LONDON (AP) – The last-minute trade deal between the UK and the European Union means companies will save on new tariffs and border disruptions at the start of the new year, an economic shock that would have exacerbated financial and labor problems caused by the pandemic.
The news of the agreement on Thursday generated sighs of relief from the offices of business leaders and politicians, as well as consumers who anticipated product shortages and transport workers facing the potential for long backups. to border crossings.
The Governor of the Bank of England, Andrew Bailey, recently warned that failure to reach a trade agreement between the UK and the EU would have a greater long-term impact on the British economy than the long-term impact of the coronavirus pandemic, which has caused the deepest recession in the country. in more than three centuries.
The deal has yet to gain the approval of the British and EU parliaments. Here is a review of the changes to come and their possible implications.
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WHAT COMES OUT OF THE UNITED KINGDOM IN JAN. 1?
Although the UK left the EU on 31 January, it follows the bloc’s rules until the end of this year as part of a transition period towards the new economic relationship. The problem was, what comes next?
The United Kingdom leaves the European single market, which after its departure will encompass around 450 million people. The aim of the single market is to make trade as simple as possible, regardless of where a company is located within the European Economic Area, which in addition to the 27 EU member states includes non-EU nations, including Iceland and Norway. The rules governing trade are the same throughout the single market and are based on the free movement of goods, services, capital and people.
The UK is also abandoning the customs union, which eliminated tariffs among members and created a common external tariff for non-members. Under the customs union, the EU negotiates international trade agreements on behalf of its members, giving it a weight in the world economy that no member would have.
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WHAT IS THE NEW RELATIONSHIP?
Under the terms of the new agreement, there will be no tariffs on goods traded between the UK and the EU. For carmakers, for example, this is a relief, as without an agreement a 10% charge would have been applied from 1 January. There will also be no quotas, which means exporters can transport as many vehicles as they wish.
However, trade will not be as weak as before as the UK leaves the single market and the customs union. Companies will have to submit customs forms and declarations for the first time in years. There will also be different rules on product labeling, as well as health checks on agricultural products, for example.
The government has estimated that the new bureaucracy will result in an additional 215 million customs declarations each year at an annual cost of about £ 7 billion.
But an agreement entails what could have been considerable chaos and a deeper blow to trade, as the new tariffs would have added to the cost of doing business between the UK and the EU for many different categories of goods. Many see Thursday’s deal as the best of a bad situation for business.
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WHAT WILL BE THE IMMEDIATE IMPACT?
It may take time to adjust, probably causing traffic jams on both sides of the English Channel, as well as delays in ports in the days and weeks after January 1st. of imported meat and dairy products, will increase in the coming weeks.
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HOW WILL THE NEW BUSINESS RELATIONSHIP AFFECT ECONOMIC GROWTH?
Economists agree that the deal is better for the British economy than an outcome without an agreement and will help it recover from the coronavirus recession, which is expected to reduce economic output by around 12 % in 2020. The impact is much smaller for the EU and other countries in the world, which would have experienced mainly some volatility in the financial markets in the absence of an agreement.
The EU accounts for about half of UK exports, so avoiding tariffs will help many companies. Executives may begin to implement investment decisions they had kept pending during the last years of uncertainty about Brexit. However, the agreement with the EU does not incorporate the full scope of the services sector. As it accounts for around 80% of the British economy, companies that rely heavily on business with the EU, such as banking and finance, face a more gloomy future. This is particularly disastrous for the huge UK banking sector.
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WHAT ABOUT THE LONG TERM?
In the longer term, most forecasts think that the British economy will end up being a few percentage points lower in the coming years than it would have been otherwise if it had stayed in the EU. This may not sound like much in the context of this year’s recession, but it does mean that living standards would be lower than would otherwise have been the case.
Economists at Berenberg Bank wrote that “the exit from the single market and the EU customs union will reduce the UK’s potential growth by hurting its export prospects and reducing foreign direct investment inflows and skilled labor. of the EU “. They estimated a maximum growth potential of 2.0% per year as an EU member, compared to 1.7% with the agreement on Thursday and 1.5% without an agreement.
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WHAT WILL THE UK DO DIFFERENTLY?
The aim of Brexit was to allow the UK to set its own rules and do things its way. Therefore, the critical point during the months of tense trade negotiations was figuring out what to do when and if the UK deviates from EU rules.
The EU has long feared that Britain would submit to the bloc’s social, environmental and state aid rules in order to gain an unfair advantage with its exports to the EU. Britain has said that having to comply with EU rules would undermine its sovereignty. The agreement reached a compromise by granting a key UK claim that the European Court of Justice not be involved in resolving disputes. Instead, it allows for the possibility of trade arbitration or countermeasures in the event that either party considers that it is being harmed by labor, political or labor measures. If these measures are used in excess, either party may reopen the trade aspects of the treaty.
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WHAT IS TRADE OUTSIDE THE EU?
Until 31 December, the United Kingdom remains bound by the 40 international trade agreements that the EU has negotiated in recent years. Towards the end of the year, the United Kingdom has tried to take away these offers, such as with Japan and Mexico, but there are still some to be concluded. In early 2021, the UK will be able to forge its own trade agreements with whomever it wants. Negotiations with the United States have already begun, although President-elect Joe Biden has indicated that trade deals are not the highlight when he takes office later in January.
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Associated Press writer David McHugh contributed from Frankfurt, Germany.
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