Canadian businesses need more than optimism from Boris Johnson

Britain's new prime minister will need more than a can-do attitude to keep trade growing between Canada and the U.K., after a late decision by his predecessor scuppered an agreement that was set to keep the terms of Canada's existing European Union trade deal in place.

"Like some slumbering giant, we're going to rise and ping off the guy-ropes of doubt and negativity," Boris Johnson vowed as he took the reins of the British Conservative Party Tuesday and prepared to meet the Queen.

But even in the notoriously optimistic world of trade negotiations, the giant economic risks of leaving the European Union can't simply be shaken off before Oct. 31, the next Brexit deadline.

The uncertainty Johnson inherits includes skeptical partners like Canada preparing for a no-deal scenario by "hedging their bets," as U.K. Trade Secretary Liam Fox told British parliamentarians earlier this month. (Fox may not carry the trade file for much longer, after failing to back Johnson for the party leadership.)

It's not that Canada's team of veteran trade negotiators didn't do their job. In fact, they thought they had a bilateral deal ready to go last year — despite bargaining with overburdened and inexperienced British negotiators who lacked a realistic sense of what various bilateral trade measures were worth, both politically and economically.

A senior Canadian government source with knowledge of the talks told CBC News that a finalized proposal to continue most of the terms of the Comprehensive Economic and Trade Agreement (CETA) and apply them to a newly-independent Britain was put in front of Prime Minister Justin Trudeau's cabinet more than a year ago.

'A different level of desperation'

Then the U.K.'s efforts to approve a withdrawal agreement with the European Union failed spectacularly in the run-up to last spring's original deadline. 

Panic set in over the prospect of a no-deal Brexit. In an emergency move to protect British consumers and businesses from sudden price shocks, the U.K. published a "temporary" list offering any country — not just those with pre-existing trade deals — tariff-free access for 87 per cent of what the U.K. imports, without a requirement for any reciprocal tariff cuts for British exports.

Canadian officials found out about it from the media, the source said.

Lowering these tariffs undercut the value of the preferential trade deal Canada thought it had negotiated with the U.K. Canada was grateful it hadn't finalized its commitment too soon, the government source said.

"Why would Canada make any concessions in a CETA equivalent [deal] when we know that we'll have pretty much 95 per cent duty-free access into that market?" said Brian Kingston, vice-president of the Business Council of Canada.

"Yes, the U.K. is an important and large market, but any negotiator sitting down with them would recognize that there's a different level of desperation with the Brits."

'Furious' or just frustrated?

While radical tariff liberalization could be a legitimate competitive strategy for the British, Kingston said it needs to be something they commit to long-term, not something they switch to temporarily when efforts to negotiate transitional trade deals fail.

"You're not going to attract investment if there are any uncertainties," he said.

A media report said the British were "furious" at Canada's refusal to give then-prime minister Theresa May a political win when she needed it.

But the Canadian government official who spoke to CBC News insisted this wasn't true.

Were people frustrated and disappointed? Sure. But British officials understood why Canada wouldn't proceed.

"The Canadians — not unreasonably — said that they recognize that they will get a lot of access to the U.K. market through the currently-planned emergency 'day one' no-deal tariffs," a senior British diplomat told CBC News Tuesday.

"The key point is that those no-deal tariffs are temporary and that with a new PM and a new cabinet ... [they] may take a different view on that."

Regardless, Canada needs to get a "safety net" in place beyond this first year of temporary tariff cuts, the British diplomat said.

Were the British really furious? "I don't think that could be further from the truth. The relationship's really solid," he said, adding that both sides continue to talk and remain committed to a "seamless transition."

In fact, Steve Verheul, the head of trade policy and negotiations at Global Affairs Canada, is expected to head to London in the next few weeks to take the temperature once Johnson's new team is in place.

The timelines are impossibly tight. Canada is about to head into a federal election. Johnson could call one too, seeking a mandate to proceed.

"There's complete [political] dysfunction on the U.K. side," said Jason Langrish, executive director of the Canada Europe Roundtable for Business. He said he's been talking to both sides, trying to find solutions.

"Why negotiate with people who change their mind on a daily basis? And who likely won't be around to close off any deal? That's what it's come down to," Langrish said.

What Canada agreed to

The aborted deal more or less preserved what the U.K. had with Canada as a member of the EU.

Despite a U.K. request for up to 2,000 metric tonnes of cheese quota — something Canadian negotiators had to explain would be a total non-starter in an election year in Canada — no new market access was offered for British dairy products.

The Canadian government source said negotiators proposed "something creative" with existing World Trade Organization quota to ensure an unspecified amount of access for British cheesemakers post-Brexit.

Additional access to the U.K. market was offered for Canadian livestock producers, who have been struggling to overcome regulatory hurdles to make full use of their new EU quota.

CETA's other agricultural quotas would stand for the remaining 27 EU member countries.

What could Canada lose if it doesn't have a bilateral deal in place in time for Brexit?

Access to the British automotive market, for starters. Cars were among the few imports that would still face tariffs on the temporary no-deal list. Beef and pork also would face tariffs.

Beyond this trade in goods, "any companies using CETA's labour mobility provisions could be affected," said Mark Agnew, the director of international policy at the Canadian Chamber of Commerce.

He said his members are disappointed Canada hasn't been able to announce a continuity deal with the U.K. the way other countries have.

But overall, the costs to Canada of a no-deal Brexit without a bilateral trade agreement in place may be less than the financial risks for U.K. exporters if they lose preferential access to Canada, Agnew said.

Divorce terms still unclear

The bigger issue is what happens with the U.K.'s relationship with the European Union, Agnew said, "because that dictates what will happen in the U.K.-Canada context."

Many Canadian businesses use the U.K. as their launching pad into the European market. If supply chains start facing customs hassles when they cross the English Channel, entire business strategies could go sideways.

"I can understand when Canadian companies say they're keen to get certainty on future arrangements, and that's what we hope to have delivered in the next few months," the senior British diplomat said.

So why should Canada be patient, despite this Brexit mess?

With CETA in effect with the European Union, and while the U.K. is still a member of the EU, trade between Canada and the U.K. specifically has being growing faster than Canada's trade with the EU as a whole.

"Canada's exports to the U.K. have gone up about 35 per cent," the diplomat said. "We want to keep that going."