Bemused Canadians offer trade advice to Brexit Britain

A group of free market economists, including Patrick Minford and Roger Bootle, have issued a report arguing that a “hard” Brexit would benefit the UK economy and turn the country into a “driver of global free trade”.

To Canadians, faced with President Donald Trump’s demand to renegotiate the North American Free Trade Agreement (Nafta) and struggling to maintain access to the US market, this is bemusing. The Nafta renegotiation may go smoothly, but it may also prove to be a cautionary tale for anybody eager to enter trade negotiations with the current US administration.

Nafta is important for Canada because of the way its companies are enmeshed in cross-border supply chains facilitated by tariff elimination. But tariffs are not what really restricts the international flow of goods, services, knowledge and professionals any more.

Rather it is trade costs due to regulatory differences. A trade agreement is good at reducing discrimination against foreigners, which can ease conditions for traders, but it is not much help in reducing regulatory differences, which are outside the reach of Nafta.

That is why the Canada-US Regulatory Cooperation Council, established in 2011, was a vital innovation. Take cars. Canada used the RCC to accomplish greater alignment with the US, by far its most important automobile market, going further than in the Comprehensive Economic and Trade Agreement between Canada and the EU.

It is not news that trade depends on standards. Two centuries ago when the early cotton trade was globalised, traders and brokers decided upon and formalised quality standards before making them enforceable. Many standards that matter for supply chains are still created by companies through private contract.

Being in or out of the EU or Nafta makes no difference to the creation and implementation of such rules, although those that begin as a supply chain requirement can become the market standard. The real problem, however, is when those standards are adopted as mandatory technical regulations by governments without the involvement of foreigners.

Real regulatory co-operation needs agency-to-agency discussions at the time new rules are being contemplated, not when drafts are circulated for public comment. Trying to solve problems after regulations have been adopted is much more difficult.

Such co-operation is the holy grail and, like the holy grail, it may forever be out of reach. Trade negotiators worry about national advantage, and regulators have little mandate to consider the concerns of other countries, though they should.

Many free trade agreements now have regulatory co-operation or regulatory coherence chapters. But a trade agreement — Ceta, for example — will never provide the same degree of influence on the development of new EU regulations that Norway enjoys, at least in legal principle if not in practice, as a member of the European Economic Area, or that the UK has now with its right to vote as a member of the EU.

In a future bilateral trade agreement with the US, the UK is unlikely to have as sophisticated a regulatory co-operation process with the US as the RCC, because the UK is a much smaller trading partner for the Americans than Canada.

Once Britain leaves the bloc, UK companies may simply follow EU rules anyway, without their former rights to participate in the elaboration of standards or their government’s right to help develop and interpret regulations.

That is why, for Canadian observers, trying to disentangle the UK from EU regulation while maintaining supply chain integration, seems foolish. Trade agreements with other countries will be a poor substitute.

The writer is professor emeritus in the School of Policy Studies at Queen’s University in Canada

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