The UK-EU trade deal - a work in progress
30 Dec 2020
After more than four years since the UK voted to leave the European Union, the two sides have agreed to a trade deal. While the pact averts the threat of a “no-deal” Brexit, frictions remain for businesses and some significant issues are unresolved. Our experts take a closer look at what the deal means for the economy and British companies, and what happens next.
The UK-EU Trade and Cooperation Agreement concluded on Christmas Eve consists of three pillars: a free-trade agreement, a framework for cooperation between law enforcement and judicial authorities, and governance arrangements that allow for cross-retaliation. One of the main aspects of the agreement is that while it will enable the tariff- and quota-free trade in goods, it doesn’t apply to the services industry or the financial services sector. Below we summarise some of its key points.
One industry which faces special restrictions is the auto sector. Petrol and diesel cars must be made with 55% local content, whilst the rules on electric vehicles see overseas components limited to 60% by the end 2023 and falling to 55% by the end of 2026. This had been a thorny issue, given the high Japanese component content of some cars made in the UK, which the government had argued should be treated differently in light of the free trade deals that both the UK and the EU have with Japan.
Ultimately the component content limits may not be as favourable as hoped, but the fact that rules will be phased-in alleviates at least some concerns about a “cliff-edge”. While the free trade deal in goods is welcome news, it should be noted that the UK will no longer be part of the EU’s Single Market and as such the free movement of goods no longer applies. This means extra paperwork and procedures from 1 January, making trade no longer frictionless and potentially adding to business costs.
Crucially, with some narrow time-limited exceptions (e.g. derivatives clearing for 18 months and settling Irish securities for six months), the EU has not granted “equivalence” to the UK yet. This would give access to EU markets for some, but not all, financial services, albeit with the proviso that it could be withdrawn with just 30 days’ notice – an issue Switzerland had to contend with in 2019. Before deciding on “equivalence”, the EU wants to see how the UK would like to diverge from the EU frameworks. In contrast, the UK has extensively (although not entirely) granted equivalence unilaterally to EU-based financial services. In these circumstances, UK firms will either need to use EU subsidiaries to provide services to EU clients or rely on other contingency plans.
Level playing field
Dispute resolution mechanism
Generally, if the deal fails in a specific part, this does not affect the rest of the agreement's validity. That said, there is an important “rebalancing mechanism”. Should, after four years, one party decide that there have been too many breaches of the “level playing field” provisions, or that a measure with a material impact on trade and investment has been in place for a year, they can instigate a review of the entire trade agreement. Should the dispute not be resolved after a year of negotiations, the entire trade agreement could be suspended, leaving UK-EU trade on World Trade Organization terms.
Even a free trade agreement such as this one will introduce substantial trade frictions for businesses in terms of paperwork, even without tariffs, relative to trading in a single market.
The economic impact
What happens next?
Overall, the agreement is a welcome end to the UK’s four-and-a-half-year process of leaving the EU and removes a significant source of domestic uncertainty, which has represented a headwind to business investment. Ultimately, the deal and eradication of the “no-deal” Brexit threat should help support the economic recovery through 2021. However, the coronavirus pandemic remains a major downside risk.
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