Canada, the U.K., CETA, Brexit, trade and hedging markets

Canada and the U.K. share one present problem:

Dealing with a vexatious, tricky and grudging European Union.

But our two countries have one major difference:

Only one is utterly reliant upon one major trading partner.

And the reliant one isn’t the U.K.

That might surprise some people, who assume the U.K. does almost all of its trade with the EU, but in fact the U.K. is reliant on the EU for less than half of its exports. (Exports to the EU range from 38 to 50 percent monthly.) Canada is completely reliant upon the U.S. and Mexico, with the two NAFTA partners taking 78 percent of Canadian exports.

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In another interesting fact, the U.S. is the U.K.’s number one nation-to-nation trading partner, more important than German or France by a considerable amount.

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Canada is also an important trading partner for the U.K., at 16th place today as a home for its exports. In 2013 the U.K. exported 7.5 billion pounds in goods and services to Canada.

No wonder the U.K. wants to see the Canada-EU free trade deal (CETA) approved. Better access to another already-large U.K. export market would be a good thing. A deal should see two-way trade surge. The U.K. has also been keen to see the still-stumbling EU-US free trade talks proceed, but now that the U.K. has opted for Brexit, it’ll probably switch its attention to getting a U.K.-US deal as soon as possible. (That might take quite a few years.)

When the tempestuous Brexit talks commence in 2017, things are likely to get nasty. European politicians often like to fulminate against British demands for special treatment within the EU, and they might want to try to exact some vengeance on the U.K. if it opts for a “hard Brexit.” Those in love with the EU experiment want to ensure Britain suffers by leaving, otherwise others will be tempted to leave as well.

But the British government and a good section of its public doesn’t seem to be panicked about EU hostility. Sure, it’ll be unfortunate if the Europeans play hardball, but the UK buys more from the EU than it exports to the EU, so it can play hardball right back at them. Some say the British are living in deep denial about the damage likely to come from Brexit, but I think it’s more likely to be a self-confidence based on seeing the EU’s problems up close, and from an understanding that the EU is far from being the U.K.’s only export option. in fact, it is a slightly declining market for the U.K.

Canada’s situation with the U.S. is far less comfortable. The British can contemplate having half their export trade complicated by Brexit because they still have 50 percent unaffected, and perhaps likely to become much larger outside EU restrictions on trade. But Canada shudders when any talk of the U.S. border closing pops up. That’s not hard to understand, as any farmer or rancher knows. The U.S. can virtually bankrupt sections of our export-reliant industries by closing the border. Hogs and cattle have been ravaged by U.S. border actions over the years, revealing Canada’s over-reliance on those markets. Grains fare better, because the U.S. is not most of the market for any of the main grains, other than oats.

In that, grains are like the U.K. facing Brexit, and hogs and cattle are like Canada facing U.S. border action.

The big news on the Canada trade front this week is that a regional parliament in Belgium has rejected CETA and the deal can’t presently be passed. (Seldom are the Walloons so important!) There is lots of pressure across the EU to get the deal approved, especially since it took five years to negotiate and has been awaiting ratification for a couple of years. It also stands as a symbol to the world for whether or not the EU actually wants free trade deals with non-EU states. As failure of this deal would be seen as a death blow for the EU-US deal, and for any possible future deal. But the EU has a sclerotic political/bureaucratic system, and if you think the willingness of insiders to push it through will be enough, think for a minute what happened in Canada during the Meech Lake mess.

Canada will survive not getting CETA approved. It just makes for more-of-the-same with Europe, which is stunted but ongoing trade with the trading bloc. That will be the situation the U.K. probably faces after Brexit: smaller trade that is stunted by import tariffs and regulations. It also creates the obvious need for the U.K. to immediately begin trying to get trade deals with growing nations that are more open to trade. Ten years from now the EU’s share of British exports might be less than one-third, and that wouldn’t be bad for Britain.

That should give Canada impetus to get a deal with the U.K. done ASAP, and encourage us to redouble our efforts to build trade deals with other non-U.S. countries. Britain’s non-reliance on the E.U. shows what we could gain from a less heavy reliance on our southern neighbour. Most Brits aren’t living in terror of what the EU might do to their market access. It’d be nice for Canada to be similarly comfortable with our own situation. Living in fear of a trading partner’s whims isn’t a comfortable situation.

 

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