Brexit Finally Got Done, but the UK is
Trading Market Access for Sovereignty

January 20, 2021 | UK, Brexit

Executive Summary

A Brexit Deal that is only Slightly Better than no Deal

  1. The UK-EU Trade and Cooperation Agreement (TCA) avoided a no-deal exit on 31st December. Yet, short-term and long-term negotiations will be necessary to complete and adapt the deal.
     

  2. The agreement covers areas from police cooperation to fishing, focusing largely on trade in goods and ensuring zero tariffs and quotas. Nevertheless, businesses have reported increased frictions in trade.
     

  3. The UK has traded market access for sovereignty, but the extent to which the UK can diverge in practice from the EU – and the political, social or economic purpose of doing so – remains unclear.

Watch out for

  • The UK and EU adapting implementation of the agreement in the short-term to ease pressures on importers and exporters.
     

  • Both sides negotiating ways forward, especially on financial services, personal data, and emissions trading.
     

  • Boris Johnson’s first electoral test post-Brexit in May: Scottish Nationalists doing well in local elections may lead to a renewed push for independence.

Key Figures

  • UK-EU trade amounted to €741 billion in 2019, with UK exports to the EU of €326.6 billion and EU exports to UK totaling €414.4 billion.
     

  • In November 2020 80% of UK businesses did not have sufficient Brexit preparations in place.
     

  • Brexit costs for the UK can reach up to 8% of GDP over ten years, more than the estimated cost of the Covid-19 pandemic.

State of Play

Brexit Moves from a Hot War to a Cold War

Four and a half years after voting to leave the EU, the UK and EU succeeded in negotiating a Trade and Cooperation Agreement that came into effect on 1st January 2021. The TCA, which is similar to the EU’s association agreements, is now the foundation for UK-EU relations going forward. While ensuring zero tariffs and quotas for goods, it is a shallow trade deal that faces significant problems. On the short-term importers and exporters are struggling with new customs rules. Medium- and longer-term disagreements over areas such as finance, fishing and mutual recognition of professional qualifications will continue to raise conflict. In particular the question of continued „equivalence“ in financial services granted by the EU is a key concern for the City. Consequently, the agreement’s Partnership Council and 19 specialized committees will now begin never-ending negotiations to complete and adapt the agreement. The TCA takes the heat out of Brexit, but UK-EU differences and political tensions within the UK make for a continuously bumpy road ahead. The UK is set to remain an awkward partner for the EU.

Key Issues 1&2

Trading Access for Sovereignty

The TCA consists of three pillars. Firstly, the trade agreement covers economic, largely goods but also transport and energy, and social relations. Secondly, a framework for policing and law enforcement regulates cooperation in these areas. Finally, a single overarching framework covers the management of relations and is headed by a Joint Partnership Council. The full details and operation of the agreement remain uncertain. While goods benefit from zero quotas and tariffs this does not prevent a range of non-tariff barriers disrupting trade. For example, there is mutual recognition of standards in business areas such as medicinal products and temporary concessions on rules of origin for electric car batteries. This contrasts with other business areas such as chemicals without mutual recognition of standards, doubling compliance needs and thus costs for the chemical industry. Services face an even less generous situation due to a multitude of exceptions that vary by not only sector but also member states. Progress was limited on financial services, where passporting rights have now ended. Efforts are now underway to agree on a Memorandum of Understanding, establishing a framework for Financial Services Regulatory Cooperation by the end of March. So far, the EU has extended the desired „equivalence“ status for UK financial services by six months, giving Brussels considerable leverage to prevent London from „regulatory undercutting“. In recognition of the limited time for businesses to prepare, both sides agreed on temporary measures such as a six-month agreement on data access to keep trade moving. The UK initially prioritized cross-border flows rather than enforcing new trade rules.

 

Whether the TCA allows the UK more autonomy in its trade and economic policies remains disputed. While the direct effect of EU policymaking has been largely curtailed, the TCA binds the UK to the EU in three ways. First, to ensure a “level playing field” it largely prohibits state subsidies. This allows either party to quickly impose “rebalancing measures” in the form of proportionate sanctions such as tariffs. This threat is a powerful one, more so for the EU given it remains the UK’s biggest export market. Second, the numerous non-tariff barriers mentioned above will lead the UK to ensure its standards will not drop below EU ones to not lose access to EU markets. This, however, will have Brexiteers ask what the whole departure was for. Finally, the new structure of TCA committees and working groups will facilitate a close relationship, keeping the two sides in constant negotiation and adaptation. Thereby the EU Court of Justice will still assert its influence, not least through its continued jurisdiction in Northern Ireland. As a result, the UK Government is likely to shy away from any substantial changes and only symbolically diverge from the EU.

A European Power in a Multipolar World

The TCA provides an opportunity for London to review its ambitions not only towards the EU but also domestically and internationally. It remains uncertain, however, which economic model Brexit should deliver. It is still unclear whether the UK will be going beyond symbolic divergences to compete with the EU through deregulation and increased state intervention, or something in-between. UK politics is likely to be dominated by constitutional questions, as local elections in May are expected to see the Scottish National Party win a mandate for a second independence referendum. Local governments across England, including London, will also raise questions about whether the over-centralized government in Westminster can manage an increasingly fragmented UK.

 

On foreign policy, there is a strong desire to look beyond Europe and play a leading role in a multipolar world. The ongoing “Integrated Review” of foreign, security and defense policy but also the UK’s chairing of the G7 in 2021 paves the way to a sharper turn against authoritarian countries such as Russia and China. However, the political, economic and constitutional uncertainties generated by Brexit, will limit this ambition. The need to engage in TCA negotiations with the EU and a strained “special relationship” with the USA are leading back to a focus on Europe and the North Atlantic. In the end, Brexit Britain may turn out to be more of a European than a global player, and one that haggles with the EU driven by the narcissism of minor differences.