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20 November 2020

Michael Gasiorek is Professor of Economics at the University of Sussex and Director of the UKTPO.

Discussions and evaluations on the future UK-EU relationship have been on-going since the referendum of June 2016, and we are close to another milestone – by the end of the year, we will either have a free trade agreement (FTA) with the EU or no-deal. Note this is a milestone and not the endgame. Whether or not there is an agreement there will still be considerable practicalities to resolve, and no doubt some areas will be open to future negotiation. There is a lot of talk in the press about sticking points (fisheries, state aid and level playing field provisions, dispute settlement) but how good the deal is for the UK will depend on the scope and the depth of what is agreed, and whether some areas are only notionally covered and need to be sorted out in future negotiations.

If there is an agreement, this blog lists ten key issues to be mindful of when assessing how ‘good’ the deal is for the UK. If there is no agreement, then these issues will matter for future trade with the EU and beyond, the total impact on the UK, and the distribution of that impact across industries, regions and people.  The ten issues are not listed in any order of importance, however, they outline the key dimensions of trade that will affect the UK economy and politics in the UK come the end of this year.

1) Tariffs

No-deal means trading on WTO terms and so the UK will levy tariffs on its imports from the EU and vice versa. A Free Trade Agreement (FTA) should remove tariffs on most goods – but not necessarily all. It will therefore be important to see if there are any exceptions to the tariff liberalization and which goods or sectors these are in. Where there are exceptions, they are likely to be for certain agricultural goods and possibly fisheries.

2) Rules of Origin

In an FTA rules of origin are needed to determine which goods are eligible for the lower or zero tariffs that have been agreed between the partners. Goods can only be eligible if they have been ‘produced’ (ie are originating) within one of the partner countries. The rules of origin outline the criteria a good needs to satisfy to be deemed as originating. Really important here is whether an agreement goes beyond bilateral cumulation (where you can count the intermediate inputs from each partner as originating), or whether it allows for any diagonal cumulation (where you can also count the intermediate inputs from specified partners as originating). Diagonal is much better than bilateral. While the UK is keen on diagonal cumulation, it appears that the EU is unlikely to agree to this.

3) Mutual Recognition

Leaving the EU means that in order to access the EU market UK goods will need to prove that they are produced to the right standards to make them acceptable for sale in the EU. This adds bureaucratic complexity and costs for UK firms. Even if the UK unilaterally adopts EU standards in a sector, procedures for proving that standards have been met are necessary – known as conformity assessment. This raises the question of which bodies are accredited to carry out these assessments for UK exports to the EU. It is cheaper and easier if there is agreement on the mutual recognition of conformity assessment – i.e. the EU accepting that UK certifiers can make these certifications. The UK’s ask in this regard was ambitious and hoped for mutual recognition in a wide range of sectors, but the EU is unlikely to agree to these requests, and at best, there may be a small number of sectoral mutual recognition agreements for certain manufacturing sectors.

4) Fisheries

Economically, for the UK this is not an important industry as it accounts for less than 0.2% of GDP.  However, fishing has a symbolic significance which is tied up with the UK being a maritime nation. There is concern for the economic fate of fishing communities, and notably the issue of sovereignty over British waters. There is a strong case to be made that the current arrangements disadvantage the UK industry and that there are better scientific methods (zonal attachment) for allocating fishing quotas. But agreeing to this will be very hard. If there is an agreement it is likely to allow for a transition period and periodic reviews.

5) Financial Services

While the preceding points all focused on goods trade, services trade is also extremely important for the UK given that as a whole it accounts for around 80% of GDP. A key sector for the UK is financial services (approx. 7% of GDP). Under current arrangements, financial services firms in the UK have passporting rights in the EU which allow them to sell their product in EU markets. At the end of the transition period, which ends on 31 December 2020, this will no longer apply. The sector is hoping that the EU will grant ‘equivalence’ status which would enable them to continue their current activities. However, equivalence is not as good as passporting as it is normally granted on an annual basis and can be revoked at 30 days’ notice and so provides firms with much less certainty.

6) Mutual recognition of professional qualifications (MRPQ)

MRPQ allows people with professional qualifications obtained in one country to have these qualifications recognised in another. These rules are extremely important to allow professionals qualified in one country to work or provide a service in another country. After the transition period and without a deal the EU framework for MRPQ will no longer apply to the UK, which may have a significant impact on the ability of both manufacturing and services firms to offer their services in the EU market. It may also affect the ability of UK firms to source professional services from the EU or EU residents. Related to this too will be what agreements are in place for the temporary movement of workers (GATS mode 4), in order to allow people to travel to deliver a given service. For the UK, it will be important to obtain an agreement on MRPQ as well as on the temporary movement of workers.

7) Digital Trade

The rise of the digital economy raises a range of complex issues for trade relations and agreements between countries.  Digital trade refers to digitally-enabled transactions of goods and services that can either be digitally or physical delivered and involve consumers, firms and governments. Underpinning digital trade is the movement of data across borders which thus needs to be regulated. This raises the question of how to manage data flows across borders which may facilitate the provision of goods and services while raising issues of competition, privacy, consumer protection and cybersecurity.

8) State aid and level playing field provisions

These are the contentious areas. The UK would like as much freedom to set its own rules while maximizing access to the EU market; yet, the EU wants to ensure that the UK does not get any competitive advantage in the future for example because of laxer environmental or social standards, or more generous state aid. What will matter here is the extent to which the UK spells out its proposed state aid regime, and/or allows for dispute settlement clauses which would give the EU some effective redress if the UK is deemed to have given UK firms a competitive advantage. On environmental and social provisions, while both sides appear to agree on current standards, the issue is how to deal with future divergence: will the UK agree to match future EU standards; will it agree not to regress from current standards; or will it do neither, which some MPs believe is the only position compatible with ‘sovereignty’.

9) Northern Ireland

The Northern Ireland protocol is designed to manage the issue of no border on the island of Ireland, in particular in the event of no-deal. However, even if there is a deal, the border issue would continue to pose challenges and the protocol provides the basis of those arrangements. The UK Government has performed a bit of volte-face and is no longer content with what it signed up for. The Internal Market Bill overrules the Protocol by (a) allowing UK ministers to implement rules on export declarations and procedures from Northern Ireland to Great Britain, which could override the obligations in the Withdrawal Agreement; and (b) by allowing the UK Government not to apply the state aid clause in the NI protocol. The aim of that clause was to ensure the trade between Northern Ireland and the EU is not distorted by subsidies. In addition, the Government intends to introduce a clause in the Taxation Bill to allow it, rather than the Protocol’s Joint Committee, to determine whether a good travelling from Great Britain to Northern Ireland is at risk of moving into the Republic of Ireland and hence of having to pay the EU tariff on entry to Northern Ireland. It will be interesting to see if the EU insists and if the UK Government agrees to drop these contentious clauses in the event of an agreement.

10) Governance/Dispute settlement

In any FTA, the arrangements that govern the agreement especially in the event of non-compliance – how does one party seek redress if the other party ‘transgresses’ – are important. For the UK, it would be politically unacceptable for jurisdiction to be given to the European Court of Justice, so expect some form of formal arbitration process which kicks in if disputes cannot be resolved more amicably. The EU wants a unified governance structure which would enable more robust enforcement, including cross-sectoral retaliation, whilst the UK has advocated multiple governance structures which would prevent this from happening.

There are of course other areas to watch out for, for example, investment provisions (including dispute settlement) or the inclusion of Most-Favoured Nation clauses which we have not detailed here.

Leaving the EU will have economic costs for the UK. This applies whether there is a deal or not. Clearly leaving without a deal will be significantly worse than with a deal – but it’s hard to know by how much until the deal is public. Either way, there will be short term impacts in the early months of next year such as possible lorry queues, and strains as firms adjust to changes in costs arising from changes in tariffs and regulatory barriers. In addition, a no-deal outcome is likely to be accompanied by a good deal of acrimony which will prevent pragmatic solutions to inevitable issues as the partners separate, and probably sour relations for a lot longer.

Whilst the UK Government has seemingly pursued Brexit at almost any cost, the deal between the UK and the EU, or if there isn’t one, will be moulded by the politics on both sides. But there is also an opportunity now to get the principles of governance and policy right for the future, and minimise the negative economic impact on the UK.

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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