Letter from London: Brexit

Managing Director
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Posted on July 15, 2016

Britain joins the ranks of nations that are debating the value — and the cost — of free trade agreements.

It sounds like the start of a bad joke: How is the political rise of Donald Trump like the ‘Brexit’ debate in the UK?
But it is no joke—and no coincidence—that the aspiring right-wing presidential candidate and a growing number of left-leaning British politicians are aligned in their vocal scepticism about the economic growth that derives from trade agreements and economic integration.
On both side sides of the Atlantic, positions that challenge the received wisdom on the benefits of trade agreements have powerful populist roots: Workers in developed countries around the world increasingly lay the blame for their faltering fortunes on the impact of free trade deals.
America’s participation in the recently negotiated Trans-Pacific Partnership (TPP) may even hang in the balance
In all cases, the disaffected argue that the long-term costs of free trade far outweigh any short-term benefits. They also maintain that comparative advantage—not thousand-page agreements—is what drives trade. And the political reality is that disgruntled voters who feel championed and empowered are the most likely to turn out at the polls for their candidates.
This pushback, which has steadily gained momentum, has implications for Canadian companies, most of which rely heavily on U.S. and UK markets and capital. For Canada the stakes are high on both counts: The U.S. market annually absorbs over 75 per cent of Canadian exports, while the European Union (including the UK) is in second place, at about 12 per cent
The wrangle over free trade may not be a new one, but it does bear close scrutiny for its potential to gain further traction.
In the UK, the divisions on whether to remain in the European Union or go it alone date back 41 years, although the stakes and the political positions couldn’t be more different in 2016.
In 1975, the Conservatives argued passionately to remain in the EU, while the Labour Party was split. Now though, the Labour Party is broadly in favour of remaining and the Tory party is divided.
The so-called Brexiters fear national sovereignty will be diminished in the face of the EU’s road map toward ever-closer political union. Embedded in that are such issues as immigration and the need to control UK borders, including in the face of the Syrian migrant crisis, as well as the economic freedom to trade with the rest of the world.
The Brexiters face two significant challenges. First, their current campaign is fragmented. Second, there is the uncertainty of what comes next, if the UK votes to leave.
While it’s expected that there would be a negotiation period of about two years to extricate the UK from the EU, it’s hard to predict how such things as terms and timelines for a new relationship would be framed. Greenland is the only other country to have left the EU, and that example doesn’t offer much guidance on what a UK exit would entail.
It is that uncertainty, something that capital markets abhor, that is likely to cause the most disruption, at least in the short term.
Such business and economic considerations, not surprisingly, dominate the debate.
Led by Conservative Prime Minister David Cameron, those who advocate remaining in the EU cite the economic benefits, as well as the need to continue influencing the broader European agenda. The business community, which relies heavily on European markets, supports the PM.
If the UK votes to remain in the EU, Canadian businesses with direct or indirect interests in the UK will see no change until the Comprehensive Economic and Trade Agreement (CETA) with the EU kicks in sometime in 2017.
If, however, the UK votes to leave, Canadian companies using the UK as a European base will have to assess whether to remain in the UK or move to the Eurozone. What is less clear for exporters to the UK is whether the tariffs will remain or, as a temporary arrangement, CETA will hold until a new trade agreement is in place. If the CETA process is any measure, however, a UK-Canada Trade Agreement could take eight to 10 years—at least a couple of lifetimes in both politics and trade theory.

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