On November 21, 2020, Canada and the United Kingdom came to an agreement in principle on the Canada-United Kingdom Trade Continuity Agreement (Canada-UK TCA or TCA). The Canada-UK TCA is expected to replace the Canada-EU Comprehensive Economic Trade Agreement (CETA), which governed Canada-UK trade prior to Brexit and during the 2020 transition year. The Canada-UK TCA is expected to apply from January 1, 2021, at the moment the UK leaves the EU legal framework, and thereafter CETA will cease to apply between Canada and the UK.
The value of merchandise traded between Canada and the United Kingdom totalled $29 billion in 2019. It is estimated that roughly 20% of Canadian goods entering the UK, including agriculture and seafood, would have faced tariffs if no agreement to replace CETA was concluded. For the UK, the absence of a continuity trade agreement would have meant an estimated £42 million additional tariff burden on UK exports to Canada.
The text of the Canada-UK TCA has yet to be released, and the briefings published so far remain high-level. However, by way of overview, our understanding is that:
- many aspects of CETA will remain in substantively the same form in the TCA,
- some aspects were modified; and
- some aspects will require fresh negotiations before an agreement can be reached.
Elements that remain the same or have been bilateralized
Most of CETA is carried over in the TCA. In this regard, assuming a smooth conclusion of the negotiation's final steps, most businesses currently benefitting from the agreement will only be required to make minor administrative adjustments to their operations.
Notably, the TCA rolls over the elimination of duties on 98% of tariff lines. The TCA is said to keep the same "look and feel" as the CETA, with key chapters relating to institutions, transparency, trade remedies, mutual recognition of professional qualifications, and customs and trade facilitation all remaining intact.
Certain key aspects of CETA, such as rules of origin, market access, and investment, have been bilateralized. Notably, this includes extended cumulation provisions for the UK, which allow for EU inputs to UK exports to Canada to count towards rules of origin requirements for a limited time period. Investment protections are said to be included within the TCA. However, entry into force of the dispute resolution mechanism, the investment court, remains contingent on EU member ratification of the dispute resolution process.
Key changes from CETA to the TCA
Sticking points in the negotiation that required reconsideration of some of the obligations under CETA are said to include some aspects of market access, sanitary and phytosanitary obligations, technical barriers to trade, government procurement, and financial services. Businesses that are currently benefiting from these chapters are best to follow closely the TCA adoption and ratification process and specifically watch for any issues that may affect them. Notably, Canada gave up no new market access for cheese or other supply-managed products in the TCA. In other words, the UK loses access to CETA's dairy tariff rate quota but can continue to compete for the EU's WTO quota for a limited period of time. Outside of free trade agreement arrangments, Canada imposes a 245.5% tariff on cheese and similarly high tariffs on several other dairy products.
Entry into force of the TCA and opening of new negotiations
Both Canada and the UK require treaties to be tabled in Parliament for a minimum of 21 days prior to taking legal steps to bring a treaty into force (although the UK process allows for this to be avoided in "exceptional" cases). This includes treaties that do not require any domestic implementing legislation. Given that both parties already benefit from CETA, legislative amendments required to roll over CETA should be manageable for both Parliaments. In both countries, there appears to be broad support for the TCA across the main political parties. Nevertheless, both countries will be hard-pressed to meet these requirements while allowing any significant debate on the transitional agreement.
The TCA is intended to be a temporary stop-gap measure; it is anticipated that, within a year of its ratification, the parties will commence a full FTA negotiation. Negotiations will likely start in the second half of 2021 after both parties have concluded relevant industry consultation. Notably, certain industries such as Canadian agri-food producers have noted continued non-tariff obstacles that have limited their ability to grow their markets in the EU. Other industries on both sides, including financial services for the UK are likely to specifically note trade troubles or lacunae under CETA during this period. The TCA is said to commit both sides to conclude a comprehensive free trade agreement by 2024. The future free trade agreement is expected to further deepen Canada-UK integration.