Canadian businesses brace for ‘Hard Brexit’ following U.K. election results

Canadian businesses in the United Kingdom are now bracing for a so-called ‘Hard Brexit’, after the Conservative Party won a decisive victory in Thursday’s British federal election.

“Basically what it means is a pain in the butt for us,” said Luke Davies, co-founder of Tina Davies Studio, a Toronto-based cosmetics company.

In 2015, Davies expanded his business to the United Kingdom.

“It was just an easy place for us to have a centralized hub of inventory and we distributed the goods all around Europe from the U.K.,” he said.

“And it was actually a pretty slick little way to operate a small business like ours internationally.”

But one year after the company’s British expansion, a political and business bombshell dropped: On June 23, 2016, the U.K. voted in favour of Brexit, signalling the likely end of Britain’s tariff-free trading relationship with Europe.

That’s left Tina Davies Studio looking for another way to supply its European customers.

“It’s really hard to sell things online if your customers are having to pay import duties.”

Theirs is one of around 600 Canadian companies operating in the U.K. — Canada’s closest trading partner in Europe accounts for 40 per cent of merchandise exports into the European Union.

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Those Canadian businesses have now been waiting for more than three years to see what Brexit will bring.

“For a lot of Canadian businesses, frankly, there’s just Brexit fatigue,” said Mark Agnew, senior director of international policy at the Canadian Chamber of Commerce.

“We seem to be going from: it’s a ‘Hard Brexit,’ ‘Soft Brexit,’ no Brexit at all, delayed Brexit; and I think what Canadian business are really looking for is having some clarity come out of this election.”

A Conservative majority government should provide some clarity for those companies, albeit not the outcome many of them were hoping for.

British Prime Minister Boris Johnson now has a clear mandate to push forward with Brexit by Jan. 31. Once that happens, though, it will remain business as usual until the U.K. and the EU can agree on a new trade deal or the UK opts to leave without one — what’s known as a ‘No Deal Brexit’.

Until those negotiations are concluded, it will remain an open question as to what Brexit will entail. Johnson has advocated for a so-called ‘Hard Brexit’, which involves taking the U.K. completely out of the EU – including both the single market and the customs union.

“If he goes for a hard line, you know, a clean break from Europe, then he’s got a big problem — not just with Canada, but a lot of our other trading partners,” said Paul Kelly, professor of political philosophy at the London School of Economics, noting that many countries, including Canada, have secured free trade agreements with the U.K. via the EU.

Johnson has vowed to complete trade negotiations with EU before the end of 2020, but trade experts doubt that timeline is realistic.

“What we do know is it takes longer than 11 months to negotiate a trade agreement,” said Stephen Wilhelm of Export Development Canada’s London office.

“I think that’s the biggest uncertainty, is what will happen as we approach Dec. 31st (2020) if there isn’t an agreement between the U.K. and the EU.”

In preparation for what happens after the U.K.-EU divorce is finalized, the British government has signed at least 20 “continuity” free trade deals covering 50 countries or territories, aimed at replicating the preferential access it has enjoyed to non-EU countries as a member of the world’s largest trading bloc.

The Canadian government has thus far not signed a continuity deal with the United Kingdom.

“We’re not keeping up with the Joneses,” said Agnew. “If you look at what the U.K. has been able to do with a number of other countries, such as South Korea and Switzerland, they have that trade agreement, or I guess you could call it insurance policy, that’s in place and ready to go for whenever the U.K. does leave the EU.
“Unfortunately, Canadian businesses don’t have that same guarantee there yet.”

Despite the election result, trade experts predict continued uncertainty for Canadian companies in the U.K.

“For a small, medium-size company, I think the incremental cost that Brexit has already caused is significant,” said Wilhelm.

“Even during the transition period, negotiations will continue between the U.K. and the EU in terms of what the trade and investment agreement will be between the U.K. and the EU, and therefore that clarity won’t come on Jan. 31 as part of the withdrawal agreement.

“So there will continue to be some uncertainty for Canadian companies that are trying to decide where to invest.”