Suspension of the UK-Canada Free Trade Agreement: What’s the beef?
Published 29 January 2024
The UK Government announced last week that negotiations with Canada on updating the existing (continuity) free trade agreement (FTA) had been suspended. This is because, it appears, the two parties could not overcome key sticking points, notably with regard to Canadian quotas on exports of UK cheese, and the UK holding a firm line on the import of beef from Canada.
Focusing on goods trade, there are three takeaways from the suspension of these negotiations:
1. The UK still has an agreement with Canada – but it is not quite as good as before.
The suspension of the negotiations does not mean that the UK does not have a free trade agreement with Canada. The agreement with Canada was ratified in April 2021 and remains in force. However, the suspension of the negotiations does mean that the UK has not managed to secure an improved agreement which was a key objective. It is also the case that the existing agreement has certain elements which were time-limited. These will, therefore, cease, impacting some firms and sectors (see below for more detail).
The existing agreement with Canada is one of the UK’s ‘continuity agreements’. In other words, the UK and Canada effectively agreed to roll over the provisions that were in the EU-Canada FTA to maintain continuity – with a few time-limited elements. There are three principal time-limited elements:
a) The UK had negotiated transitional tariff-rate quotas on UK cheese to facilitate the exports of cheese. These ended on the 31 December 2023.
b) There was a range of rules of origin quotas on selected products. These origin quotas allowed for less constraining rules of origin to be applied up to a certain quota limit. Above that limit, more restrictive rules of origin were to be applied. These origin quotas were due to end three years after the application of the agreement, and hence would end in April 2024. Many of the origin quotas applied to Canadian exports to the UK – on products ranging from sugar, processed foods, fish, textiles and clothing. Origin quotas on UK exports to Canada apply only to textiles and clothing.
c) The agreement allowed for some diagonal cumulation of EU inputs for rules of origin purposes. Hence, the UK could use EU inputs and count these as ‘originating’ in its exports to Canada, and similarly, Canada could use EU inputs as ‘originating’ in its exports to the UK. This element of diagonal cumulation will also end in April 2024.
2. The direct negative economic effects for the UK will be very small.
In 2022, Canada accounted for just under 1.5% of UK exports, and just over 2% of UK imports. As a trading partner, it ranked 17th and 12th for exports and imports respectively. Though note if you take the EU as a single partner, then Canada would be the UK’s 9th most important export destination and 5th most significant import supplier.
The share of UK cheese exports destined for Canada in 2022 was slightly under 2.4%; and the shares of UK textile and clothing exports destined for Canada are also in most cases less than 2%. Hence, with regard to cheese exports and textile and clothing exports it seems clear that while there may be impacts on individual producers within these sectors for whom the Canadian market is important, the aggregate effect on these industries let alone the UK economy of the termination of these transitional elements will be small. Similarly, for Canadian firms, it will prove more expensive for some to export to the UK. This is likely to lead to some combination of higher prices or reduced supply for consumers. Once again, however, given the relative shares of Canadian firms in the UK market, the effects are likely to be negligible in aggregate.
It is harder to gauge the impact of the lack of cumulation of EU inputs and this will again vary by individual producer and by sector. The changes will mean that for some producers it will be harder to obtain originating status on exports from the UK to Canada, and vice versa. Rules of origin are particularly important in the car industry, in part because of the high degree of supply chain integration, and in part because rules of origin are often more restrictive. The lack of cumulation of EU input may mean that UK cars will face higher tariffs on exports to Canada. However, once again, the aggregate effects may be small as only 3.2% of UK car exports in 2022 were destined for Canada.
3. Signing free trade agreements is difficult and takes time. Signing good FTAs is even harder.
In the Brexit debate since the referendum, much was made by some as to how easy it would be for the UK to quickly sign free trade deals both with the EU and with other countries. The last Conservative party manifesto promised that more than 70% of UK trade would be accounted for by countries with whom the UK has a free trade agreement.
Experience has shown that it is not so easy to sign free trade agreements, and the target of 70% has not been met. Indeed, promising a given target which depends on negotiations with other countries was always going to be risky. The UK’s negotiating position is also not as strong as an individual nation as it was as a member of the EU. As the US has shown little inclination to sign an FTA with the UK, the target was always going to be nigh impossible. The UK and India have also been negotiating an agreement for some time but getting it over the line has also proved difficult.
In the case of the UK-Canada negotiations, it appears a major sticking point was the UK’s product safety rules under which Canadian hormone-treated beef is not certified for export to the UK. The Canadians wanted these rules relaxed (on the grounds that they are unscientific) in return for a continuation of the preferential access to the Canadian cheese market for UK exporters. The UK Government decided it could not agree to the requests being made and so suspended the negotiations.
Modern free trade agreements are extremely lengthy, detailed, and complex covering a very wide range of areas, way beyond simply market access in goods. So, while, on the face of it, the UK and the Canadian governments could not mutually agree on markets in cheese and beef, ultimately there were not sufficient economic incentives and trade-offs to continue the discussion. In these circumstances suspending negotiations may well have been sensible. It will be interesting to see if being prepared to suspend the negotiations may also impact the parallel re-negotiations of the UK-Korea agreements, as well as the ongoing negotiations with India.