UK-EU Divorce Granted: What Happens Now That Brexit Is Over?

10.01.2021 23:33

Stratfor Worldview

Politics, Europe

Can Britian actually hold itself together and manage to become an economic powerhouse?

Five years of economic uncertainty for households and companies that began with the Brexit referendum of 2016 have come to an end. The European Union and the United Kingdom have reached a free trade agreement that covers most goods, but only a limited number of services. This means that manufacturers in the European Union and the United Kingdom will be able to continue trading with each other from Jan. 1, 2021, without any quotas or tariffs, and the heavily disruptive scenario of trade under World Trade Organization tariffs has been avoided. On the contrary, the services sector (which represents around 80% of the British economy) will have limited access to the EU single market. On Dec. 24, Brussels and London announced a free trade agreement after nine months of negotiations. The announcement came only a week before the scheduled British exit from the single market on Dec. 31. In addition to trade, the deal covers cooperation on areas including nuclear energy, energy interconnections, aviation, fishing, police and judicial affairs.

The deal includes the elimination of tariffs and quotas for EU and British goods. Customs controls, however, will be applied to ensure goods comply with the agreement. This will result in additional bureaucracy that did not exist when the United Kingdom was a part of the single market.
Starting Jan. 1, companies in the British financial services sector will lose their authorization to sell their products in the single market. The European Union grants so-called "passporting" and "equivalence" rights to third countries with similar regulatory environments, but no deal has been reached yet. This is a crucial issue for the United Kingdom, as financial services represent around 7% of the British economy. London is likely to try to reach an agreement with Brussels on this issue in 2021.
The agreement does not automatically recognize one another's professional qualifications. This means that lawyers, accountants, architects and other professionals in the European Union and the United Kingdom will not be able to automatically sell their services in each other's markets and may need to open offices in the European Union and the United Kingdom, respectively, to do so. This is another area of possible negotiation in 2021.
The deal does not include a so-called "mutual recognition of conformity assessment," which means that EU and British companies will have to certify their products in each other's markets, which will create extra costs.
The free movement of people between the European Union and the United Kingdom will end, which means that people will need visas to work in each other's territories.

The deal will now be put to a vote at the European Council, which represents the EU governments, and the British Parliament. The vote at the European Parliament will take place in January, which means that the trade deal will enter force only provisionally Jan. 1, pending full confirmation from EU lawmakers. The European Commission has been in permanent contact with EU governments during the negotiations, which means that the European Council will likely ratify the deal. In the United Kingdom, Prime Minister Boris Johnson's Conservative Party controls a comfortable majority of seats in Parliament, and some members of the opposition Labour Party may also vote for the deal. While some euroskeptic Conservative members of parliament may vote against the deal, the rebellion should not be strong enough to torpedo the deal. The provisional implementation of the deal will create some uncertainty about its future, but the European Parliament will probably ratify it considering the significant political capital that the European Commission has invested.

Nigel Farage, who leads the Brexit Party, and some hard-line Conservative members of parliament have already criticized the deal. But most Conservative members of parliament have said they will support it, which means it will probably be ratified.
The French government has been particularly loud in its claims that it would not support a "bad" trade agreement. But Paris is unlikely to veto the agreement after so many months of negotiation.
The European Parliament will not have the power to modify the terms of the deal in January; the vote will be on a "take it or leave it" basis.

In the short term, the United Kingdom's reduced access to the EU market is likely to negatively impact the British economy. In the long run, this trade deal gives London some degree of autonomy to develop its own regulations and standards and opens the door for it to negotiate free trade agreements with other countries. For the European Union, the deal preserves access to the British market for a sector where it has a trade surplus (goods) while reducing its exposure to a sector where it has a trade deficit (services). The deal also achieved the EU goal of keeping the Irish border open and preserving the integrity of the single market from external competition because it includes provisions to sanction the United Kingdom in the case of unfair competition.

The current British trade strategy started in 2019, when London chose to exit the EU single market and customs union and negotiate a basic free trade agreement with the European Union.
In a press statement on Dec. 24, the British government said that the deal guarantees "we are not bound by EU rules, there is no role for the European Court of Justice and all of our key red lines about returning sovereignty have been achieved."
The British government has expressed interest in signing multiple free trade agreements around the world with countries such as the United States and the members of the British Commonwealth; many of these countries were waiting for the EU-U.K. negotiations to end before proceeding with their own talks.
In recent years, firms in the British financial services sector have moved some of their staff and operations to the single market in order to continue to be able to sell their products in the European Union.

This agreement puts an end to the period of political and economic turbulence that began with the Brexit referendum of June 2016. The European Union and the United Kingdom will continue to negotiate aspects of the bilateral relationship that remain unaddressed as well as the bilateral disputes that may emerge during its implementation. But with a free trade agreement in place, Brexit will finally become a secondary issue in European politics. Since 2016, business groups, unions, farmers, consumers' associations and other groups have demanded clarity from the European Union and the United Kingdom about their future relationship. Brexit has also been a dominant factor of British politics and, to a much lesser extent, EU politics.

One of the more important long-term political consequences of Brexit for the United Kingdom will be the issue of Scottish independence. A majority of Scottish voters supported the "remain" side during the Brexit referendum, and the governing Scottish National Party wants another independence referendum in the country, something London opposes.
For the European Union, a key political goal was to send the message to domestic voters that exiting the bloc is not easy or painless. Nationalist and euroskeptic political parties in the bloc will now face the challenge of adapting their rhetoric to a post-Brexit Europe.

The EU and U.K. Reach a Trade Deal, Ending Brexit. What Now? is republished with the permission of Stratfor Worldview, a geopolitical forecasting and intelligence publication from RANE, the Risk Assistance Network + Exchange. As the world's leading geopolitical intelligence platform, Stratfor Worldview brings global events into valuable perspective, empowering businesses, governments and individuals to more confidently navigate their way through an increasingly complex international environment. Stratfor is a RANE (Risk Assistance Network + Exchange) company.

Image: Reuters.