The Canada, Australia Models for Post-Brexit Trade and What They Mean for Britain

(Bloomberg) --

With the end of the U.K.’s Brexit transition period on Dec. 31 fast approaching, Prime Minister Boris Johnson has told the European Union the U.K. intends to exit the bloc with a deal similar to Canada’s or its setup with Australia - in reality a catch-all term for World Trade Organization terms. Following a lack of progress at the EU leaders’ summit on Oct. 15, he said he had concluded that a Canada-style deal wasn’t on offer and that the U.K. should prepare for arrangements “that are more like Australia’s, based on simple principles of global free trade.” Here’s a look at what both situations would mean for the U.K.

Australia

Johnson has said that if no free-trade deal is possible by the end of 2020, he’s prepared to take a looser arrangement like Australia’s. It’s essentially a rebranding of the nuclear option of a “no deal” Brexit, which referred to the possibility of the U.K. leaving the EU without any deal at all. It would involve doing business on WTO terms in most areas, with tariffs on goods and an agreement on the processes to reduce some regulatory barriers.

• PROS: The 2008 EU-Australia Partnership Framework establishes a set of shared policy objectives regarding trade and investment. It fosters cooperation in sectors like investment, food certification, aviation, border management and law enforcement. The deal does not bind Australia to EU regulatory oversight or immigration rules, and Australia does not have to make financial contributions to the EU budget.
• CONS: Australia is not a member of the European customs union or single market. That means its goods exporters are subject to EU tariffs and quotas and Australian services providers do not have preferential access to the European continent. Furthermore, Australia’s banks do not have passporting rights to operate in Europe. The EU and Australia have been negotiating a more ambitious new free-trade agreement to help increase market access and cross-border trade and investment.

Canada

The EU’s deal with Canada was regularly mentioned during the Brexit campaign and emerged as Johnson’s favored model. The agreement was popular with the U.K. because it would allow free trade without remaining in the EU’s so-called single market, removing the need for harmonized rules and free movement of people. Back in 2016, the bloc called the free-trade accord, known as the Comprehensive Economic and Trade Agreement or CETA, “the most ambitious trade agreement that the EU has ever concluded.” When it entered into force provisionally the next year, the deal ended 98% of tariffs on goods, and will remove 99% of them after seven years.

• PROS: The deal eliminates tariffs on most goods, provides increased access to services providers, and cuts costs by harmonizing EU-Canadian regulations and standards. The EU estimates that the accord will increase bilateral trade between Canada and the EU by about 12 billion euros ($14.1 billion) per year.
• Under such an arrangement, Britain would stop paying financial contributions to the EU budget and the U.K. would regain control of its immigration rules and other internal regulations.
• CONS: A free-trade agreement like the CETA would represent a downgrade from the U.K.’s previous trade relationship with the EU because it would erect trade and regulatory barriers that haven’t existed for decades.
• It also does little for trade in financial services -- likely leaving British operations in the EU governed on the basis of “equivalence” rules that are still under review. These could allow banks to conduct some businesses across borders.

The Reference Shelf

• A Bloomberg article on talks between the U.K. and EU.
• Bloomberg Opinion’s Therese Raphael explains why Johnson is in a dangerous corner.
• Bloomberg Opinion’s Lionel Laurent on the trust deficit in the Brexit talks.
• A New York Times editorial on Remember Brexit?
• QuickTakes on how the U.K. and EU would trade under WTO rules, what did and didn’t change on Jan. 31., the potential “cliff edge” in 2021 and regulatory “equivalence.”

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