Canadian businesses need more than optimism from Boris Johnson

Britain's new prime minister will need more than a can-do attitude to keep trade growing between Canada and the U.K., after a late decision by his predecessor scuppered an agreementthat was set to keep the terms of Canada'sexisting European Union trade dealin place.

"Like some slumbering giant, we're going to rise and ping off the guy-ropes of doubt and negativity," Boris Johnson vowed as he took the reins of the British Conservative Party Tuesday and prepared to meet the Queen.

But even in the notoriously optimistic world of trade negotiations,the giant economic risks of leaving the European Union can't simply be shaken offbefore Oct. 31, the next Brexit deadline.

The uncertainty Johnson inherits includes skeptical partners like Canadapreparing for a no-deal scenario by"hedging their bets," as U.K. Trade Secretary Liam Foxtold British parliamentarians earlier this month. (Fox may not carrythe trade file for much longer, after failing to back Johnson for the party leadership.)

It's not that Canada's team of veterantrade negotiators didn't dotheir job. In fact, they thought they had a bilateral deal ready to go last year despite bargainingwith overburdenedand inexperienced British negotiators who lacked a realistic sense of what various bilateral trade measures were worth, both politically and economically.

A senior Canadian government source with knowledge of the talks told CBC News that a finalized proposal to continuemost of the terms of the Comprehensive Economic and Trade Agreement (CETA) and apply them toa newly-independent Britain was put in front of Prime Minister Justin Trudeau's cabinet more than a year ago.

'A different level of desperation'

Then the U.K.'s efforts to approvea withdrawal agreement with the European Unionfailedspectacularly in the run-up to last spring's original deadline.

Panic set inover the prospect of a no-deal Brexit. In an emergency move to protectBritish consumers and businesses from sudden price shocks, the U.K.published a "temporary" listofferingany country not just those with pre-existing trade deals tariff-free access for87 per cent of what the U.K. imports, without a requirement forany reciprocal tariff cuts for British exports.

Canadian officialsfound out about it from the media, the source said.

Lowering these tariffs undercut the value of the preferential trade dealCanada thought it had negotiated with the U.K.Canada was gratefulit hadn't finalized its commitmenttoo soon, the government source said.

"Why would Canada make any concessions in a CETA equivalent [deal]when we know that we'll have pretty much 95 per cent duty-free access into that market?" said Brian Kingston, vice-president of the Business Council of Canada.

"Yes, the U.K. is an important and large market, but any negotiator sitting down with them would recognize that there's a different level of desperation with the Brits."

'Furious' or just frustrated?

While radical tariff liberalization could be a legitimate competitive strategy for the British, Kingston said it needs to be something they commit tolong-term, not something they switch to temporarilywhen efforts to negotiate transitional trade deals fail.

"You're not going to attract investment if there are any uncertainties," he said.

A media report said the British were "furious" at Canada's refusal to give then-prime minister Theresa May a political win when she needed it.

But the Canadian government official who spoke to CBC News insisted this wasn't true.

Were people frustrated and disappointed? Sure. But British officialsunderstood why Canada wouldn't proceed.

"The Canadians not unreasonablysaid that they recognize that they will get a lot of access to the U.K. market through the currently-planned emergency 'day one' no-deal tariffs," a senior British diplomat told CBC News Tuesday.

"The key point is that those no-deal tariffs are temporary and that with a new PM and a new cabinet ... [they] may take a different view on that."

Regardless, Canada needs to get a "safety net" in place beyond this first year of temporary tariff cuts,the British diplomatsaid.

Were the British really furious? "I don't think that could be further from the truth. The relationship's really solid," he said, adding that both sides continue to talk and remain committedto a "seamless transition."

In fact, Steve Verheul, the head of trade policy and negotiations at Global Affairs Canada, is expected to head to London in the next few weeks to take the temperature once Johnson's new team is in place.

The timelines are impossibly tight. Canada is about to head into a federalelection. Johnson could call one too, seeking a mandateto proceed.

"There's complete [political] dysfunction on the U.K. side," said Jason Langrish, executive director of the Canada Europe Roundtable for Business. He said he's been talking to both sides, trying to find solutions.

"Why negotiate with people who change their mind on a daily basis? And who likely won't be around to close off any deal? That's what it's come down to," Langrish said.

What Canada agreed to

The aborted deal more or less preserved what the U.K. had withCanada as a member ofthe EU.

Despite a U.K. requestfor up to 2,000metric tonnes of cheese quota something Canadian negotiators had to explain would bea total non-starter in an election year in Canada no new market access was offered for British dairy products.

The Canadian government source saidnegotiators proposed"something creative" with existing World Trade Organization quota to ensure an unspecified amount of access for British cheesemakers post-Brexit.

Additional access to the U.K. market was offeredfor Canadian livestock producers, who have been struggling to overcome regulatory hurdles tomake full useof their newEU quota.

CETA'sother agriculturalquotas would standfor the remaining 27 EU member countries.

What could Canada lose if it doesn't have a bilateraldeal in place in time for Brexit?

Access to the British automotive market, for starters. Cars were among the few importsthat would still face tariffs on the temporary no-deal list. Beef and pork also would face tariffs.

Beyond this trade ingoods, "any companies using CETA's labour mobility provisions could be affected," saidMark Agnew, the director of international policy at the Canadian Chamber of Commerce.

He said his members are disappointed Canada hasn't been able to announce a continuity deal with the U.K. the way other countries have.

But overall, the coststo Canada of a no-deal Brexit without a bilateral trade agreement in place may beless than the financial risks forU.K. exporters ifthey losepreferential access to Canada, Agnew said.

Divorce terms still unclear

The bigger issue is what happens with the U.K.'s relationship with the European Union, Agnewsaid, "because that dictates what will happen in the U.K.-Canada context."

Many Canadian businesses use the U.K. as their launching pad into the Europeanmarket. If supply chains start facing customs hassles when they cross the English Channel, entire business strategies couldgo sideways.

"I can understand when Canadian companies say they're keen to get certainty on future arrangements, and that's what we hope to have delivered in the next few months," the senior British diplomat said.

So why should Canada be patient, despitethis Brexit mess?

With CETAin effect with the European Union, and while the U.K. is still a member of the EU, trade between Canada and the U.K. specifically has being growing faster than Canada's trade with the EU as a whole.

"Canada's exports to the U.K. have gone up about 35 per cent," the diplomat said. "We want to keep that going."