Brexit is back in the limelight—again. Just a few days before the official Oct. 31 deadline, the European Union has agreed to extend the Article 50 exit process for the United Kingdom until Jan. 31, 2020. This new extension is called a “flextension” because it allows the U.K. to leave the EU any time before that date. While this certainly avoided a cliff-edge exit and came as a relief for many exporters, Brexit isn’t over yet and recent history has shown that new political developments surrounding the negotiation process can materialize at any time.
Given Canada’s historic ties—politically and economically—to the U.K., if the country opts to leave the EU, it’ll have a significant impact on the way Canadian exporters do business with their U.K. customers. The U.K. is Canada’s fourth-largest export market, behind the United States, the EU (not including the U.K.) and China, with total exports of goods and services reaching $23.3 billion in 2018. Services accounted for $7 billion or 55% of total Canadian exports to the U.K. in 2018 (excluding gold), making it the only major market where Canadian service exports exceed goods exports.
While export numbers are significant, they only tell part of the story. There are also many Canadian companies established in the U.K. In 2016, the latest year for which we have data, sales by foreign affiliates of Canadian companies located in the U.K. amounted to $39.4 billion, a number that had been steadily on the rise for some years. Supporting this growing Canadian presence is substantial Canadian direct investment in the U.K., which reached $177 billion by the end of 2017. Not only do these statistics highlight the extent to which Canada’s economy is inextricably linked to the U.K., they also suggest the potential economic impact that Brexit could have on Canadian businesses.
Brexit implications for Canadian exporters
A “hard” Brexit, in which the U.K. leaves the EU without an agreement, could have significant impacts, especially in the short term. But even a negotiated Brexit deal, like the one the U.K. is pursuing, could have a negative impact on its economy for years to come. A new report from an academic think-tank in the U.K, for example, predicts that the repercussions of Prime Minister Boris Johnson’s latest Brexit agreement will still be felt in 10 years, with a per capita reduction in gross domestic product (GDP) of between 2.3% and 7%, taking into account the impact on trade, migration, and future productivity gains.
For Canadian exporters, any economic uncertainty within a target market the size of the U.K. is a cause for concern. A protracted economic slowdown post-Brexit could present challenges for Canadian exporters across multiple sectors. Exporters who rely on the delivery of goods to the U.K. could face major delays and disruptions in shipping, while the country adopts and implements new customs procedures.
For Canadian exporters, any economic uncertainty within a target market the size of the U.K. is a cause for concern.
Managing the impact of Brexit proactively
When considering how your export business will navigate the post-Brexit economic waters, careful planning is key. For example, a crucial part of preparing for Brexit is to learn as much as you can about how the sectors in which you’re active are likely to be affected based on each possible outcome. While the effect on some sectors may be limited, others such as financial services, automotive, and agriculture may be more impacted in the Brexit aftermath. Once you’ve developed a more nuanced understanding of how your business may be affected, then it’s important to develop contingency plans that lay out clearly how you intend to proceed under each scenario.
A crucial part of preparing for Brexit is to learn as much as you can about how the sectors in which you’re active are likely to be affected based on each possible outcome.
Fortunately, you don’t need to do this all on your own. Staying in close contact with your business partners in the U.K. is a great way to keep informed of the latest developments. Connecting with commercial networks established by Canadian companies on both sides (U.K. and EU) could also help alleviate trade disruptions and allow you to better adapt to potential shifts in trade and production. Obtaining legal and technical professional advice is another option to consider to make sure the way you’re currently doing business will continue to work post-Brexit.
Both the U.K. government and the European Commission have published resources to help companies prepare for the various Brexit outcomes. The Canadian Trade Commissioner Services (TCS) also offers a variety of resources for Canadian exporters.