THE STANDING SENATE COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE
EVIDENCE
OTTAWA, Wednesday, October 4, 2017
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:48 p.m. to study foreign relations and international trade generally (topic: the impact of Brexit on Canada).
Senator A. Raynell Andreychuk (Chair) in the chair.
The Chair: Honourable senators, we are continuing our study under our general reference. The committee is authorized to examine such issues as may arise from time to time relating to foreign relations and international trade generally.
Under this mandate, the committee has invited the next witnesses to give committee members a briefing on the impact of Brexit on Canada and any other issues around Brexit that would be of value to our committee.
Without further delay, as we have only an hour, I’m pleased to introduce to the committee Dr. Achim Hurrelmann, Director of the Institute of European, Russian and Eurasian Studies, and Associate Professor of Political Science at Carleton University. He just testified before us, so he’s well versed in the procedure here in the committee.
We’re very pleased that you were able to accept our offer. As I indicated before, we don’t go into long biographies. Those are given to the senators, and we want to take our time on your testimony and questions and answers.
Appearing by video conference from Barcelona, Spain, Dr. Patrick Leblond, Associate Professor and Associate Director, Graduate School of Public and International Affairs at the University of Ottawa.
Thank you for accepting our invitation.
As we are pointed at Brexit today, I know that there is some interest in Barcelona. We will try to keep to the topic as much as we can.
We will hear from the witnesses as I have listed them, so we will start with Dr. Hurrelmann.
Achim Hurrelmann, Institute of European, Russian and Eurasian Studies, Associate Professor, Department of Political Science, Carleton University, as an individual Thank you very much for listening to me again. I will focus my presentation on the legal and political processes of Brexit and what they mean for Canada. I will leave to Professor Leblond the economic relationship, trade flows and so on, where he is more an expert than I am.
Let’s review a couple of key dates to start.
June 23, 2016, was when the referendum was held in the United Kingdom, and 52 per cent of the participating voters decided that Britain should leave the European Union. Subsequently, on March 29 of this year, the British government formally notified the European Union of its intention to withdraw from the European Union. On June 19 of this year, the first Brexit talks were held, and the negotiations between the U.K. and the so-called EU27, which are the remaining member states, formally began.
I want to briefly remind us of the status quo. The U.K., as a member of the European Union, is part of the world’s largest single market defined by the free movement of goods, services, capital and labour. The EU has a dense regulatory regime covering products, health and environmental standards, amongst other things. It is a customs union with the exclusive competence to conclude external trade agreements, such as the CETA agreement with Canada; and all member states are subject to binding European Union law that is interpreted by the Court of Justice of the European Union.
I mention all this because the objectives of Brexit are to leave some but not all of these arrangements. If the Government of the United Kingdom gets its way, they would like to end the free movement of labour; replace EU regulation with British rules; leave the customs union and conclude their own external trade agreements; and end jurisdiction of the Court of Justice in the United Kingdom, but they would like to retain access to the EU market for British goods, services and capital.
From the perspective of the European Union, this amounts to cherry-picking from a comprehensive single-market regime and has therefore been declared unacceptable. The EU position is that unless the United Kingdom accepts the full single-market package, the EU will not allow unrestrained access to the EU27 market. This is what is now being negotiated.
The EU is in a strong negotiating position because the economy of the United Kingdom is dependent, of course, on the large market of the European Union. U.K. exports to the EU account for 13 per cent of the United Kingdom GDP, while EU exports to the U.K. account for only about 3 per cent of the EU GDP. That shows some imbalance that is reflected in the negotiation dynamics.
I briefly want to review the procedures according to which Brexit is negotiated. The basis is article 50 of the Treaty on European Union, which sets a two-year time frame — that means until March 2019 — for negotiating the withdrawal arrangements as well as the framework for the future relationship, as the article calls it.
The agreement, if it’s reached, will need to be approved by a qualified majority of the EU member states — 72 per cent of the member states representing 65 per cent of the EU’s population — as well as by the majority of the European Parliament. In the U.K., Theresa May has committed to also letting both houses of the British Parliament vote on this agreement.
At the same time, there is a parallel process occurring in the United Kingdom, the so-called withdrawal bill, which you might also have followed, which would convert EU legislation into British law to ensure that economic and social regulation that so far has been made at the EU level for all EU member states remains in place after the United Kingdom leaves. These laws could subsequently be altered by the British legislature, but businesses will likely press for the U.K. to maintain some correspondence with EU product standards in order to have access to EU markets.
The ongoing negotiations have unfolded as follows: The U.K. would have liked to discuss the withdrawal terms and the future relationship as one package and allow trade-offs between the two, but the European Union has insisted on a sequential approach. The first issues that are now being discussed are sometimes called “divorce issues” relating to the financial settlement — how much the U.K. still owes the European Union — and the rights of citizens in the other jurisdiction — what happens to EU27 citizens who reside in the U.K. and U.K. citizens residing in the EU? — as well as the very tricky issue of the border between Northern Ireland and Ireland?
According to the EU’s template, only when the talks about these three issues have shown sufficient progress, will they be willing to engage in talks about the future relationship.
I want to note that any future arrangement that is a comprehensive economic agreement — CETA or more — will likely not be negotiated under article 50 but will require a separate negotiation which would very likely require unanimous agreement by member states of the European Union, as well as ratification according to domestic constitutional procedures, just like CETA. As we see, this takes a long time.
This is why we have recently seen a lot of discussion about transition periods, which would see continued application of EU rules to the United Kingdom for a certain period of time beyond March 2019 and ideally stretching until a new long-term agreement comes into force. But the terms of a potential transition period are still very unclear and also extremely contested within the British government. At the ongoing Tory Party conference, various ministers have been giving very contradictory statements on whether the transition period will be full single-market membership or customs union membership and how exactly it will look. If the U.K. ministers cannot even agree on this amongst themselves, then, of course, negotiations will not make progress quickly.
To conclude, I want to briefly talk about the outcome options of the current talks. It’s possible in March 2019 to have a withdrawal deal without a transition period. It would be preferable, in my view, to see a withdrawal deal with a transition period so that the cliff’s edge in March 2019 is avoided. In both cases, talks about the future relationship would likely continue after 2019. It is very unlikely that the long-term relationship will be settled by then. However, it also cannot be ruled out that there will be no deal, and then future trade will have to occur under the general framework of the WTO most-favoured-nation rule.
What does all of this mean for Canada? Obviously, the precise terms of the British withdrawal, the precise terms of the transition period, as well as the future relationship, are very important for the Canadian economy, particularly in light of CETA. The United Kingdom is by far the biggest economic partner of Canada in the European Union. I’m sure Professor Leblond will talk about this some more.
CETA will no longer apply to the United Kingdom when it leaves the European Union, unless the transition period includes U.K. membership in the customs union.
At the moment, it is very difficult for Canadian policy to plan ahead because the outcomes are still very much up in the air and the negotiations have not given us any certainty of where we might be going.
The Chair: Thank you.
We will now turn to Dr. Patrick Leblond. The floor is yours.
Patrick Leblond, Graduate School of Public and International Affairs, University of Ottawa, as an individual: Thank you very much for the invitation. I will give my introductory remarks in French, but, of course, members of the committee can ask questions in either French or English. I will be happy to answer in either language.
[Translation]
My introduction follows on from Professor Hurrelmann’s, actually, because I would like to talk about the situation that will exist once Great Britain has left the European Union, and about what will happen after March 2019.
Professor Hurrelmann already began to discuss various scenarios. For Canada, the best scenario in the short and medium term would indeed be for Great Britain and the European Union to come to an understanding on a transition period lasting from two to three years and that, while negotiating that transition agreement, the Comprehensive Economic and Trade Agreement, or CETA, will continue to apply. So, Great Britain will continue to be part of the agreement between Canada and the European Union, and the status that Canadian businesses enjoy today, in terms of doing business with Great Britain, will continue for at least a few more years.
Otherwise, with no similar transition agreement under which CETA continues to apply, the major question is knowing what is going to happen. Two scenarios are possible. The first is that Canada and the United Kingdom agree to “copy and paste” CETA, which was negotiated between Canada and the European Union, and apply it directly to Great Britain, effectively replacing the European Union with the United Kingdom. That would be the easiest and best solution, both for British companies doing business in Canada and for Canadian companies doing business in the United Kingdom. As Professor Hurrelmann said, for Canada, the European market is the bigger.
Nevertheless, even if we managed to transpose CETA directly between Canada and the United Kingdom, there would still be things to negotiate. First, there are the commercial quotas where customs duties are not applied. For one thing, Canada has granted the European Union some dairy quotas. What would the United Kingdom’s quotas be? Would the European Union agree to give the United Kingdom a share of those quotas negotiated under CETA? That would be part of the negotiation between the United Kingdom and the European Union. Would any resulting distribution be acceptable to Canada? That remains to be seen. If the European Union ever refuses, Canada and the United Kingdom will have to negotiate new quotas themselves. In the other direction, the European Union has granted Canada some quotas to export beef and pork to the European market. There again, what share of those quotas would Canada grant to the United Kingdom? Would the European Union agree to reduce its own quotas?
We know that these two issues have been hot topics for Canada. To an extent, they could delay the implementation of a free trade agreement or a comprehensive trade agreement being signed between Canada and the United Kingdom. That is one example of where negotiations would be needed. There are others. For example, there could be discussions about the exceptions that the European Union has granted to Canada or that Canada has granted to the European Union. Do we want to have the same exceptions in an agreement between Canada and the United Kingdom?
The danger arises when we open negotiations on one aspect of the agreement. The danger is in saying that, if we are negotiating one thing, why don’t we negotiate another? Pressure groups will insist on certain points and the danger is that, in the absence of that transition period, during which CETA would apply between Canada and the United Kingdom, even if we tried to “copy and paste” the agreement, we will end up without one. There, we revert to another scenario that Professor Hurrelmann mentioned: the World Trade Organization agreements.
So the tariffs and customs duties that would apply would be those of the European Union. Since it is not possible for the United Kingdom to negotiate tariffs in time, it would agree to apply the European Union’s tariffs to its trading partners. So Canadian companies exporting to the British market would see various tariffs applied, and they would be those of the European Union.
Then there would be other factors, because CETA would no longer apply. There would be less access to government procurement in Canada for British companies. It would be the same for Canadian companies in the British market because, at that point, the applicable rules would no longer be those of CETA, but of the plurilateral agreement on government procurement negotiated through the WTO.
As you can imagine, going from CETA to the WTO would be going back to the status quo that Canadian companies were in until very recently. Given that uncertainty, we might also wonder what Canadian companies will do in the meantime because, if they want to take advantage of CETA in order to trade on the British market, they will wait to see what the rules of the game will be in terms of trade and investment. The same will apply the other way around for British companies doing business with Canada. Will British companies that would like to do business with Canada, invest here and trade here wait to see what the rules will be? That wait may be another year and a half, two, three, four or five years, perhaps even longer, given the time needed to negotiate all the details. The danger we face now is uncertainty, not knowing what the rules of the game will be. I will stop there and will happily take your questions in French or in English.
[English]
The Chair: Thank you for both presentations.
I am going to turn to Senator Woo for the first question.
Senator Woo: Thank you, witnesses, for your very enlightening testimonies.
The question of the impact of Brexit on Canada is less about the impact on the Canada-U.K. relationship and more on the Canada-EU-minus-U.K. relationship. That’s how I look at it. The U.K. will be the demandeur when they leave under whatever terms, and they’re going to be desperate to negotiate agreements with other countries, including Canada, before they try to start negotiations with us, and obviously we cannot do so until we understand where they will stand.
As Professor Hurrelmann told us, the EU is a much larger market, so what will be really important is the way the EU minus the U.K. evolves its trade policy vis-à-vis the world, having already negotiated the CETA with us.
How do you see the evolution of trade policy thinking in the EU, having gone through this very traumatic experience with the U.K.? I think you already told us that TTIP is not going to happen — it’s far off — but what else is the EU going to pursue in terms of trade agreements that might undercut the preferences we now enjoy because we have an agreement with them already?
Do you understand my question? This is for either of you.
Mr. Leblond: The answer to the question, from my perspective, is that I do not think the EU’s trade policy will change as a result of Brexit. In fact as a result of Brexit, the EU is trying to send very clear messages that it wants to continue negotiating trade or economic partnership agreements with other parts of the world.
There was a reference to TTIP, the transatlantic trade and investment partnership with the Americans. Those negotiations are now on hold, but it is not because the EU doesn’t want to negotiate with the Americans; it’s because the Americans do not want to negotiate with the EU. We all know President Trump’s views on free trade, and it is in that context that those negotiations have stopped. It is not the EU’s decision to stop those negotiations.
Already, the EU has engaged with Japan. A couple of months ago, there was an announcement that the EU and Japan had arrived at an agreement in principle. That underlines again the EU’s commitment to an open trading system — certainly to free trade.
I would also not abandon the idea that the EU is committed to the multilateral process, a little bit in the same way that Canada is. Right now, because that process is stalled, there has been much more emphasis put on bilateral or regional types of agreements like CETA. But I certainly think given the absence of American leadership on many levels, the EU is now feeling the pressure that in a way it has to play a leadership role with other partners like Canada. I think that whether the U.K. is part of the EU or not, the EU will keep moving forward. The question is then to what extent the United Kingdom will want to partner with the EU on many of these issues, and also with Canada.
Mr. Hurrelmann: I think I would share that assessment in principle. I’m less optimistic about the TTIP agreement because there has also been significant politicization of that agreement, and a lot of opposition against the agreement within Europe. Even if the European Commission would negotiate an agreement, this would make it likely there would be a lot of mobilization against it.
In that sense, it might even be helpful for the EU’s trade agenda that TTIP is stalled because of the Americans and this very politicized agreement is off the table for now, so they can pursue the agreements with Japan and others, which the EU is certainly moving forward on.
Senator Marwah: Thank you, witnesses, for your enlightening comments. I have a question which probes slightly further than Senator Woo’s question. Mr. Leblond, this is directed to you.
I would like to further probe the impact of Brexit on Canada. Given the fact that CETA is done — we have our trade relationships with Europe taken care of and the U.K. is on its own — does this put Canada in a better bargaining position to negotiate something with the U.K.? They’re going to need some friends somewhere. Do we move quickly to that point, or do we give them exactly what we give the EU? Should we push for EU plus or CETA+? What’s your thought in terms of the strategy there?
Mr. Leblond: The answer is that it does put Canada in a good position. As was mentioned, the U.K. would be in a demandeur position, so it does give us some leverage. Yes, the U.K. will be looking for friends. It will be looking to try and maintain its trade relationships as quickly as possible. The fact that there is already a free trade agreement between Canada and the EU to which the U.K. has signed on makes it easier.
Then I guess it will be a question as to how much Canada thinks it can get from the U.K. by trying to use this leverage and whether we really want to use it. I think the general view — at least this would be my perspective — is that we would rather have the U.K. within the EU than outside, but it’s still an important economic and political partner on trade, investment, security issues, foreign policy, et cetera.
In the context of that relationship, some groups will probably ask for something more than we got from the Europeans or maybe give less than what we gave the Europeans so that we can, in a way, gain a little bit more. That’s possible. Ultimately I think it will be the responsibility of the government to decide how long we want to hold off on getting a deal and therefore have WTO rules apply, potentially, and create this uncertainty around our most important economic relationship with a European country.
It’s going to be a bit of a trade-off where what we gain, on the one hand, by negotiating might be a slightly better deal than CETA. You mentioned CETA+ with the U.K. Does it mean we have to wait longer before we get to that agreement? In the meantime, it means investments are not happening on both sides of the Atlantic. Maybe trade is not happening because of the uncertainty and trade barriers that would, in a way, reappear between Canada and the U.K. because now, of course, CETA applies.
I think it will be for the negotiators to determine which way to go and how much we think we can get. My view is that maybe it’s better to go forward with what CETA offers right now, negotiate quotas and a few things — in a way, the tweaks that Mr. Trump was talking about — and make sure we have an agreement as quickly as possible so that the current situation that applies in terms of CETA continues to apply afterward so there’s continuity of business with Canadian firms and British firms.
The Chair: Mr. Hurrelmann, do you have anything to add?
Mr. Hurrelmann: I think it would be ideal to reduce this uncertainty and to give a perspective on what Canada and the United Kingdom are aiming at. As my colleague mentioned, right now it’s not necessarily an attractive option to invest in the United Kingdom because we know CETA applies for now, but we don’t know what happens after 2019.
I think the main task for the Canadian government right now should not be to get a slightly better deal out of the British but to find ways to reduce this uncertainty and to send a signal that we are committed to finding a way that the CETA rules will continue to apply, that there will be no cliff’s edge, that maybe they will become better, but that for sure businesses can rely on continued application of CETA-like rules. I think that would be very important.
[Translation]
Senator Pratte: I will start with a question for Mr. Leblond.
You brought up the various parts of CETA, quotas for dairy products in exchange for quotas for beef products, and so on. What do we know about the precise role that the United Kingdom played in the various compromises during the negotiations? That would be useful to know when renegotiating a modified CETA with the United Kingdom. What could their demands be, for example? What could be new or different, compared to the current CETA?
Mr. Leblond: That is a good question. Ideally, you should ask the negotiators, as they would probably know better than I do. But we must not forget that we really know very little because the European Commission negotiates on behalf of the European Union. So, unlike Canada, where the provinces participated in the CETA negotiations, the member states of the European Union were not there, having actually given the commission quite a broad mandate to negotiate. Then, it was just a question of deciding whether to sign or not.
We know that lobbies were putting pressure on the European Union, the European Commission, certainly in terms of quotas on Canadian exports of beef and pork to the European Union. However, to my knowledge, it was mostly the French and the Irish who were somewhat apprehensive about more Canadian beef arriving on the European market. I think that, to a certain extent, there were also British producers, mostly in Scotland, who saw that there would be more competition and who were a little less enthusiastic about the idea. On the other hand, however, dairy and cheese producers in France, Italy and Britain, welcomed the export quotas to Canada.
We may well see many of the same dynamics on aspects that are a little more sensitive. Overall, we would have to find out in the very specific sectors whether or not there had been significant demands by Great Britain during the negotiations. Great Britain strongly supported the agreement with Canada. Some lobbies expressed their concerns, but, at the end of the day, it was a European Commission decision that assessed the overall compromise for the European Union in general, not necessarily for member states in particular. Above all, we must not forget that, at the start, the agreement was negotiated with the idea that it would not be a mixed agreement, meaning that the agreement would not need to be ratified by the parliaments, national or regional, of the member states, but simply by the European Parliament and the European Union’s council of ministers, using a qualified majority vote.
The dynamics were affected there too. We know that, at the end, for political and legal reasons, CETA became a mixed agreement requiring ratification by national and regional parliaments. That changed the dynamics. At the very outset, when the commission negotiated, that did not apply and it deprived member states of some weight and leverage during the negotiations.
For all those reasons, it is difficult to answer your question clearly or precisely. I apologize for that.
[English]
The Chair: We’re obviously preoccupied with Canada, but the unravelling of the U.K. and Europe affects other arrangements that involve the European Union. We’re preoccupied with ours, and we understand the U.S., but there are those association agreements like with Turkey, et cetera, and on the eastern flank.
Are those going to preoccupy members in the union more than perhaps the Canadian one? We saw that the U.K. reached out to us in many ways on that. Is that unusual because we have a better trade arrangement historically with them? Where are the balances and imbalances within CETA when they are trying to juggle many balls in the air as they are unravelling with the U.K.?
Mr. Hurrelmann: The good position for the EU27 is that the agreement remains in place. So all these questions concern the Government of the United Kingdom much more than the other member states. They are happy with the CETA agreement as it has been negotiated and might actually see potential to reap added benefits if the biggest partner of Canada in the EU drops out and potentially Canadian investment and trade is diverted to other EU member states.
In that respect, I don’t think there’s much concern on the part of the EU27 for the economic relationship with Canada. They will, as you mentioned, continue to pursue other trade and political relationships, including with countries in the eastern neighbourhood. I also see relatively few effects of Brexit on these templates for agreements that have been in place and will remain in place.
One bigger challenge for the European Union is going to be its common foreign and security policy, where the United Kingdom has been a main contributor as one of the strongest military powers in Europe with its seat on the UN Security Council and so on. In this area, losing the United Kingdom will certainly have a more significant effect.
At the same time, the British have also often prevented moves towards more supranational decision making on common foreign and security policy issues, so there could also be an opening for creating a joint EU headquarters and things that the British have found unacceptable. This is an aspect of the Brexit negotiations that also deserves attention. What will be the relationship between the U.K. and EU in security and foreign policy and to what extent will the U.K. continue to contribute to EU structure, such as the common foreign and security policy?
The Chair: I have one other question. The politics and dynamics within Britain have been changing and in Europe. Some of the rhetoric we’re hearing from parliamentarians is that it’s disrupting their lives and there will be a price to pay for Britain to leave Europe. Is that rhetoric, or do you think that’s going to be translated into policies driving governments?
Mr. Hurrelmann: The European Parliament, as I mentioned, has to approve any withdrawal deal, and they’re trying to make the most of these powers. The European Parliament is always interested in building its own power base, and they are certainly doing that. The majority groups of the European Parliament will also be trying to protect the integrity of the single market and what they see as the integrity of the European Union. They will likely be taking a harder line than some of the member states on the types of compromises the EU can make with the British.
So it’s not just rhetoric. They have to be taken seriously as an actor in these negotiations. Of course some of the statements are over the top a little bit. Nevertheless, I think the European Parliament is a very significant actor in this process.
The Chair: Dr. Leblond, do you have anything to add?
Mr. Leblond: Yes. I think it’s also a reflection of the power imbalance that Professor Hurrelmann was talking about earlier in his remarks. Yes, the departure of the United Kingdom from the EU has an impact economically and politically. Nevertheless, it’s going to hurt the U.K. more than the EU because in this sense the U.K. is the junior partner, and the U.K. is more highly economically dependent on the European Union. I think a lot of the rhetoric that we’re hearing from the Parliament and other EU leaders is a reflection of that reality.
It is true that for the U.K. it’s going to have negative impacts. We’re already seeing those impacts economically and much more than certainly the Brexiters anticipated. Probably not as much as the remainder threatened would happen, but this is nonetheless the reality. I think a lot of the rhetoric that is happening is a reflection of that.
In addition, let’s not forget that the EU has to be tough in this negotiation because, of course, it wants to show that there is a cost to leaving the European Union. If it’s shown to be too soft vis-à-vis the U.K. in terms of, “Yes, you leave, but you can still get a good deal by choosing à la carte,” as Professor Hurrelmann was saying at the beginning, this doesn’t send a very strong signal to other member states who might be thinking or groups within those member states who might be in favour of leaving the European Union. It is a little bit like Marine Le Pen was advocating during her campaign to some extent, and then the Cinque Stelle party in Italy, and let’s not forget what’s happening in Poland and Hungary. So the EU and the EU institutions have to show that there is a cost to leaving the European Union and that they will act accordingly and will not give anything away to the U.K. The U.K. will have to negotiate hard for it.
The Chair: Will Canada then get caught up with which side to choose in certain issues?
Mr. Leblond: I don’t think so. First of all, those negotiations do not involve Canada. They’re really about the U.K. and the EU. I doubt that both sides would want to try to play the game of “You are on my side or their side, and if you’re not on my side, then my enemy’s friend becomes my enemy.” I really don’t think so. Again, it’s in both parties’ interests to have good relationships with Canada. The U.K. has, of course, a long, historic, deep relationship with Canada and that will continue. The EU also has a long-established relationship.Let’s not forget that the first partnership agreement that the EU signed was with Canada in 1976, if I recall correctly, and that relationship will continue.
In fact, to your question about whether the fact the U.K. was leaving the E.U. would create less interest from the European Union to cooperate with Canada and to be focused on Canada, I don’t think so. I think, in fact, with CETA it will create more cooperation and Canada will be more present in Europe and in European leaders’ minds. I think right now, because of the situation in the United States and the position that this government has taken internationally in terms of wanting to play a leadership role in several issues, including progressive trade, that means that the EU will welcome partnerships and cooperation on these issues.
I think we’re going to continue to have very good relationships with both partners. All we can do is encourage our partners to resolve their issues as quickly and as peacefully as possible, and I think that will be the case. I would be very surprised if we were asked to choose between one or the other because no one would gain from such a situation. It would not give any leverage to either side, whether that be the U.K. or the EU, in their own negotiation.
Senator Housakos: My question is to Professor Leblond. I apologize because I came in a little late and maybe didn’t get the full context of your comments.
A few moments ago, if I heard correctly, you made the claim that in the “Brexit” of the U.K. from the EU, the net loser in this would be more the United Kingdom rather than the EU. You also went on to say we’re already seeing signs that the British economy is feeling the strains of Brexit.
Having said that, if you look at the fundamentals and the technicalities of the U.K. economy, you will agree it’s one of the strongest in Europe. If you look in terms of the net provider of revenue into the various EU programs, the U.K. has been a huge contributor to the EU pot. Certainly the U.K. would be amongst the top two or three economies, and they would be the one subsidizing the bottom three or four nations in the EU community that are struggling.
Going back to the point you made earlier that the EU has to make it difficult for the U.K. to leave, why would you make it difficult if you had a partner that wasn’t making a huge contribution to the EU? I think the first reason Germany, France and their partners are making it so difficult and costly for the British to carry out Brexit is they want to send a message to the other members; you are absolutely right. But the second one is the exit of such a rich and strong economy that provides capital and one which has a huge trade deficit with other EU states. The United Kingdom has consistently had a massive trade deficit within the European Community, which is one of the reasons you have a lot of upheaval in the United Kingdom. In order for trade agreements to work, be it Canada-U.S., NAFTA or whatever else, you need it to be win-win for everyone.
There is a sentiment when I travel to Europe that the northern economies, which tend to do a little better, have a resentment towards the southern economies because in the European Union you don’t have fiscal transfer payments as we have in Canada between the have and have-not provinces. Those evolve and that’s how our federation works. The EU has never rectified that imbalance.
Did I understand correctly or am I misquoting or taking out of context your earlier comments?
Mr. Leblond: I don’t think you are. You are making an important point. Even if I said that the U.K. might suffer more than the EU overall in terms of its trade relationship, given the fact that the EU is bigger and has more diversified economic relationships and less relative dependence, you’re right in terms of the budgets. I was speaking more in commercial terms.
But the contribution the U.K. has been making to the EU budget and other EU programs has played an important role and that will have an impact. It will remain to be seen on what basis the U.K. will remain involved in some of these programs. We’re already hearing that the U.K. might actually continue being a member in one form or another of Euratom given the importance of nuclear power, and there are others like that. Prime Minister May has talked about continuing to partner with the EU on security and defence, so we’ll have to see what form that will take. So the engagement will continue.
I think it’s also why there is a willingness on both sides to negotiate some kind of trade or economic partnership agreement. What form that will take remains to be seen, although the EU is using its leverage, knowing that the U.K. would lose significantly if it had to operate under WTO rules to conduct its trade with the EU without a free trade agreement. In that sense it’s using that leverage to negotiate on the issues of separation. That involves the money and the border between Northern Ireland and Ireland, as Professor Hurrelmann mentioned.
Those are tough issues as are those of the European migrants, people who come from other countries to the U.K. and what will happen to U.K. citizens in the rest of the EU.
You can see that both sides are trying to push their importance to each other. It seems quite clear that in this negotiation the EU has the upper hand vis-à-vis the U.K., but at the same time it has no interest in completely abandoning the U.K. Otherwise, it would have already done so. It’s negotiating hard and so are the Brits. I think that’s fair game, but ultimately they will both have to compromise because otherwise they will both lose. I think that’s the reality.
Now we’re starting to see action. For such a long time no one really wanted to budge, but now, as March 2019 is coming very quickly, there is a realization on both sides that they had better solve this and start negotiating what the after-Brexit will look like. That’s why the U.K. has now mentioned the question of a transition and that the EU seems to be open to such a thing. This demonstrates the goodwill and the recognition of the importance of both sides.
Your point is correct but I would not neglect the fact that for the U.K., this is going to have an important cost. Right now, there is the issue of uncertainty. A lot of companies are not investing in the U.K. because they’re waiting to see what kind of relationship the U.K. will have with the rest of Europe.
In the automobile sector, the U.K. has been a great platform to export to the rest of the EU, but if there are going to be tariffs or if the rules and regulations are going to be different, many Japanese companies, for instance, might decide to invest in other parts of Europe. We know in the financial sector that a lot of banks are now no longer waiting to see what will happen. They’ve already planned to move some of their operations and are hedging their bets. So it is adding a cost to the U.K. economy. I think that’s an important message that becomes part of the negotiation and makes for the willingness on the part of both parties to find a solution as quickly as possible.
Senator Woo: I think you have answered my question, but if there is anything to elaborate, I would welcome comments from either of you two professors. It picks up on the costs that the U.K. is already incurring because of the uncertainty. Markets are forward-looking and businesses will not wait for agreements to be finalized. They are making plans right now.
Apart from the examples you have already given us on the auto sector, are you seeing patterns in the relocation of production vis-à-vis the U.K., the EU and the rest of the world so that we can start thinking about how Canada might position itself? Are there trends in particular industries that are making their moves already for the sake of their own certainty or because they are anticipating a very unfavourable outcome? You may have already answered the question, but any more that you can add on this would be very helpful to us.
Mr. Hurrelmann: My impression is that there have not been any major relocations of production or something like that to date. That would happen if there were serious concerns that no agreement would come about. I think the business community does realize, as Professor Leblond said, that both sides have a strong interest in compromising and, therefore, has not factored in any potential costs of a non-agreement.
We do see some movement in the financial sector, which is very important for the United Kingdom and which faces the issue of the City of London losing its so-called passporting rights to trade in Euros; and we see Frankfurt very actively trying to woo financial companies to move over, maybe not completely but with some of their employees. So I would continue to expect some movements on that end, maybe more than actual manufacturing.
Mr. Leblond: I agree with Professor Hurrelmann that we haven’t seen any real shifts as a result of Brexit happening. I did mention the fact that it’s mostly uncertainty, so it’s a wait-and-see game by many manufacturers, where maybe they had planned to increase their investments in the U.K. and now they’re waiting. In some cases, they got actual guarantees from the British government. In the case of some of the Japanese manufacturers, if they went ahead with their investments and actually suffered losses as a result of Brexit, they would be compensated by the U.K. government. But there are limits to that kind of compensation that can be offered by the U.K. treasury, and as a result, in most cases it’s a wait-and-see, which has had an impact on the U.K. economy.
A trend that we’re seeing, which is not so much a relocation in terms of industry or sector, is on the migration side. In fact, the U.K. was very attractive to many Europeans across the EU, from low-skilled agricultural workers to people in the service sector, in restaurants and others. Now, apparently as a result of Brexit and the fears that these people might not be able to stay in the U.K., that they might be sent back, a lot of these industries are facing difficulties in finding workers, whether it’s servers in restaurants or people who pick fruit and vegetables on the farms. That’s having a negative economic impact on the U.K.
In that sense, we can ask ourselves to what extent Brexit is going to have the ambitious people, the smart people who have gone to the U.K. in the past, remade their lives and contributed to the U.K. economy in all sorts of ways and who created innovations. If those people leave and go back to their country and the new ones don’t come — and we’re already seeing signs of that — then they are bringing back their knowledge, their ideas. I think that is something negative for the U.K.
For Canada, it’s not clear what the impact will be. Maybe, as Professor Hurrelmann said, it will mean that Canadian firms — at the beginning, they would have thought, “Okay, with CETA, we’re going to go to the U.K.,” because that’s the normal market to go to because of language, culture and shared affinities. But maybe now other parts of the EU will be more thriving, and this will create an attraction for Canadian firms and others to conduct their business more across the EU than they would have done with the U.K.
The Chair: Thank you. We’ve come to the end of our questioning. I very much appreciate that both of you were able to accommodate us on short notice, at a distance, Professor Leblond, and closer to our meeting room, Professor Hurrelmann.
This has been very helpful. The message I heard from both of you is that uncertainty is the real issue that we should be addressing, and we should be encouraging both parties to come to a reasoned conclusion for the benefit of themselves but also their trading partners and bilateral partners. So it has been extremely constructive, and I thank you both on behalf of the committee.
Senators, we’re adjourned now until tomorrow. We will have one briefing session on Asia, and it will be from Global Affairs officials. Then we will have a short in camera meeting to discuss future business. We have two items on the agenda, and we’ll deal with those tomorrow.
(The committee adjourned.)