CIIT Committee Report

TRADE BETWEEN CANADA AND THE UNITED KINGDOM: A POTENTIAL TRANSITIONAL TRADE AGREEMENT – INTERIM REPORT

INTRODUCTION

On 23 October 2020, the House of Commons Standing Committee on International Trade (the Committee) adopted a motion to undertake a study to “a. receive an update on the federal government’s progress in negotiations of a Canada-United Kingdom transitional trade agreement; b. hear from stakeholders affected by the implementation of a new Canada-United Kingdom transitional trade agreement; c. study the impacts of a lack of a transitional agreement with the United Kingdom being in place by December 31, 2020, when the application of the Comprehensive Economic and Trade Agreement (CETA) to the United Kingdom ends.” As of 23 November 2020, the Committee had held three meetings on this study during which 16 witnesses – including governmental officials, a business, and representatives of trade associations, organized labour and civil society organizations – appeared. Some spoke to the Committee before negotiations for a Canada–U.K. transitional trade agreement were concluded, while others appeared after an agreement had been announced. The Committee also received a brief from the Canadian Chamber of Commerce.

THE PAST: BILATERAL TRADE UNDER THE COMPREHENSIVE ECONOMIC AND TRADE AGREEMENT

In recent years, Canada’s trade relationship with the United Kingdom has been governed by the provisions of the Canada–EU Comprehensive Economic and Trade Agreement (CETA), which was signed on 30 October 2016 and entered into force provisionally in 2017. As of 2 December 2020, 16 EU members had ratified CETA, including the United Kingdom. Witnesses spoke to the Committee about Canada–U.K. trade, the implications of Brexit and of not having a Canada–U.K. transitional trade agreement in force by 31 December 2020, and consultations concerning a Canada–U.K. trade agreement post-Brexit.

A. Trade between Canada and the United Kingdom as a European Union member

The Business Council of Canada and the Canadian Chamber of Commerce highlighted the importance of the United Kingdom as a trading partner for Canada, indicating that – in 2019 – the United Kingdom accounted for 40% of Canada's merchandise exports and 36% of its services exports to the EU. Moreover, the Business Council of Canada noted that approximately one-third of its members have a “meaningful presence” in the United Kingdom.

B. Brexit and its implications

On 23 June 2016, the United Kingdom held a referendum on its membership in the EU, and left the EU on 31 January 2020 after concluding a “withdrawal agreement.” Pursuant to the agreement, until 31 December 2020 and despite not being a member state, the United Kingdom continues to be subject to the EU’s rules, and remains part of its single market and customs union. After 31 December 2020, the United Kingdom will no longer be a party to CETA.

During the withdrawal agreement’s transition period, the United Kingdom can conclude trade agreements that may come into force after the period ends. For continuity with trade and investment relationships covered by EU agreements, during the transition period, the U.K. government has concluded trade agreements with more than 20 non-EU countries and trading blocs, and is currently negotiating with such countries as the United States and Australia. As well, the United Kingdom has expressed its intention to pursue membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The Canadian Chamber of Commerce and the Business Council of Canada stressed the importance of maintaining Canadian access to the United Kingdom’s market beyond the end of the withdrawal agreement’s transition period. According to the Business Council of Canada, this continuity is “critical” for Canadian businesses.

Without a trade agreement between Canada and the United Kingdom, beginning on 1 January 2021, the two countries’ trade would be subject to the World Trade Organization’s rules. Furthermore, the United Kingdom’s new tariff regime that was published in May 2020 – the U.K. Global Tariff – would apply to all merchandise imported by the United Kingdom from countries with which it does not have a trade agreement, including Canada. In speaking to the Committee prior to the TCA being announced, Global Affairs Canada officials indicated that approximately 80% of Canadian exports would enter the United Kingdom duty-free under the Global Tariff regime, with certain sectors – especially agriculture and seafood – facing duties. For example, the Lobster Council of Canada noted that a 20% tariff would be applied on lobster meat after 31 December 2020.

C. Consultations about a post-Brexit Canada–United Kingdom trade agreement

On 28 July 2018, a notice in the Canada Gazette indicated the potential for Canada to discuss “a transitional agreement with the United Kingdom that will allow a seamless transition of CETA.” According to Global Affairs Canada officials, shortly after this notice, negotiations started for a Canada–U.K. transitional trade agreement “aimed at substantively replicating the CETA on a bilateral basis as an interim measure in response to Brexit.”

In March 2019, the United Kingdom published a temporary tariff schedule that would have been applied if the country had left the EU without a withdrawal agreement. Under that schedule, approximately 95% of tariff lines would have been duty-free. Global Affairs Canadas officials indicated that, as a result of the schedule’s publication, Canada “paused” its discussions with the United Kingdom about a trade agreement. In highlighting that some other countries “also paused” their discussions with the United Kingdom, the officials mentioned that these countries “didn’t do it officially but they certainly took a step back and then looked at what's in their interests.” The officials added that the Minister of Small Business, Export Promotion and International Trade was “in agreement with” the recommendation “not [to] continue the negotiations at that time.” The Canadian Association of Importers and Exporters Inc. commented that it was not consulted about Canada’s decision to pause the discussions with the United Kingdom in 2019.

Global Affairs Canada officials noted that trade negotiations between Canada and the United Kingdom resumed in August 2020. In distinguishing between those negotiations and such other trade negotiations as the CPTPP, the Canadian Chamber of Commerce and the Canadian Agri-Food Alliance indicated that there had not been a formal notice in the Canada Gazette to initiate a consultation process. The Canadian Chamber of Commerce characterized its consultation with the Government of Canada regarding a Canada–U.K. transitional trade agreement as being “a bit more by industry initiating some of those contacts.”

As well, Global Affairs Canada officials mentioned that the consultation network that was developed for the CETA negotiations was used when negotiations were conducted for a Canada–U.K. transitional trade agreement. According to the officials, because “a number of CETA chapters could be converted to bilateral provisions in a straightforward manner,” only a limited number of areas required intensive negotiations, which led to “targeted consultations with implicated sectors,” and “mostly in the agriculture sector.”

Agriculture and Agri-Food Canada officials spoke about the department’s “robust suite of consultative tools that [are used] to engage with agriculture stakeholders in the context of all … trade negotiations.” The officials indicated that they pursue their consultations through the Agricultural Trade Negotiations Consultation Group, and noted that they “also engage closely with groups like the Canadian Federation of Agriculture, the Canadian Agri-Food Trade Alliance … individual industry associations and individual companies,” which they did “consistently throughout the discussions with the United Kingdom on a potential transitional agreement.”

In characterizing the consultation process as a “two-way street,” the Canadian Agri-Food Trade Alliance said that it was “closely engaged” in this process, and underscored that it had “conversations with the negotiators and the minister's office as well.” The Canadian Chamber of Commerce noted that “there has not been any formal Gazette notice for the U.K. [consultation] process,” but added that “both the minister's office and departmental officials at Global Affairs Canada have certainly been responsive whenever [they have been] contacted [for] an update on the file.” The Business Council of Canada described the officials as “very accessible,” mentioned that it has been “well-informed throughout the [negotiation] process,” and acknowledged that it has “been able to reach out and receive an answer” if it had any questions.

In providing a different perspective, Livingston International, the Lobster Council of Canada and the Canadian Labour Congress remarked that they were not aware of any federal consultation process. In this context, the Canadian Labour Congress stressed that “there has not been outreach [from the government] just yet.” As well, the Canadian Association of Importers and Exporters Inc. indicated that it was not consulted or made aware of export-related requirements that will exist on 1 January 2021 if a Canada–U.K. trade agreement is ratified by that date, which reduces “predictability and transparency” for them.

THE PRESENT: BILATERAL TRADE UNDER THE TRADE CONTINUITY AGREEMENT

On 21 November 2020, while the Committee was undertaking its study of a potential Canada–U.K. transitional trade agreement, Canada’s Minister of Small Business, Export Promotion and International Trade and the United Kingdom’s Secretary of State for International Trade announced the conclusion of negotiations for the TCA. If the agreement is signed and ratified by both countries by 31 December 2020, this agreement will govern trade between Canada and the United Kingdom beginning on 1 January 2021. In their appearance before the Committee, witnesses noted the scope of a bilateral transitional trade agreement and underscored the importance of the TCA.

A. The scope and nature of a transitional trade agreement

During a meeting with the Committee that occurred prior to the TCA being announced, Global Affairs Canada officials said that a number of the chapters in CETA – including those on institutional arrangements, definitions, exceptions relating to transparency, trade remedies, customs and trade facilitation, and mutual recognition of professional qualifications – could be replicated in a Canada–U.K. transitional trade agreement. According to the officials, other issues – such as sanitary and phytosanitary measures, technical barriers to trade, government procurement and financial services – would require some minor technical changes to transform the CETA obligations into Canada–U.K. obligations. Furthermore, the officials pointed out that such issues as market access for goods, rules of origin and investment would require more substantive discussions.

During the appearance by Global Affairs Canada officials on 20 November 2020, the Committee requested a definition for two terms: “transitional trade agreement” and “comprehensive trade agreement.” According to the response submitted to the Committee on 30 November 2020, there is “no set definition of a transitional trade agreement” and “the discussions between Canada and the U.K. that led to the announcement of [the TCA] were based on the Canada-European Union [CETA], and were intended to replicate and preserve the current preferential terms of trade between Canada and the U.K. under CETA.” The response also noted that “comprehensive trade agreement is not a defined term, and therefore no single definition exists.” As well, it indicated that, “in the context of Canada’s international trade agenda, a comprehensive trade agreement is one that covers a majority of trade between the parties to the agreement. This includes a broad set of chapters and disciplines that address a range of trade issues including, but not limited to, trade in goods, trade in services, investment, intellectual property rights, government procurement, State-owned enterprises, competition policy, environment, labour, and electronic commerce.”

Global Affairs Canada officials described the trade negotiations with the United Kingdom as “unique,” and added that Canada’s trade negotiators have not “had one like this ever, and we have been at this more than a few years, where we’re looking at trying to replicate something that is already in place.” The officials characterized the approach that was taken as the “only option” available to “mitigate the potential damages to businesses” that could arise in the absence of a trade agreement.

As well, Global Affairs Canada officials said that both Canada and the United Kingdom have a “keen interest … to make sure that [they] have a bilateral [trade] agreement in a timely manner.” Regarding the existence of a sunset clause in a Canada–U.K. transitional trade agreement, the officials remarked that they “don’t recall … anybody talking about a sunset clause, per se.” The officials also commented that the transitional agreement’s clauses “will more or less compel the United Kingdom to have a strong interest in wanting to move forward and then finalize a new bilateral agreement with Canada.”

B. The importance of the Trade Continuity Agreement

In speaking to the Committee following the 21 November 2020 announcement about the conclusion of negotiations for a Canada–U.K. transitional trade agreement, the Canadian Agri-Food Trade Alliance characterized the TCA as an important first step in ensuring that Canadian exporters are able to preserve the access and benefits that currently exist because of CETA. According to the Canadian Agri-Food Trade Alliance, “the temporary certainty and stability a transitional agreement provides is welcome news … and … parliamentarians [should] work together and pass this agreement before the end of the year.” However, the Canadian Agri-Food Trade Alliance also cautioned that “there remains a real fear that a transitional agreement will simply reinforce a situation that remains unacceptable under CETA due to the persistence of trade obstacles that continue to hinder Canadian agri-food export.”

As well, the Canadian Association of Importers and Exporters Inc. supported the TCA, and said that CETA’s rules of origin and certification requirements should be included in the agreement. Similarly, the Lobster Council of Canada described the TCA as “good news” and, with a focus on opportunities for exporters, urged a seamless transition from CETA’s certification requirements to any similar provisions in the TCA.

THE FUTURE: BILATERAL TRADE UNDER A SUBSEQUENT TRADE AGREEMENT

While the Committee’s study is focused on a transitional trade agreement between Canada and the United Kingdom, which – as noted earlier – was announced on 21 November 2020, a number of witnesses spoke about the future. They highlighted the need for a subsequent agreement, the public consultations that should occur prior to negotiations and their priorities for a subsequent agreement.

A. The need for a subsequent agreement

The High Commission of Canada to the United Kingdom said that the United Kingdom is interested in having a trade policy that is independent of the EU, which will be possible beginning on 1 January 2021.

The Canadian Agri-Food Trade Alliance characterized the United Kingdom as the “highest value market” for a number of Canadian agricultural and food products, and emphasized the need to conclude a subsequent Canada–U.K. trade agreement. The Lobster Council of Canada believed that such an agreement would provide certainty for the country’s lobster exporters.

B. Public consultations prior to negotiations

In describing a Canada–U.K. transitional trade agreement as an “interim measure,” Global Affairs Canada officials stated that Canada and the United Kingdom intend to begin new trade negotiations “sometime next year.” According to the officials, “full-scale consultation with all interested stakeholders” will likely occur in the first half of 2021, following which “a mandate” from Cabinet will be sought and negotiations will begin “shortly thereafter.” The officials also indicated that “any policies in place for the notification of Parliament” concerning trade negotiations would be followed.

The Canadian Agri-Food Trade Alliance mentioned that it expects “engagement and consultations” with the Government of Canada and Canada’s negotiators not only during the “design stage” and negotiation of future trade agreements, but also in the “enforcement and implementation” of such agreements.

C. Priorities for a subsequent agreement

In discussing their priorities for a subsequent Canada–U.K. trade agreement, witnesses mainly focused on three issues: trade barriers; enforceable labour rights and labour mobility provisions; and investor–state dispute-settlement (ISDS) clauses. That said, witnesses also made brief comments about other issues.

Concerning trade barriers, the Canadian Chamber of Commerce said that agricultural non-tariff barriers have been “quite problematic in the EU context,” and noted its hope that the United Kingdom will “eventually take a different approach.” Similarly, the Canadian Agri-Food Trade Alliance highlighted that trade barriers are preventing Canada from reaching its full trade potential with the EU under CETA, and speculated that these barriers – particularly those in relation to beef – could be “carried over” to a subsequent Canada–U.K. trade agreement. The Canadian Agri-Food Trade Alliance urged the Government of Canada to “go back to the negotiating table” with the United Kingdom in 2021 to conclude a “meaningful agreement that will remove non-tariff barriers.”

On the topic of labour, the Canadian Labour Congress mentioned that CETA’s labour provisions are subject to a compliance mechanism that is not binding, and stressed that a subsequent Canada–U.K. trade agreement should include “robust and fully enforceable provisions for labour rights.” Moreover, a brief submitted to the Committee by the Canadian Chamber of Commerce suggested that, in future discussions with the United Kingdom, Canada should pursue measures that would facilitate Canadian firms’ ability to “move skilled talent into the UK to service their foreign investment operations.” The brief also stated that Canada and the United Kingdom should work to “facilitate easier temporary entry under the contractual service supplier route to minimize burdens related to sponsorship requirements.”

Regarding ISDS, the Canadian Labour Congress argued that Canada’s future trade agreements should not contain such provisions. Similarly, the Trade Justice Network contended that Canada should “never sign another [trade] agreement with an ISDS clause in it.”

Finally, witnesses identified priorities for a subsequent Canada–U.K. trade agreement pertaining to the environment, regulatory cooperation, digital trade and customs processes. In speaking about the environment, the Canadian Labour Congress emphasized that Canada’s future trade agreements should “address the environment” while, concerning regulatory cooperation provisions in such agreements, the Canadian Labour Congress suggested that provisions in this area should be characterized by transparency and accountability. Regarding digital trade, a brief submitted to the Committee by the Canadian Chamber of Commerce noted that Canada should try to replicate the provisions that are contained in the CPTPP and in the Canada–United States–Mexico Agreement while, in relation to customs processes, the brief mentioned that Canada should seek additional measures to “modernize” such processes.

The Committee’s Recommendations:

Recommendation 1

That the Government of Canada immediately announce the scenarios it is considering with respect to the passage of the Canada–United Kingdom Trade Continuity Agreement (TCA) with either a plan for how the Government proposes to ensure the ratification of the TCA prior to 31 December 2020 or a detailed articulation of what Canadian exporters who trade in services or goods with the United Kingdom can expect in the event that the TCA is not ratified by the deadline, including what kind of support the Government will provide to affected Canadian exporters.

Recommendation 2

That the Government of Canada recognize that a so-called “transitional” trade agreement is nevertheless permanent so long as it has no expiration date and that the consultation process for the Canada–United Kingdom Trade Continuity Agreement (TCA) was wholly inadequate for a permanent trade agreement. Therefore, the Government should include a sunset clause in either the final version of the TCA or the ratifying legislation for the TCA to ensure that the important issues addressed in the TCA are revisited by the Parliament of Canada, whether Canada and the United Kingdom conclude a successor agreement or not.

Recommendation 3

That the Government of Canada allow reasonably sufficient time between the tabling of the final text of the Canada–United Kingdom Trade Continuity Agreement and the adoption process in order to allow parliamentarians to properly study the text before making a decision.

Recommendation 4

That, for any future trade agreement negotiated by Canada, the Government of Canada commit to report to parliamentarians on the status of the situation and on the planned deadlines throughout the negotiation process.

Pursuant to Standing Order 109, the Committee requests that the government table a comprehensive response to this Report.