What can the UK learn from Canada about trading effectively with a neighbouring economic superpower?

By John Alty

Tuesday 20th February

Comments from this blog were originally published in POLITICO’s Trade Pro newsletter on Tuesday 20th February

With Downing Street eyeing a General Election in the latter half of this year, the trade and political commentariat are going into overdrive on how a possible change of government could impact the future of trade between the UK and the EU. Although the EU as a bloc continues to account for the largest share of the UK’s exports, the trading relationship between the UK and the EU is still impacted by the repercussions of Brexit. While SMEs are concerned about the cost and complexity of exports, importers are worried about new border checks.

The current Government has recently unfrozen some aspects of the UK/EU relationship while the Labour Party has pledged to fix the Brexit deal and reset the UK’s relationship with the EU, to ensure the UK remains a country where firms want to invest. Despite these moves, there are questions for a forthcoming Government as to how a future UK/EU trade strategy could work in practice, and the real impact of improved relations between the UK and the EU.

It’s worth looking at how other close geographic and economic neighbours manage these things to see if there are useful lessons to learn. Take the example of Canada and the US, two economies that are closely interrelated. They boast an intensely integrated trading relationship, with almost 70% of Canadian manufacturing exports going to the US[1]. The two countries are bound by a trade agreement which also includes Mexico (USMCA), but they retain their separate customs arrangements and regulatory autonomy. They have also had some spectacular trade rows – for instance, about imports of Canadian soft wood into the US. Nevertheless, the trade relationship between the two countries is crucial to each of their success.

So, how does Canada ensure that its exports to the US can compete as seamlessly as possible on the huge US market, and get the benefit of US economies of scale in imports for its consumers? There’s no single “magic bullet”. Different regulations remain, which inevitably impose some cost, but the US and Canada have taken a number of steps to minimise frictions.

Most importantly the two countries set up a Regulatory Cooperation Council in 2011, involving 16 Canadian and US agencies which oversee highly regulated sectors. A conscious decision has also been taken to try to synchronise changes in regulation, based on joint risk assessments and common data, increasing the likelihood of similar decisions.

In some cases, Canada will go as far as to follow US law, even providing for automatic updates in Canadian law where US law changes. However, this is the exception. Even where regulations may vary, mutual recognition of testing and certification means businesses can test their products in their home base and avoid the cost of testing abroad.

While the Canada-US example is arguably the strongest, Australia and New Zealand have gone even further. In their case the default position is that goods put on the market in one country can also be marketed in the other. Food standards are set by a joint body and whilst the two countries have separate competition authorities, they have cross membership to encourage similar approaches.

What might this mean for the UK and EU?

Firstly, it shows that maintenance of respective sovereignty, as two separate entities and legal regimes, is compatible with close cooperation. This is especially true in instances where there are similar cultural and historical approaches to issues of public health and safety, the environment and consumer rights. In some cases this might mean the smaller economy (in this case the UK) deciding to keep its legislation aligned in a particular area with the larger economy, but this is not the norm.

However, much can still be done to cut red tape. In the 2023 Spring Budget, the Chancellor announced that to speed up drug approvals the UK would more or less rubber stamp approvals already given by the EU Medicines Agency. This is not formally a recognition of the EU decision, but it gets as close to it as possible whilst preserving the UK’s right to take a different decision in a particular case. Similar arrangements were proposed with other trusted drug regulators.

As a minimum, it should be possible, with political will on both sides, for regulators to work closely together to minimise unnecessary differences, and coordinate on the timing of change. More could have been done, for instance, to synchronise the EU and UK Carbon Border Adjustment Mechanisms (CBAM).

These principles could also apply to the much discussed option of a veterinary agreement between the UK and the EU to get rid of checks on trade in agricultural products. At its most extreme this could involve the UK simply agreeing to accept any regulations on food safety made by the EU, but there are less intrusive options. For instance, the EU has a veterinary agreement with New Zealand, which specifies the level of checks which need to be made based on a high level of confidence in one another’s regulatory systems and standards of hygiene. Even though this wouldn’t abolish border checks, it could act to reduce them substantially.

Getting the full benefits of this type of coordination, in a “variable geometry” arrangement where there might be different types of solution for different trade issues, would require a change of approach on both sides. For the UK this would require avoidance of divergence for divergence’s sake and acceptance that it has more to gain from increased access to the EU than vice versa. At the same time, it would also require a willingness on the EU’s part to drop accusations of “cherry picking” and cooperate on regulatory issues in an open way, not just take it or leave it. After all, all trade agreements are really exercises in mutual cherry picking, as both sides decide where it is in their interest to make trade and investment easier between them. The more preconditions you put down, the more beneficial opportunities you may miss for yourself.

Undoubtedly, there will be plenty of other pressing issues calling for attention both in London and Brussels. But if the right steers are given at political level, much of the detailed work can go on underneath the radar, by the expert agencies and Ministries responsible. Other countries have shown that progress is achievable when the appetite is there on both sides.

[1] OECD International Merchandise Trade Statistics; ONS Trade, OECD TIVA


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