Birmingham, United Kingdom – The UK has left the European Union, and as far as the government here is concerned, Brexit is over. But it’s not quite that simple, and the hard work and tough decisions are yet to come, according to a new report published on Tuesday by the research organisation The UK in a Changing Europe.
In Brexit: What Next?, the authors focus on the tight December 31, 2020 deadline for the end of the “transition period”, by when the UK’s Prime Minister Boris Johnson is determined to have secured a deal with the EU covering trade, security and other issues.
Writing in the report, the think-tank’s director, Anand Menon, said it was “hard to see anything more than the barest of bones deal being agreed by the end of the year”.
According to Johnson, however, that is not something to fear.
Speaking on Monday, Johnson said a trade deal similar to those that the EU holds with other countries was achievable, and he indicated that, either way, the UK would be fine with the Withdrawal Agreement that dictated the UK’s departure from the EU last week.
“We have made our choice – we want a free trade agreement, similar to Canada’s,” Johnson said in London. “But in the very unlikely event that we do not succeed, then our trade will have to be based on our existing Withdrawal Agreement with the EU.”
The prime minister added he was confident “that Britain will prosper mightily”.
However, the report from The UK in a Changing Europe – a think-tank based at King’s College London – says an extensive trade deal could take years to negotiate. Canada-EU trade deal negotiations began in 2009, and the deal has yet to be ratified by all EU states. In the meantime, UK businesses that rely on trade with Europe will struggle, say the report’s authors.
UK-EU trade is also on a different scale than Canada’s trade with the EU. The UK’s volume of trade with the EU is also almost six times as high as that of Canada.
Around half of the UK’s total international trade is with the EU. It’s especially important to the services industry, and, in particular, to financial services. The report points out that if UK firms are no longer able to conduct their business in Europe from their UK bases, they will have to set up subsidiaries in the EU, losing the UK the 11.5 percent of its employment tax revenue that comes from financial services.
The uncertainty over tariffs may also lead to companies holding off investments.
“When businesses trading with the EU do not know if they will face tariffs, and what new regulatory barriers and checks will be in place, it is hard to see why they should make long-term investments that are dependent in whole or in part on ‘frictionless trade’,” the report said.
Autonomy vs alignment
The UK government is insisting it will not agree to a deal under which it simply aligns itself with existing EU rules.
This will likely be the central battle between UK and EU negotiators.
It boils down to this: the UK wants zero tariffs in any deal. In return, the EU wants assurances that UK businesses will not be able to undercut EU businesses, which may happen if they no longer have to adhere to certain regulations, for example, concerning safety or workers’ rights. How will the UK be able to convince the EU of this, while keeping regulatory autonomy?
The UK in a Changing Europe report argues the more favourable approach for most UK businesses would be alignment, as “more alignment with EU regulations and standards will facilitate more trade, because alignment itself can reduce the cost of trading internationally for UK and EU firms”.
But John Ashmore, the editor of CapX, a news website set up by the Conservative-leaning Centre for Policy Studies think-tank, is more understanding of the UK government’s position.
“It makes little sense to leave the EU if we are going to continue to abide by its rules, particularly when we have no say in their formulation,” Ashmore said. “If you think about [the EU’s] position, it does suggest that they fear the UK could become a more competitive economy if we do diverge from EU rules, which certainly some Brexiteers see as one of the big advantages of leaving.”
Ashmore also pointed out that being free of EU regulations may be beneficial for some UK businesses.
“[EU] member states have to follow EU regulations even on business conducted entirely on their own territory, and the vast majority of British firms don’t export anything to the EU,” Ashmore said. “In that sense, there may be opportunities to cut burdensome, unnecessary red tape that business have found costly.”
Despite many economists’ predictions of problems that may arise as a result of a “bare-bones” deal, others are more optimistic.
“Now we have firmly established that we are leaving the customs union and single market, the difference between deal and no deal is not that great,” said Victoria Hewson, a research associate at the Institute of Economic Affairs. “Now that businesses have certainty that this is what they need to prepare for, the risks of a shock to the economy are much lower.
“International businesses are considering just as much how they can preserve their position in the UK market, as they are concerned about the UK’s access to the EU market.”
Leaving the economic debates to one side, it’s also important to remember that, for Johnson at least, this is still an inherently political issue. Johnson is now keen even to avoid the word “Brexit”, and ensure that his base supporters know he is not going to back down on his promise not to extend the transition period.
“From a purely political point of view, extending the transition period would be a bad idea for him [Johnson], as he’s staked a lot on it,” said Ashmore.
“He also wants to get Brexit out of the way as quickly as possible, to focus on the many other priorities he has.”