One month on from the end of the Brexit transition period and the dust may have settled on the 11th-hour agreement reached between the EU and UK, but many businesses and individuals are still coming to terms with the reality of what it means for them.
Although the agreement was lauded as a success, what it’s essential to remember is that it’s not a trade deal in the conventional sense – as in one where trade barriers are lessened, and we move from a closed trade position to one that is much more open. Instead, Brexit meant that the UK was moving from a frictionless, open trade position to one where restrictions were inevitable. That means that, although the trade agreement reached is largely tariff-free (although tariffs do remain in place in some areas) for goods traded between the EU and the UK, there are a raft of new non-tariff barriers.
Dealing with new trade frictions
And that’s proving to be the issue. Businesses that have traded for nearly five decades in a frictionless way with the EU or companies that have never known a difference, face documentation and controls they are not used to. For those firms used to trading globally and therefore used to filling out customs declarations, understanding rules of origin and so forth, that may be a minor inconvenience. Larger firms too may have had the foresight to hire customs agents to complete documentation (before they became as hard to hire as unicorns) and manage the process on their behalf or have the capacity to absorb the increased admin in-house; not ideal admittedly, but doable.
However, medium and smaller businesses are facing a much more significant challenge. Many of them, perhaps without the manpower to dedicate to preparations or focused on getting their business through the pandemic crisis, were just not ready for that change. We’ve all heard the stories of goods held up at ports and warehouses, additional logistics costs and businesses looking to shift operations to hubs within the EU. And nowhere has this been more keenly felt than in Northern Ireland, where the agreed Protocol designed to prevent a hard border between north and south has, in effect created a border in the Irish Sea. Decimated supermarket shelves and goods turned away without the right certification have marked the first few weeks of 2021.
Understanding the economic consequences
Of course, we will adapt to the new normal of trade with our nearest neighbours and largest trading partner, but we will undoubtedly continue to feel the repercussions. Even with a free trade agreement in place, UK growth is reduced by 0.1% a year. That may not seem a significant hit to the economy, but its cumulative effect will be felt. UK businesses may well feel that it’s not worth trading with the EU – and vice versa.
Nor is the break as clear cut as anticipated by those shouting loudest for Brexit and an independent UK. Not only are we locked into a divorce package which will see us paying into EU coffers for some time, but the agreement also contains non-competition clauses, which essentially means that if the UK deviates significantly from the EU’s rules, compensatory tariffs can be introduced.
The agreement also only focuses on trade in goods, with the services sector reverting to WTO terms. That means no recognition of qualifications, no reciprocal arrangements for doing business in the EU and no equal access. That will likely lead to a smaller trade in services surplus with the EU. With trade deficit unlikely to shrink, that may mean the UK’s overall deficit with the EU widens.
Worth the pain?
And what about the new opportunities to trade with the rest of the world? Those agreed so far are primarily merely a rollover of the existing deals the UK had as part of the EU. On its own, the UK doesn’t have the clout to negotiate from a strong position, when you compare it to the heavyweights like the US, China and, dare one say, the EU as a trading bloc.
No doubt, the initial pain points will be absorbed, and businesses and individuals will get used to the paperwork and the cost and time it takes to trade. So, a ‘new’ normal for trading with the EU will be achieved. But the effects of trade friction with the EU will be an ongoing price we will all have to pay for Brexit. Unanticipated pinch points will undoubtedly continue to occur, and new issues, not in the deal or thought through, unearthed with some regularity.