15 March 2016

The free trade deal between the EU and Canada, known as the Comprehensive and Economic Trade Agreement (CETA), is attracting growing interest as it is being increasingly cited by the ‘Leave’ camp as a possible template the UK could follow for its relationship with the EU after Brexit.

As London Mayor Boris Johnson put it last week,

I think we can strike a deal [with the EU] as the Canadians have done based on trade and getting rid of tariffs. It’s a very, very bright future I see.

Overall, CETA is the most comprehensive and ambitious free trade deal the EU has negotiated to date. However, it is still some way from replicating the level of access to the single market the UK currently enjoys as a member of the EU – particularly in services and financial services. Let’s take a look a bit more in detail.

The bright side

First of all, trade in goods. The EU and Canada have agreed to scrap 100% of tariff lines on industrial and fisheries products – nearly all of them upon entry into force of CETA, and the rest after transition periods of up to seven years. As regards agricultural products, the EU and Canada will eliminate 93.8% and 91.7% of tariff lines respectively – again, nearly all of them on the day CETA enters into force and the rest after seven years.

Second, public procurement – an area that is sometimes undervalued but is potentially worth hundreds of billions. CETA brings about significant liberalisation, particularly on the Canadian side – since European companies will be allowed to bid for public contracts in Canada at all levels of government (with some limitations in the Provinces of Québec and Ontario).

Third, CETA does not involve Canada paying into the EU budget or signing up to EU rules on the free movement of people in return for increased market access.

The dark side

Now for the not-so-good stuff. Some agricultural products deemed sensitive (e.g. eggs or chicken and turkey meat) are not covered by CETA, while for some others (e.g. beef or sweetcorn) duty-free access will only be granted for limited quantities. In other words, under a Canada-style relationship with the EU after Brexit, UK farmers would be partly exposed to EU tariffs – a step backwards from the current situation.

More generally, with some limited exceptions (e.g. for Canadian carmakers), trade in goods under CETA will be largely based on EU rules of origin – which are used to determine whether a sufficient proportion of a product is actually ‘Made in Canada’ and can therefore benefit from reduced or zero tariffs in the EU. Outside the EU’s customs union, UK exports of goods would need to comply with extra bureaucratic customs checks, which could raise costs particularly for those firms with complex supply chains. Furthermore, the UK would also lose its vote over the setting of EU regulations and product standards. These are all important points, given that the EU would continue to be the UK’s largest trading partner for the foreseeable future no matter the outcome of the June referendum.

But arguably the biggest challenge the EU-Canada deal poses as a potential model for UK-EU relations after Brexit is that it only grants limited services liberalisation – by no means comparable to being a member of the single market. While CETA does introduce further openings in areas such as mining, postal services and maritime transport, hundreds of pages are devoted to listing ‘reservations’ to liberalisation commitments – that is, Canadian and EU carve-outs from the deal.

As regards financial services more specifically, CETA does not prevent the EU and Canada from keeping a number of regulatory and licensing requirements in place. In order to take advantage of the EU financial services ‘passport’, for instance, Canadian firms will have to establish a presence in the EU and comply with EU regulations. Therefore, the ‘Canadian model’ could ultimately make it harder for UK-based financial services firms to sell into the EU market.

Between the UK and the EU, it can’t be just about trade

Looking at the bigger political picture, one final point is worth making. Not least for geographical and historical reasons, the UK’s economy is a lot more integrated than Canada’s with the rest of the EU. Just think about how many Brits currently live and work in other EU member states, and vice versa. This means that any UK-EU agreement after Brexit could not be just about trade – it would inevitably need to cover other aspects. Therefore, the EU-Canada deal could only ever serve as a template the UK could build upon – certainly not as the ‘Holy Grail’ of models for post-Brexit UK-EU relations.