Trade with Canada - What Happens Next?

29 Jan 2024

Published in: British Chambers of Commerce News

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BCC Head of Trade Policy, William Bain responds.

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Negotiations with Canada on a new free trade deal have broken down, but what does this mean for businesses trading with the country and what happens next?

BCC Head of Trade Policy, William Bain, examines the implications:

One of the immediate effects of dialogue ending is that there will be no reprieve for cheese or dairy exporters in the UK. They have already been told they must access the non-EU quota for Canada cheese and dairy imports – this took effect on 1 January.

They will face stiff competition to access this quota, from the likes of Mexican and Swiss exporters, with long-standing contracts and supply chains into the Canadian market.

Any exports that UK cheese makers agree outside of the quota will face tariffs of 275%, making them completely uncompetitive.

Chambers have said that some affected cheese exporters in their areas have already accepted they will lose substantial sales in the Canadian market.?

But the impact does not stop there. At the end of March, UK businesses will lose the ability to cumulate EU content in goods they make and sell to Canadian customers. Currently these goods are subject to tariff preferences in the UK-Canada continuity trade agreement.

But from April onwards, any EU content in these manufactured items will be classified as non-originating content. If EU parts cannot be counted then firms could see the qualifying content for tariff free trade slip below the minimum percentage.

That means tariffs will apply to those goods. For the automotive sector, with annual sales of cars worth £784m to Canada, this will run into tens of millions of pounds per year. Other manufacturing sectors will also be affected.?

What does this mean for UK-Canada trade?

The prospects of a resumption of talks before elections in the UK this year or Canada, likely next year, are minimal. Canada was reported to be seeking additional access for its beef meat beyond the existing quota and also seeking equivalence of its animal health rules on beef. But it does not appear the UK was prepared to grant this.

Similarly, the Canadian Prime Minister, Justin Trudeau, had promised the dairy sector in Canada that he will not sign agreements which open up further access for dairy exporters from other trading partners.

With neither side preparing to move from these positions it would seem that prospects for a bespoke free trade agreement are now very much on the back burner.?

Does the current trade agreement with Canada continue in effect?

Yes. Apart from the rules of origin changes and the specific tariffs on cheese, the UK can continue to trade with Canada on the basis of its existing agreement in perpetuity. No further cliff edges apply.

How does this affect ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)?

Only six, of the 11, CPTPP states are required to ratify the UK’s accession for it to take effect. Canada is currently chair of the CPTPP group, but it has no ratification veto. It may choose to play hardball over its own ratification, which could prevent the UK from taking advantage of CPTPP trade terms in Canada. This will require legislation to be passed in the Canadian Parliament. But it would not apply to the UK’s terms with other CPTPP members, for example Malaysia or Australia.?

Would traders be able to choose between preferences in different agreements if the UK’s CPTPP accession protocol is ratified by each CPTPP member?

Yes, where there is an overlap of trade or tariff preferences in the agreements, depending upon the commodity.?

Will CPTPP come into effect for UK traders in a single event or country by country?

Country by country – depending upon how quickly they ratify the UK’s Accession Protocol. So, there may be a sequence of phase-in dates for UK traders as ratification proceeds.

If Canada doesn’t ratify the UK’s Accession Protocol what does this mean for UK traders?

There is no indication that Canada will not ratify, but if matters escalated, and it chose not to, it would mean for example the data flow provisions in CPTPP (Article 14) would not apply between the two countries and the cross-cumulation provisions within CPTPP would not apply either (chapter 3, article 3). These are the rules which allow content for one or more CPTPP countries to be cumulated into originating UK goods. These can then, mostly, be exported at no or minimal tariffs to another CPTPP country under the trade preferences in the agreement.?These are areas not covered by the current UK-Canada trade deal and would further hamper businesses seeking to export.