Trade barriers between Britain and Canada are increasing after no deal is reached

By | March 31, 2024

(Bloomberg) — Provisions allowing Britain to sell products containing European Union components to Canada tariff-free are set to expire on Monday after the two countries failed to agree on extensions.

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While British government officials try to play down the impact on British industry, especially carmakers, one critic calls it “embarrassing” for the country’s post-Brexit trade policy that it could not reach a deal even with a close ally .

Forming closer trade links with countries outside the EU was touted by Brexiteers, including Prime Minister Rishi Sunak, as a key benefit of leaving the bloc. But so far Britain has only signed new bilateral free trade deals with Australia and New Zealand, and those deals have been criticized by MPs and farmers alike.

The inability to secure an extension of the so-called rules of origin with Canada even after last-ditch talks between the UK Trade Secretary Kemi Badenoch and her Canadian counterpart Mary Ng on the sidelines of the World Trade Organization conference in Abu Dhabi in late February, underlining how difficult it will be for Britain to boost its tariff-free trade with non-EU markets.

It could also be a sign of growing divisions within the ruling Conservative Party, which is trailing opposition Labor in the polls ahead of a general election expected later this year as divisions against Sunak grow.

Although the EU is still Britain’s largest trading partner, and Labor has pledged to deepen that relationship in a bid to boost the economy if the country wins the general election, negotiators are finding out firsthand that the close Britain’s bond with the EU could alienate the country. from other trading partners.

“We may have allies, but we all have interests,” said David Henig, director of the European Center for International Political Economy. He added that there was “a lot of naivete” in government trading circles at the time of Brexit, and that it was “embarrassing” that Britain had failed to secure a new trade deal with Canada.

The expiry of the rules of origin provisions on Monday comes after negotiations on a broader, enhanced free trade deal between Britain and Canada were “paused” by Badenoch earlier this year. At a time of infighting within the Conservative Party, the trade secretary is seen as a potential successor to Sunak. While she has tried to distance herself from the plot against the prime minister, Badenoch has raised eyebrows with a wave of interventions on social media that some saw as undermining him.

Someone close to Badenoch said having an independent trade strategy outside the EU meant being willing to play hardball, and the trade secretary was willing to put her foot down. This position is likely to go down well with the right of the Conservative Party, many of whom voted for Brexit to increase British sovereignty and who would be reluctant to relinquish control through trade deals.

Several people with knowledge of the matter said in the run-up to the pause in negotiations that British officials were becoming increasingly reluctant to tackle the broader deal as they focused on getting an extension of rules of origin, which was a hangover from the British membership of the EU.

But two people close to the Canadian negotiating team said Britain offered nothing in return. Canada wanted a firm deadline on rules of origin to push Britain to prioritize the broader trade deal. The two countries have a strong relationship, but that doesn’t mean Canada can give things away for free, said a Canadian official who asked not to be named because the talks are private.

Rules of origin measures affect a range of industries, but in the context of trade between Britain and Canada they are particularly critical for the UK car manufacturing sector. Canada was the eighth largest export market for car companies last year, with exports totaling almost £700 million ($883 million).

According to the British Society of Motor Manufacturers and Traders, exporters who could previously trade tariff-free under rules of origin will now be hit with a 6.1% levy, or around £3,000 per vehicle.

“The potential tariff liabilities will be significant,” SMMT CEO Mike Hawes said in a recent letter to Parliament’s Business and Trade Select Committee.

The breakdown in negotiations was largely due to Canada’s insistence that Britain relax food safety rules, according to several people familiar with the matter.

Canada’s agricultural and food processing market is focused on exports to the US, where practices such as chemically washing carcasses and injecting beef and pork with hormones are common. In the EU, and in Britain, due to its former membership of the bloc, such practices are banned.

Canada had hoped that Britain’s need to expand rules of origin provisions would lead to some flexibility on washing carcasses, or even growth-treated beef and pork. But according to people with knowledge of the British position, this was a red line the government was unwilling to cross.

“Canada’s decision not to extend these rules of origin will increase the cost of trade and hurt businesses on both sides of the Atlantic,” the Department of Trade and Business said. “The UK government remains willing to work with Canada to find a solution that works for both countries, but we will not accept going back on the current terms.”

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