What the U.K. Brexit Means for Canada

By Angus Gillespie

The shockwaves that permeated through much of Europe in the immediate aftermath of the United Kingdom’s decision to leave the 28-member European Union in a referendum vote on June 23 have yet to subside. In an already uncertain global economic environment this will only add to the vacillation and the full-scale repercussions may not be known for years. Yet to be accurately ascertained is the level of impact this bold move will have on the trading relationship between Canada and the U.K., who have been close allies dating back to this country’s Confederation – and beyond.

Most economists who have commented publicly are of the opinion that the impact of the U.K. Brexit on Canada’s economy will likely be quite small in terms of trade and only slightly greater for investing. However, the consequences could be far more appreciable if the anti-globalization sentiment is the catalyst for a trend that continues to gain traction, which is a very real concern, and therein the consternation envelops.

Literally hours after the U.K. vote was made known, political parties in Netherlands and France began voicing their displeasure with the EU while advocating they too take the same exit route as the British. If France were to follow suit it would leave only Germany as a strong economic power and essentially left alone to sort out the enormous discord of a number of financially broken countries including the likes of Greece, Portugal, Spain and even Italy. As witnessed time and time again, international stock markets react negatively to volatility, instability and insecurity.

Andrew Grantham, Senior Economist, CIBC, believes the impact on Canada, as of now, will be minimal, but says that it warrants keeping an eye on if it appears other countries will decide to follow the U.K.’s opening bold move. In the case of the UK it was much more a vote about frustrated Britons forcing a substantive move on addressing what they feel are lax immigration policies than it ever was about their economic standing with or without membership in the EU.

“For me, it’s potentially a bigger deal if this is a first step into a reversal of globalization, such as more countries deciding to leave the EU,” Grantham states, while speaking about the impact on Canada during a panel discussion at the Toronto Region Board of Trade.

Other members of the panel included: Jaime Watt, executive chairman at public strategy firm Navigator Ltd; Nicholas Thadaney, CEO, Global Equity Capital Markets, TMX Group; and Andrew Willis of The Globe & Mail.

Canada shares similar cultures to the U.S. and U.K., but does not invoke anywhere near the same level of protectionism. This country has also not seen a decline in real wage growth or anti-immigration sentiment that is considered to be the fundamental reason behind the drastic move in the U.K. – and one espoused by U.S. Republican presidential candidate Donald Trump.

Watt believes the anti-immigration sentiment spreading in the U.S. and U.K. could actually be beneficial for investment in Canada.

“If life is uncertain in two of our principal allies and trading partners then suddenly Canada is looking pretty good,” he says.

A Failure to Communicate

The U.K. is the third-largest export destination for Canada but that still amounts to less than 3% of the total and more than half of that is gold. Watt believes the vote in the U.K. was largely based on frustration and anger in believing that politicians are not hearing their concerns. He says what is happening – and has happened – in the U.K. is not dissimilar to the U.S. with the Donald Trump phenomenon. A rebellion against the establishment has been made abundantly clear.

“If the bull in the China shop and breaks some of the China – then so be it,” Watt says. “These are people who have been left behind, whose voices haven’t been heard and they are now deciding to hell with it, we’re going to do what we want.”

Watt also noticed that the Brexit vote brought about a very transparent result along voting lines that hadn’t been yielded in a very long time. It’s a generalization, but largely it was the older generation that voted to leave while the younger people wanted to remain.

“We saw a generation of people who voted in their own interests and not in the interests of their children. This is a very fundamental change and in doing so, they’ve saddled the generation to come with an outcome they didn’t want,” Watt says.

According to Watt one of the biggest mistakes politicians and business leaders can make is to underestimate the anger of a sizable portion of the general population who feel their voice is no longer being heard. If the U.K. Brexit vote doesn’t wake them up, nothing will. He also says people need to take Donald Trump’s legitimacy in the presidential race far more seriously than many have done up until now.

“If anyone says it’s not possible for Donald Trump to win they are crazy; it’s quite possible for him to win,” Watt states. “Don’t believe for a minute any of the polls… because it’s not socially acceptable to publicly say you’re for him until you go into the privacy of a ballot booth.”

It’s fair to say a significant percentage of the U.K. Brexit vote’s outcome was based on emotional frustration and we’re seeing that mirrored in the U.S. What politicians and business leaders often seem to forget – or neglect – is that their view of the world and how it should work is often quite different from that of the everyday citizen. Failing to bridge that gap results in what the U.K. is left dealing with now. What ultimately happens in the U.S. remains to be seen but there’s no denying the social divide has never been so vast and so obvious with our neighbours south of the border.

New Trade Agreements

Along with the United States, the United Kingdom has historically been Canada’s premier ally in every sense of the word. The Brexit vote will fundamentally reshape trade agreements for each and every country the U.K. deals with. The status quo has been shattered. It can be rebuilt, but the workload is going to be immense.

Theresa May, Great Britain’s second female prime minister, will not only be compared with the legendary Iron Lady Margaret Thatcher who was the UK’s first prime minister, but she takes over as leader during an explosive, uncertain time. In her first bold move since taking the reins from David Cameron she immediately sacked George Osborne and installed Philip Hammond as the new Chancellor of the Exchequer. Former Bank of Canada Governor Mark Carney, who now holds the same position with the Bank of England, was left in a rather awkward spot when his boss was fired, leaving him to answer to Hammond. It’s still too early to say how this change will affect Carney’s role – if at all – but it’s yet another part of the dramatic saga to keep an eye on.

Regarding policy, Carney has hinted that the central bank will soon deliver added stimulus in an effort to stimulate the U.K. economy and stabilize international stock markets that have been spooked by the sudden EU exit. Although his former bosses Cameron and Osborne warned against leaving the EU, Carney says a number of contingency plans are in place to ensure a smooth transition.

“We are well prepared for this. In the future we will not hesitate to take any measures required to meet our responsibilities as the United Kingdom moves forward,” Carney says.

There are some financial experts who believe Brexit could slow Canada’s economic growth. If that turns out to be true then it’s viable to expect Bank of Canada Governor Stephen Poloz will stay the course in keeping interest rates low. The downside is that it will continue to prop up the already piping hot housing market in Vancouver and Toronto, which critics say is a false economy built on a house of cards and one that should not be encouraged any further. When interest rates eventually rise it’s going to create a lot of financial strife.

Another national concern is that there may be lower investment returns coming out of the U.K. The Canada Pension Plan Investment Board has a considerable U.K. portfolio, estimated to be about 8% of the entire plan, with a value of at least $20 billion.

Federal Finance Minister Bill Morneau has said Canadian businesses that set up offices in the U.K. to access the continental market might be forced to rethink their strategies. Insurance company Canada Life was quick to suspend its British property funds due to concerns about the price of commercial properties in that country after the British vote to go it alone.

In a speech from Quebec City, Prime Minister Justin Trudeau said “We respect the choice of the British people and will remain a strong partner of the U.K. and the European Union. Our shared histories and common values make us natural trading partners and we will continue to work with both of them as we move forward with this new decision.”

Nicholas Thadaney opines that now is the perfect time for Canada to reinforce the message that our financial-services stability is regularly ranked amongst the best in the world and that our pension plans provide some of the premier sources of global capital. An estimated 100,000 Britons work for Canadian firms there, and an equal number of Canadians work for British firms here.

Thadaney also wants to see this country pursue diversification strategies into other business sectors on an international scale beyond natural resources. He says one primary way to accomplish that is through the ratification of free-trade agreements, including the Trans Pacific Partnership. Working out trade agreements are never easy at the best of times, and now with the U.K. taking the isolationist route, it will complicate matters even further. But it’s something Thadaney says Canadians have historically been strong at negotiating.

“We’ve had a long history of interjecting ourselves into contentious dialogues and so hopefully we can leverage our relationships across the continent to help,” he says.

Canada and the EU signed the Comprehensive Economic and Trade Agreement (CETA), of which the U.K. had always been one of the loudest vocal proponents. The EU as an entity is the world’s biggest economy. The agreement would remove most tariffs on Canadian goods entering Europe, making Canadian-made goods more affordable while allowing this country to greatly enhance the amount of goods being exported.

When the dust finally settles Canada may wind up having to negotiate a separate deal with the U.K. British dealmakers are going to have to pull together numerous separate deals with the likes of the United States and the more prosperous European nations such as Germany and France. The U.S. government has already said that it will begin negotiating deals with Great Britain, but as President Barack Obama’s administration has stated, the U.K. will have to stand in line like other countries.

The U.K. also has to worry about continued internal discord, which was exasperated by the vote to leave. In response to the June 23 result, the Scottish Government announced that it may look towards holding a second referendum on independence. Many Scottish voters opted against secession from the U.K. due to a fear that an independent Scotland would not be included in the EU. As a means of keeping Scotland in the union, the British government promised to never secede from the EU. Now the Scots feel as if they’ve been deceived, with one of the primary benefits of remaining in the U.K. now vanished. The EU has origins dating back to 1957 when it was known as The European Economic Community. Great Britain had been a member nation since 1973.

By opting to go the ‘lone wolf’ route the U.K. has certainly ensured that its dealmakers will be extremely busy for the foreseeable future – both internally and externally. For Canada, the U.K. exit really shouldn’t have much of a negative impact at all, and actually has the potential to provide additional opportunities worldwide. The more substantive problem lies in whether or not the rest of the EU begins to crumble following the Brexit. If that’s the case, then Canadians will definitely have a much greater cause for concern.