A 'hard Brexit' creates uncertainty for Canada on what's next for trade

As the United Kingdom triggersdivorce negotiations with the European Union, Canadiansare watching closely to see if this split can be amicable.

If it's adversarial, and the Brexit terms are harsh, businessesmay need to bail quickly or risk getting burned.

"This is a question all of our trading partners are asking themselves. And it's an unfortunate effect of them choosing to leave us," said the EU's trade commissioner, Cecilia Malmstrom, in an interview with CBC News last week.

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Canada is on the cusp of consummating its new Comprehensive and Economic Trade Agreement (CETA) this summer one of 38 trade agreements the European Union has with countries now left wondering what happens next.

After British Prime Minister Theresa May triggers Article 50 today, it starts a two-year countdown towarda date whenthe terms of thissparkling newCETA no longer apply to Canada's highest-valueEuropean trading partner.

Duty-free treatment and other gainswill not simply carry on. Businesses that have expanded across the Atlantic, or were considering growingto capitalize on CETA, could be forgiven for not keeping calm.

Conservatives in the U.K. and some of theirideological cousins in Canada, too suggested this would all be mitigated ifCanada swiftly negotiateda bilateral free trade deal with the British, orshared its negotiating expertise, even.

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"Premature," pronounced the office of Canada's International Trade MinisterFranois-Philippe Champagne.

"It's not possible to negotiate an exit and a new free trade agreement at the same time," agreed Malmstrom. "It's just not feasible human resource-wise, and also we need to know the terms of [Brexit]before we can negotiate a free trade agreement."

"The U.K. is allowed to have any conversations they want," she said. But until Brexit is official two years from nowand the EU no longer has legal authority over U.K.trade relations, "they can't formally negotiate with Canada or any other country."

'Co-operative' vs.'adversarial' Brexit?

This first things first approach sets up the possibility of a troubling gap for those doing business in the U.K.

What happens whenold (favourable) rules cease, ifnew ones haven't been negotiated yet? Would tariffs slap back on? Would hard-fought markets close again?

Britain is a member of the World Trade Organization, but the terms of its independent trade haven't been worked out.

An isolationist U.K. is a worst-case scenario.- David Kleimann

May has chosen the "hard"Brexit approach leaving the EU politically while alsoleaving itscommonmarket and customs union.

David Kleimann, a trade law researcher with theEuropean University Institute, says the key tohow disruptive Brexit will be is whether negotiations result in a "co-operative" hard Brexit, or an "adversarial" hard Brexit.

The EU wants to negotiate the terms of exit separately fromany future trade arrangements.The U.K. may have no choice but to agree, particularly if the EU offersan additional five to seven years under current trade arrangementsuntil newagreements can benegotiated.

"One can imagine there would be transition periods before everyone is settled," Malmstrom told CBC. "Nobody wants to create more damage than needed, but they have chosen to leave."

A transition period buys time forpartners like Canada, too.

But simply"grandfathering"CETAisn't really an option, Kleimann said. That'san idea "generated in haste and panic."

CETAcan't be appliedto asingle country. Butsome language may be a good starting point tospeed upfuture talks.

"They will need five years, minimum, to sort things out," Kleimann said.

The degree to which there's free trade after Brexit"depends much on the spirit of negotiations," he said. The U.K. will have a massive incentive to land a deal so it doesn't lose foreign investment, he said.

AndBrexit extends beyond trade. While the EU can't afford to make it too easy for any member country to leave, thedivorcing parties need to keep working together on foreign relations.

"There's an incentive for the EU to push them away in the short term, and guide them back into their yard in the mid-term," he said. "An isolationist U.K. is a worst-case scenario for both."

'Challenging' for supply chains

Brian Kingston, the vice-president of policy and international issues for the Business Council of Canada, agreesanacrimonious split would be mutually damaging.

Do shipping containers need to reroute to a continental port? Will sales offices move out of London?

Studies suggest the U.K. economy Canada's third-largest export market appears poised for a significantdecline, particularly in its financial servicessector."This is very concerning," he said. "It creates a lot of questions."

"There are many Canadian companies that use the U.K. essentially as a platform into the European market," he said.

"Because of the level of integration that Europe has gone through over the years, supply chainscriss-crossthe Continent," he said. "Trying to pull that apartwill be extremely challenging."

Uncertainty isa bigbarrier to investment. But this uncertainty may last a while.

"These negotiations always take longer than originally anticipated, and given the complexity of this negotiation, I find it hard to believe that you could make all of these decisions and close all the various chapters within two years."

Reports over the weekend suggested the EU may makeits negotiating position public so member countries, as well as other trading partners, know what's on the table.

"I think it will be clearer in a couple of months,"Malmstromsaid last week."Just be a little bit patient."