecting obstacles to trade. The cultural and practical challenges imposed by unwinding over 40 years of membership did not arise in the CETA context. The rights of British ex-patriots in Spain, for example, or Polish workers in London, is a policy conundrum that really doesn’t apply in the CETA context. Uncertainty would still remain about these issues which are increasingly important to frictionless trade. 
  • CETA contains detailed rules of origin protocols requiring proof of the originating status of goods in order for them to qualify for its preferential tariff treatment. Under a Canada-style deal, trucks arriving in Dover will not face frictionless progress, they will face customs checks and scores of paperwork.
  • The UK’s status as a world leader in the services sector underscores the importance of arriving at a deep and comprehensive deal on services. CETA is the deepest and most comprehensive FTA on services that the EU has ever signed. Yet, CETA doesn’t facilitate the passporting of financial services and cross-border trade in financial services is largely confined to a limited set of services on limited terms. CETA carve-outs grant each side the right to take ‘reasonable’ measures for prudential reasons, further reducing the capacity for cross-border provision of services.
  • In contrast to the theme of convergence running through most FTAs, a central theme of Brexit is regulatory divergence. Regulatory cooperation under CETA is centred on coordination between numerous standard-setting and technical committees, participation in which is voluntary. While the EU and UK will start with the same rules governing financial services, the declared intention of the UK to diverge from those rules (expressed most recently in an intention to adjust the approach to insurance solvency margin calculations) means that maintaining equivalence long-term between parties is likely to be less straightforward and more political than it may appear at first glance. For a more detailed discussion of equivalence, please see our paper here. So even if the parties could pull off a Canada-plus deal with equivalence enhancements, it will not necessarily provide the levels of certainty businesses have been seeking.
  • CETA allows the temporary transfer of key corporate personnel, short-term business visitors, contractual services suppliers and independent professionals between Canada and the EU. This, however, is defined by reference to the particular service, typically agreed under a contract negotiated before arrival.  Under CETA, the EU and Canada can recognise each other’s professional qualifications for specified jobs so that, in theory, an Irish professional could take up a post in Vancouver. Non-professional roles do not get the same treatment. As it stands, however, CETA is more conceptual in nature with much of the detail remaining to be worked out. This stands in contrast to the extensive mutual recognition of professional qualifications available to UK citizens up to this point. 

The concerns outlined above about the lack of detail and possibility for different interpretations in relation to aspects of CETA become even more pronounced against the backdrop of the recent introduction of the UK Internal Markets Bill. Part of the rationale given for including clauses in that bill, which many see as facilitating breaches of international law, was that the EU could no longer be trusted to act reasonably in making decisions which impacted on future EU-UK trade, and that the terms of the Withdrawal Agreement were unclear and open to interpretation. Viewed in those terms, it could be viewed as ironic that CETA is seen as the model for progress by the UK while the EU is insisting on trying to arrive at a more detailed and tailored agreement. This perhaps explains the tone of scepticism which is sometimes evident in the EU response to references to a ‘Canada-style’ agreement with Michel Barnier, for example, noting earlier this year that “The United Kingdom frequently refers to precedents. It tells us it would be content with a “Canada-style” deal. But at the same time – and this is the real paradox of this negotiation – in many areas, it is demanding a lot more than Canada!

An ‘Australia-style deal’?

David Frost has warned that unless Brussels negotiators respected the UK as a sovereign state “then we will be trading on terms like those the EU has with Australia”. While negotiations which commenced in June 2018 are currently underway to establish a free trade agreement between the EU and Australia, the EU and Australia currently trade on what are essentially WTO terms, involving tariffs and quotas on traded goods. Customs checks and delays would take on an entirely different significance in an EU-UK trade context with just-in-time supply chains and ordinary citizens coming to terms with the Brexit paradigm shift. The EU position with regard to reaching an Australia-style deal is encapsulated in Ursula von der Leyen’s observation that  “honestly, I was a little bit surprised to hear the Prime Minister of the United Kingdom speak about the Australian model. Australia, without any doubt, is a strong and a like-minded partner. But the European Union does not have a trade agreement with Australia. We are currently trading on WTO terms.”

Whether or not the UK’s repeated preference for a ‘Canada-style’ trade deal can meet with any element of success or will fade into oblivion remains to be seen as developments continue to play out over the coming weeks. It is, however, a critical yardstick for evaluating the eventual outcome, and a summary of what Brexit was to deliver for the UK.  If the outcome of the negotiations is an ‘Australia-style’ deal, then it is likely that no deal will actually have been reached.

 

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If you would like to know more about Matheson’s Brexit Advisory Services, please contact michael.jackson@matheson.com, sharon.daly@matheson.com, your usual Matheson contact or any member of our dedicated Brexit Advisory Group.