The UK-EU Trade Agreement

Last updated: Mar 10, 2021

Brexit is finally completed, right? Well, yes and no. Yes, the Canada-plus-style deal has been agreed (on December 24th, 2020), but no – given the extended transition period for fishing in particular (until June 2026 ) and various future commitments to review and revisit, the process of Brexit will continue until all the provisions have been completed, and the final act is played out. Beyond that, the effects of Brexit will be felt for decades to come. So, what has been agreed?

The majority of the agreement appears to have been completed several months ago, with the three ‘sticking points’ of the so-called level playing field and state aid, governance of the deal, and fishing rights proving the most troublesome. Now that the 1,246-page document has been published (December 26th) with the UK government providing a 34 page summary, we can look at some of the key features and elements of the deal.

Key points

Scope

The Brexit deal is the largest trade deal that the UK has struck so far, since the Brexit Withdrawal Agreement, and is valued at around £300bn to the UK, with just over half of the UK’s exports going to the EU.



Trade

In essence, the bottom line is that free trade in goods between the UK and EU will continue, meaning there are no tariffs or quotas imposed by one party on the other on goods which meet the ‘rules of origin’ requirements. This means that goods originating in the UK will not face tariffs or quotas.

Of course, like most FTAs, the agreement primarily covers the flow of physical goods, although sections do cover ‘understandings’ and ‘commitments’ regarding the future direction of trade in services and investments, which represent the largest share of the UK’s economy – the share of the UK’s GDP by value coming from manufacturing is just 9%, compared with Germany, at 20% - source World Bank.

Fishing

In terms of fishing – one of the most contentious issues - the value of the fish caught by the EU in UK waters will be cut by 25% over a five and a half year transition period. This will give the UK fishing industry some breathing space to upgrade and increase its capacity while giving time for the EU fishing industry to adapt to the reduced quotas. The UK will be free to control access to its waters once the transition period has finished (in 2026).

Level playing field

The second contentious area was the so-called ‘level playing field’ governing how competition between EU and UK businesses are regulated to ensure that competition is ‘fair’. This covers areas where ‘undercutting’ could occur, such as reducing workers rights (say to strike, take maternity or paternity leave, to have holiday pay, and to have their working time limited) or watering down environmental standards, and hence reducing total production costs. The level playing field also covers state aid, which could be used to subsidise industries to gain a competitive advantage.

While the UK has agreed to the establishment of an independent competition agency which will look at possible cases of unfair competition, it is also free to develop its own system to monitor issues regarding unfair practices.

In terms of trade in services and investment, the Agreement establishes the level of access the UK and EU have granted each other, and sets out a commitment to review the services and investment sectors in order to improve how these are dealt with. The Agreement covers the obligations of both parties in terms of market access, but there is no agreement on granting "equivalence" to UK financial services providers, with a separate agreement expected in the future.

Dispute resolution

In terms of dispute resolution – the third key sticking point – either side can invoke a dispute, which might mean that the other party can employ ‘rebalancing’ if it feels that any divergence from the ‘common’ standards that exist at the end of the transition period (Dec 31st, 2020) has a negative impact on the other party.

Sovereignty

The independence of the UK as a sovereign state has been formally recognised in the agreement. The agreement is subject to international law, not EU law, with a new Partnership Council supervising the implementation and operation of the agreement.

Other features

The Agreement includes a Most Favoured Nation clause to ensure that it is adjusted to take into account any future FTAs. In terms of ‘technical barriers to trade’ (TBT) covering technical regulation, standardisation, and labelling, both parties are free to regulate goods in a way that is suitable for their own markets.

There are specific provisions covering mutual recognition, ‘equivalence’, standards, and packaging requirements in a number of specific sectors, including medical products, motor vehicles, organic products, wine and chemicals.

In terms of administrative barriers to trade, there will be procedures in place to create mutual recognition of ‘trusted traders’ to reduce the burden of excessive bureaucracy in line with the WTOs Trade Facilitation Agreement and the World Customs Organisation (WCO) which covers the requirements for ‘efficient customs arrangements’.

The Agreement also includes protocols dealing with tax fraud and exchange of information. In terms of travel, individuals – including business visitors and tourists - can stay for 90 days in any 180 day period visa-free, but beyond that a visa will be needed.



Comment

Of course, both sides are considering the deal a triumph, but deals are much more about comprise than triumph – in everyday life, success is defined as ‘winning’ and achieving what you want, so, by this standard, no party to a trade deal can ever claim success in these narrow terms.

What we don’t know exactly is what the parties would have settled for prior to entering negotiations. Both sides had their ‘red lines’ but red lines simply let the other party know how what is important to them, and set the 'negotiating framework' but reveal little about the detail of how give-and-take is likely to unfold.

What is clear is that the deal is, genuinely, historic in that no former member of a trading bloc has engineered an exit and then renegotiated its trading relationship within such a relatively short space of time. It was also 'comprehensive' in that it needed to cover highly complex areas, none the least being how exactly provisions of the Good Friday agreement would be incorporated to ensure a free flow of goods between Northern Ireland and the Irish Republic. Of course, the border issue is likely to rumble on, and it will take a concerted effort by the UK and EU, and mediated perhaps by the US, to form a lasting solution to cross border trade.

It is true that new trade deals take years, but that is largely because building a new relationship inevitably takes time, and it is likely that considerable differences exist regarding standards of products at the stat of negotiations, and that agreed processes for convergence need to be agreed for thousands of products. Not so, the EU and UK.

The frustration for many (the Irish border issue aside) was that the UK and EU had already aligned for 48 years so, surely, a trade deal would be straightforward (the Brexiteers view). Of course, for the ‘remainers’ the same facts were interpreted in precisely the opposite way – the UK and EU have aligned so closely over their 48-year relationship, then why on earth break up a successful relationship? It was never the case that leaving the EU was based on simplistic economic arguments.

Given that any gains or losses (net gains or net losses) will remain largely unknown for years, if not decades, the economic arguments were never going to be visible enough, or sufficiently compelling enough to win the argument decisively. Economics is not a sufficiently exact science to predict with any certainty what the consequences of Brexit would be. So many elements contribute to economic success (and failure) that any attempt by economists or other observers to claim that they know (for sure) that the UK will be ‘better off’ or ‘worse off’ after Brexit are, clearly preposterous. There are so many ‘it depends’ considerations that forecasters might as well ‘dip a spider in ink’ and see which way it wanders along a sheet of graph paper.

Economic success (in terms of jobs created, real wage levels, competitiveness, productivity, efficiency and profits) ultimately depends on how change is responded to. Brexit is, clearly, a significant economic shock, but shocks can lead to change, growth, better understanding, new technologies, and skill deepening, as well as causing recession, job losses, trade problems and lower standards of living.

The oil shocks of the late 1970s and the recession of the early 1980s forced car manufacturers to create more efficient engines, while the financial crisis forced banks to change how they assessed and handled risk. It is equally valid to argue that Brexit could be as great an economic opportunity (for both the UK and EU) as it is a threat.

Politics over economics?

The real driving force behind Brexit was political, cultural and social, and can only be understood through the lens of history. When Boris Johnson invoked the spirit of Winston Churchill, or when the Brexiteers referred to regaining control, to regaining sovereignty, the political force for change increasingly trumped almost all other considerations.

Journalists (and others) have long struggled to understand why, when fishing represents such a tiny fraction of the UK’s industry and trade, that it was the ‘last’ sticking point in the negotiations, and so central to the UK’s position. Similarly, (many) EU commentators still appear at a loss to understand the motivations behind Brexit.

In all its various forms, the EU has grown from 16 to 27 members over a 64 year period, with enlargement being the norm – why on earth would anyone want to leave? Perhaps those in the EU need their own space to reflect, and consider what lessons they may have learnt.



The EU is, at its heart, a political movement – initially constructed out of the immediate post-war ashes – which attempted to bind together countries with a common project and hence eliminate the possibility of further military conflict within Europe. To this end, the EU has been an unqualified success.

The single market provided the means by which exchange could take place across national boundaries, with EU institutions providing a level of legitimacy to the political project. Of course, the single market is also a success, but a qualified one in that, for decades the EU’s common agricultural and fisheries policies failed to deliver what was initially promised, despite numerous reforms.

Perhaps the single biggest paradox in the whole Brexit saga is that some of the most vocal opponents of joining the European Economic Community - as it then was - came from political left –  indeed, in a pamphlet produced by the Labour party in 1951 (called ‘European Unity’), made it quite clear that “in every respect except distance, we in Britain are closer to our kinsmen in Australia and New Zealand on the far side of the world, than we are to Europe”. This set the scene for growing Euroscepticism, with others seeing the ‘common market’ as a capitalist construction where the free movement of labour was simply another way of extracting ‘surplus value’ from labour to enable German cars to be produced cheaply and dumped around the world. Other Eurosceptics on the left, including Tony Benn, expressed concerns regarding the erosion of democracy that the 'common market posed.

Jump forward 50 years, and we find the most vocal anti-Brexit supporters coming from the centre-left.

In the UK, the centre-left is still struggling to cope with Brexit at a time when, perhaps, they shouldn’t. In a post-Brexit environment, surely the centre-left can prosper and find an ideological home by trying to grasp new opportunities to push for social and environmental reform, increasing ‘levelling up’ and the reduction in inequality of opportunity and the permanent reduction in poverty. With Brexit out of the way the left can unite to push its own post-Brexit agenda.

In some ways Brexit has created a fresh canvas, with equal opportunities for both ‘interventionists’ and ‘free-marketeers’ to face the new reality, and re-set their objectives and political ambitions through this new lens.

2020 will certainly be remembered, if not for Brexit, then for Covid. We can all hope that 2021 will be remembered as the year we discovered that solutions to problem can be found, for those in the UK and the EU, and that a line can now be drawn under Brexit. And, as people happy to remind us, now the hard bit starts.

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