Find an edge? Or just hedge?

Canadian business weighs the options as Brexit vote turmoil gives way to long-term strategizing
By Paul Brent

It was a heedless gamble that cost a sitting Prime Minister his job, prompted the resignation of another party leader and a revolt against a third, has cast a pall over the world’s fifth-largest economy and thrown trade treaties and further globalization in doubt. It might also spark the next big global recession.

Welcome to your Brexit years.

There are a few certainties that have come out of the stunning vote by UK citizens to pull out of the European Union: PM David Cameron is gone, replaced by Theresa May, London real estate is now “on sale” and the decision looks increasingly irreversible.

From a Canadian business perspective, though, it’s the lengthy list of unknowns and uncertainties that will be pondered and worried over for the next few years. How will Brexit affect Canada’s trade with the UK and EU? Will the current CETA (Comprehensive Economic Trade Agreement) trade deal survive? What will the impact be on Canada’s big banks with operations in the UK? What of all that London real estate owned by our big pension funds? And will there be a reverse “brain drain” as UK professionals look to Canada and elsewhere for new jobs?

Having narrowly avoided a “Quexit” in 1995, Canadian business leaders can now watch separatist success in action and ponder the opportunities that come with it. “I think it is more curiosity than freaking out at this point,” says John Boscariol, who leads McCarthy Tétrault’s international trade and law group. “I think more of the freaking out is going on on the other side of the pond.”

McCarthy recently held a post-Brexit panel for Canadian and UK clients. One early prediction? Canada’s pending CETA will be successfully ratified by Britain and the EU.

Boscariol is more concerned about the fate of the three dozen or so trade agreements inked by the EU that the UK was a party to and likely has to replace. Brexit could also prove fatal for a Canadian trade deal that has nothing to do with the UK or Europe, namely the controversial U.S.-led Trans Pacific Partnership pact.

Laurence Booth, professor of finance with the Rotman School of Management, is curious about the impact of Brexit on our country’s big banks and Anglo-Canadian businesses like the George Weston Ltd. (TSX:WN) empire. He’s less worried about trade turmoil. Even though we exported almost $16 billion worth of goods to the UK in 2015, making it our third-largest trading partner, it’s just 3% of total exports. “Even if we lose 10% of that as a result of tariff barriers you are talking about a tiny, tiny amount of trade.”

Brexit has already battered the British pound and London property prices, prompting Canada Life to suspend trading of its UK property funds to avoid being forced to sell properties at fire sale prices, joining a number of international funds which have halted redemptions from their UK property funds.

“The challenge that London is going to have from a property perspective now is you have had all this [new building] supply coming on which is manageable perhaps in a strong demand market but now you sort of throw demand into question,” says Corrado Russo, global head of real estate securities with Timbercreek Asset Management in Toronto. “Consensus is demand is going to suffer, especially in the office space. How do you absorb all that new supply.”

Another highly relevant question from a Canadian perspective is what will become of London’s status as one of the world’s financial and business centres when it is no longer part of the EU. “People are going to have to second-guess where they set up their business and headquarters to cover Europe,” says Russo. “So if you are not going to be in London where do you go? Is it Frankfurt, is it Paris, is it Luxembourg, is it Dublin?”

One sure thing at this point: Brexit will ignite a gold rush for the legal profession, as the UK long ago turned over responsibility for international trade to EU legalists. “Someone came up to me after our session today, another trade lawyer, and said to me they are thinking of going to the UK,” says McCarthy’s Boscariol. “It would be fascinating to go to the UK and work on that.”

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