What is the Brexit and what does it mean for Canada?

The Brexit.

It’s one of those terms you’ve probably noticed a few times in the financial pages, maybe in that European wire story you glanced at but couldn’t be bothered to read. It might be stuck in the back of your head, sounding a bit like a new breakfast sandwich at the local fast-food joint.

An abbreviation on ‘British exit’, the Brexit refers to the possibility that the United Kingdom will leave the 28-member European Union following a referendum in June. Britain has long had an uneasy relationship with the European Union and its precursor, and British Prime Minister David Cameron had promised to hold the referendum if he won the 2015 general election, though he supports staying within the union.

For Brits, it’s a very big deal. A British departure from the world’s largest trade bloc would mean renegotiated trade deals, economic uncertainty, and very possibly the end of the road for PM Cameron.

For Canada, which still shares a head of state with the Britain, it’s natural to wonder whether the shockwaves will reach across the pond if Britain pulls the trigger.

While the event obviously wouldn’t be as seismic here as in Europe, there will be noticeable effects leading up to the vote, says BMO Senior Economist Benjamin Reitzes.

Financial markets don’t like uncertainty, and the question of a G8 nation pulling out of a major trade bloc creates more than a little of it.

“You could have stock markets weakening, and just general risk aversion in bond yields, weighing on the Canadian dollar, weighing on the oil prices,” he says.

How long this lasts would depend obviously on the outcome of the vote, with a ‘leave’ vote leading to continued uncertainty. However, markets would likely calm down somewhat after the vote no matter the outcome, says Reitzes.

“Afterwards I think there will be more of a tempered reaction, kind of a ‘sell the rumor, buy the fact’,” he says.

Of course, market disruption won’t be a Canada-specific phenomenon, although Canadian companies that do business in the U.K., particularly with the European mainland, could see disruption to their business.

What is Canada-specific is how a Brexit would impact the Canada-EU trade deal (CETA), which is currently winding its way towards ratification, with Great Britain currently part of it. A Brexit could mean changes to the deal and then the possibility of a separate trade with a non-EU Britain.

Ultimately, Canada and Britain should continue to trade, but it could take a while to sort out new deals, and Canada probably won’t be at the top of Britain’s list of priorities, leading to uncertainty in the interim.

However, while Canada’s historical ties to Britain are strong, the trade between the countries has become less significant over the years, notes Carleton business professor Ian Lee.

“The reality is that we have not really for 100 years been deeply integrated or dependent on the UK,” he says.

According to Statistics Canada, Canadian exports to the UK totaled just over $16 billion last year, which makes it easily Canada’s best European customer. But that total is dwarfed by the $396 billion Canada exported to the United States, and comes in shy of the $21 billion in exports to China.

“There will be an adjustment like any shock to the system whether it’s a commodity shock or a trade shock or a currency shock. There will be short term shock,” he says.

“Contracts will be re-priced, trade agreements will be renegotiated and life will go on.”

A possible bright spot for Canadians could be the prospect of increased labour mobility within the Commonwealth in the event of a Brexit. London mayor Boris Johnson, one of the strongest voices in favour of leaving the union, has mused about a free labour mobility zone involving certain Commonwealth countries, most likely Canada, Britain, Australia and New Zealand.

Recent opinion polls show the two sides of the Brexit argument running neck-and-neck, but betting odds have shifted in favor of Britain remaining with the EU, meaning this could all go down as another referendum that just got everyone excited for a while.