European Perspectives

Brexit's direct consequences on trade

European Perspectives

Brexit or the march of folly?

Negotiating an agreement

The decision to leave the EU was a democratic choice, though questions may arise about the means by which the choice was brought about. The negotiation process to transform this choice into a legally clear and secure treaty between the EU and the UK is another matter. It could have been an orderly and well-planned process; instead, a last-minute deal has resulted in a so-called Trade and Cooperation Agreement (TCA) that is all but clear and secure.

Over the years since the referendum, the British Government spectacularly misjudged the coherence of the remaining members of the EU, simply because for them the rule of law and the integrity of the single market on which their economies depend was an absolute priority. The British negotiation approach focused more on tactical manoeuvres than on substantial proposals, and it failed. Add to that the deliberate poisoning of the negotiation atmosphere and undermining of trust, and this is what business gets now: a treaty with strong asymmetry and a high degree of uncertainty; on top of that an unstable framework, because it can be revised in five years, potentially coinciding with the next election in the UK. Investment planners will surely notice the political risks.

The impact on business

Despite the TCA, new barriers to trade are going up in practice, and in all likelihood will continue to go up between closely interrelated markets. Political posturing about new trade deals in the making with far away places will not do anything to help the many businesses affected here and now. One exporter of household appliances from the EU discovered that all energy labels needed to be replaced, simply because customs insist they now have a British flag on them instead of the EU one, regardless of the fact the energy requirements themselves had not changed.

This is happening before full import controls are in place. No doubt small companies will suffer even more than large ones. So will consumers, because extra costs will be passed on to them, if not to shareholders, in that case reducing profitability and innovation capacities.

Meanwhile, other countries are starting to savour the advantages from Brexit. Warehouses are getting fully loaded by British firms setting up a base on the continent, and financial services are setting up shop too in order to continue to benefit from the single market and economic and monetary union (Eurozone). While much attention was focused recently on Northern Ireland, which risked being the victim of a hastily withdrawn EU Commission restriction on the export of vaccines, Irish ferry companies are opening up new lines with the continent to bypass the UK.

Since the UK is no longer a member of the single market nor of the customs union, a hard border now exists with the EU and the UK is a third country now. No quota will be imposed on the trade of goods, and no tariffs provided rules of origin will be respected. The TCA has the benefit of preserving supply chains, but rules of origin are impacting companies in the UK differently, and harder, as in the EU.

This asymmetry is surfacing now, a detail conveniently overlooked by politicians. There will be checks at borders which will cause delays and costs, and these may be felt by some sectors more than others. For example, the agri-food sector, where there is a trend in the UK to diverge from EU phyto-sanitary standards that may make these checks, coupled with the required health certificates, particularly disturbing.

The UK has also left the EU VAT zone, which implies that it now needs to be collected where the sale takes place, not at the point of import. However, a new VAT system which enters into force in the EU in July this year may be helpful because British companies will have to register only once for the whole single market.

In a rapidly digitalising economy and society, data are an important economic tool. But the TCA does not provide much clarity here. It aims to maintain data flow across the Channel, but the EU has still not decided whether it considers the UK data protection arrangements adequate, and rules on storing and processing of data are left open for later. One can expect the EU will insist the UK continues to apply its high data and privacy protection standards; if it were to attempt to move towards looser, say US, rules, it could open another can of distrust and mutual recriminations, with all sorts of economic consequences.

This is not all. Business people travelling will also notice that they are entering foreign lands, needing a visa if they stay longer than 90 days, are a self-employed provider of services, or bring a pet. But since UK professional qualifications will no longer be automatically recognised in the EU, this may concern fewer people.

More worrying for anyone still tempted to leave the UK, be it for business or private reasons, is that European Health Insurance Cards are only valid until expiry date, and that phoning your counterpart on the continent or your family back home will bring roaming charges. If one hopes to relax a bit after all this, remember that the UK departure from the single market includes digital services, and online viewing of cross-border content may become an issue soon.

Discussions are continuing about financial services, and a deadline has been set for March, to provide UK financial services so-called equivalence rights. Without this, they would have to seek permission in every single EU member state where they wish to operate, hence the rush to have an establishment inside the EU. For the time being, these are rather insignificant compared to the City of London operations, but what will happen if the EU monetary cooperation proceeds? It is unlikely that continental governments like to see lucrative markets move to a third country, for example the Green Bond market, which the EU surely wants to stimulate under its Green Deal.

The cherry on the cake

The cherry on the cake of the TCA is probably its dispute settlement part. The UK no longer wanted to be submitted to the European Court of Justice, and this it obtained. In order to solve the surely many disputes which will arise over interpretation of UK or EU law, a special arbitration committee will be set up, or one will refer to the WTO. The ECJ has, over the years, acquired the highest authority in judicial matters, over and above national constitutional courts. It will be a matter of time before this dispute settlement arrangement runs foul with the ECJ.

The issue goes to the root of Britain’s uneasy relationship with the EU: its different concept of the rule of law. It shows the same ambivalence with the European Court of Human Rights. The UK government’s attempt to renege on an earlier key agreement with the EU, later withdrawn, shows many on the continent that there is no ground for trust. The row over the status of the EU Ambassador in the UK, and many other petty actions from the Brexiteer handbook, further undermine the basis for future negotiations and for the dispute settlement. The grandly-named Partnership Council is likely to be a lame duck or a debating club, not one to re-build an economic relationship broken off unilaterally.

A much overlooked side effect will be the loss of soft power for the UK, not just on the continent, but worldwide. The more data become available about the economic costs, the more this will influence the attitudes of people and strategies of governments and business alike. For the UK, this is not a return to the time preceding its membership: geopolitics is different now than in the 1970s, as is the EU with 27 members sticking together, and surely business international supply and distribution chains are not to be compared with 50 years ago. It may turn out for the better, but at this moment, everything points to the contrary. Businesses had better start thinking deep about their strategy and trade.

Dr. Stefan Schepers

Dr. Stefan Schepers is Visiting Professor in European Studies at Henley Business School and Secretary General of the High Level Groups on EU Policy Innovation.