Analysis: Any deal reached to deliver hard Brexit, hit economy

A new era begins in weeks, with the Brexit transition period ending on December 31.

The EU and UK are this week locked in tense negotiations over the terms of their future relationship after the transition ends on December 31 [File: Toby Melville/Reuters]

London, United Kingdom – The UK is now firmly on course for a hard Brexit which threatens to have a huge affect on the British economy, even if last-minute crunch talks with the European Union deliver a trade deal, analysts have said.

The two sides are this week locked in tense negotiations over the terms of their future relationship after the transition ends on December 31, when the UK is due to leave the EU’s single market and customs union.

They are believed to be edging closer to an agreement, but fishing rights, post-Brexit competition rules and issues surrounding the governance of any deal remain points of contention and are proving difficult to resolve.

Even if a compromise is reached in the coming days, any deal is now expected to take the form of a relatively thin free trade agreement with the prospect of a soft divorce seemingly no longer in play.

The divorce is expected to lead to disruption and costs for businesses and people on both sides of the English Channel, whatever happens next – deal or no-deal.

“I think it’s definitely going to be a hard Brexit if you define hard Brexit in terms of how close the economic relationship with the European Union is,” Anand Menon, director of the UK in a Changing Europe think tank, told Al Jazeera.

“The relationship, in economic terms, is going to be a pretty distant one,” he said, pointing out that the “thin deal” being pursued by London means there will still be “a huge impact on the functioning of the British economy”, even if it is sealed.

The cost of a deal

The deal London and Brussels are trying to thrash out is, in essence, a narrow free trade agreement expected to only cover goods.

Such an agreement would avert a sharp rupture that could affect more than £650bn ($875bn) in annual trade between the UK and the EU, ensuring there are no tariffs and quotas for products crossing between their borders.

However, it would not prevent the imposition of burdensome import and export procedures and so-called technical barriers to trade in the form of regulatory checks, from the start of 2021 onwards.

As a result, businesses stand to face increased bureaucracy and costs, as well as the prospect of disruption at the busiest EU-UK border points, even if the two sides settle their differences.

The deal being discussed also does nothing to safeguard access to the EU market for the UK’s vital services sector, which accounts for 80 percent of economic output.

“Whilst there will be no tariffs [under a deal] … more significant in terms of economic impact is that the UK is not going to be bound by EU regulations,” Menon said.

“That matters in two ways, it matters obviously for services, as it won’t be as easy for the City of London or legal services, for example, to trade with the EU.

“And when it comes to manufacturing … being outside of the EU’s regulations will also have a massive impact, such as on the pharmaceuticals and chemicals industry.”

Assessing the possible scale of the fiscal fallout triggered by Brexit, Britain’s Office for Budget Responsibility (OBR) has forecast a four-percent drop in national economic output in the long-run as a result of the UK’s departure from the EU, even in the event of a free trade agreement.

Failure to agree such a deal would wipe an extra two per cent from the national gross domestic product (GDP), driving up inflation, unemployment and public borrowing, the body said last week.

Britain bangs the ‘sovereignty’ drum

British officials, for their part, have said that agreeing to a deal with the EU – the UK’s largest trading partner by far – is a “preferable” outcome.

But under Prime Minister Boris Johnson’s leadership, London has also repeatedly reinforced that any agreement must “must fully respect UK sovereignty”.

“That is not just a word – it has practical consequences. That includes: controlling our borders; deciding ourselves on a robust and principled subsidy control system; and controlling our fishing waters,” the UK’s chief Brexit negotiator, David Frost tweeted on Friday.

Frost’s EU counterpart Michel Barnier warned the same day that the “same significant divergences persist”.

Johnson has predicted the UK will flourish with or without an agreement, suggesting it would “prosper mightily in either event”, and the government has repeatedly told businesses to “get ready” for Brexit.

But while a hard Brexit seems inevitable, the precise terms of the new relationship that will come into effect from January 1 remain unclear.

Sophia Wolpers, a Brexit and immigration policy specialist at the not-for-profit business advocacy group London First, told Al Jazeera such continued uncertainty was “poison for business”.

The first quarter of next year will be “very busy and costly” for firms as they adapt to the new trading arrangements and “hopefully, kick into recovery mode from the COVID-19 pandemic”, Wolpers predicted.

“After years of negotiations, we dearly hope there will be a deal, at least a bare-bones deal,” she said.

“But we are 30 days away from everything changing and as much as government is telling businesses that change is coming, clarity on the exact shape of the deal and the gaps within it is really what’s needed.

“There is less and less time for business to adapt to all of these changing circumstances. Every day counts.”

Source: Al Jazeera