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The U.K.’s formal exit from the European Union has pushed Brexit negotiations into a new and rocky stage, leaving the two sides needing to hammer out a complex trade deal by the end of 2020. As both camps set out their negotiating positions, U.K. Prime Minister Boris Johnson told EU ambassadors that the eventual agreement will likely resemble either the EU’s deal with Canada or its setup with Australia. Both of those arrangements would have distinct pros and cons for Britain.

Canada

The EU’s deal with Canada was regularly mentioned during the Brexit campaign and has emerged as Johnson’s favored model. The agreement is popular with the U.K. because it allows free trade without remaining in the EU’s so-called single market, removing the need for harmonized rules and free movement of people. Back in 2016, the bloc called the free-trade accord, known as the Comprehensive Economic and Trade Agreement or CETA, “the most ambitious trade agreement that the EU has ever concluded.” When it entered into force provisionally the next year, the deal ended 98% of tariffs on goods, and will remove 99% of them after seven years.

• PROS: The deal eliminates tariffs on most goods, provides increased access to services providers, and cuts costs by harmonizing EU-Canadian regulations and standards. The EU estimates that the accord will increase bilateral trade between Canada and the EU by about 12 billion euros ($13.3 billion) per year.

• Under such an arrangement, Britain would stop paying financial contributions to the EU budget and the U.K. would regain control of its immigration rules and other internal regulations.

• CONS: A free-trade agreement like the CETA would represent a downgrade from the U.K.’s current trade relationship with the EU because it will erect trade and regulatory barriers that haven’t existed for decades.

• It also does little for trade in financial services -- likely leaving British operations in the EU governed on the basis of the World Trade Organization’s General Agreement on Trade in Services, rather than the “passporting” rights that banks enjoy within the EU. That’s prompted talk in Britain of a “Canada-plus” -- or even “Canada plus plus plus” agreements, where one of those add-ons is financial services.

Australia

Johnson has indicated that if no free-trade deal is possible by the end of the year, he’s prepared to take a looser arrangement like Australia’s. It’s essentially a rebranding of the nuclear option of a “no deal” Brexit, which referred to the possibility of the U.K. leaving the EU without any deal at all. It would involve doing business on WTO terms in most areas, with tariffs on goods and an agreement on the processes to reduce some regulatory barriers.

• PROS: The 2008 EU-Australia Partnership Framework establishes a set of shared policy objectives regarding trade and investment. It fosters cooperation in sectors like investment, food certification, aviation, border management and law enforcement. The deal does not bind Australia to EU regulatory oversight or immigration rules, and Australia does not have to make financial contributions to the EU budget.

• CONS: Australia is not a member of the European customs union or single market. That means its goods exporters are subject to EU tariffs and quotas and Australian services providers do not have preferential access to the European continent. Furthermore, Australia’s banks do not have passporting rights to operate in Europe. The EU and Australia are now negotiating a more ambitious new free-trade agreement to help increase market access and cross-border trade and investment.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;Bryce Baschuk in Geneva at bbaschuk2@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brendan Murray, Leah Harrison Singer

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