EU-UK trade deal dispels Brexit delusions
9 January 2020
"No deal in the world can change reality or gravity in today's world. We are one of the giants." EU Commission President Ursula von der LeyenThe trade deal agreed by the EU and UK just before Christmas has laid bare the stark reality of Brexit for the British economy. It has comprehensively dispelled the delusion that Britain could enjoy the benefits of EU membership without having to follow the rules and regulations.
EU–UK trade agreement
The new EU-UK trade deal is unique in that, unlike all other agreements, it adds to rather than removes barriers to trade between the two parties. It is a long way from the seamless frictionless trading relationship promised by successive British governments since the EU referendum in 2016 and throughout the period of negotiations on a Withdrawal Agreement and post Brexit trade agreement. This deal creates significant new regulatory barriers between the EU and UK which will reduce trade and add costs.
The most obvious limitation of the EU-UK trade agreement is that it is not comprehensive. A wide range of economic activity is excluded from its provisions. It only covers manufactured and agricultural products which account for just 20% of UK GDP – while the services industry (including financial services) which dominates the UK economy – is excluded. The negotiations produced what’s called a thin trade deal.
So, let’s take a closer look at the terms of the deal.
Trade in Goods
The agreement ensures that most goods traded between the EU and UK won’t face new tariffs or quotas. However, British exports will face an array of regulatory barriers that will make doing business in Europe more costly and burdensome. The most significant of these are Rules of origin. In order to qualify for tariff-free access to the EU single market UK based companies will have certify the origin of their exports. There will be limits on what proportion of goods can be assembled from parts made overseas to qualify for tariff-free access. The implications of these rules are far reaching as they will severely limit the UK’s ability to negotiate trade deals with non-EU countries.
The other major raft of regulations relates to Testing and certification. As there is no longer mutual recognition between the parties UK regulatory bodies won’t be able to certify products for sale in the EU. This potentially requires negotiation product by product, or more likely for the UK to seek agreement on a sectoral basis or resume membership of EU regulatory bodies. For the UK there will be an additional cost to complying with these rules as a third party rather than as a full member of the single market. They also put pressure on the UK to remain closely aligned to the standards set by the EU.
As has been mentioned earlier the deal offers little on financial services. Despite a commitment to address this sector as part of a separate process later in the year, there is currently no decision on so-called equivalence which would allow firms to sell their services into the single market from the City of London.
Level Playing Field
This was one of the most contentious areas of the negotiations and focused on concerns that the UK could use Brexit to gain an advantage over its European competitors. In the end both sides committed to upholding their environmental, social, labour and tax transparency standards to make sure they don’t undercut each other. The deal doesn’t include the so-called “ratchet clauses” that would have forced the UK to amend its rules in lockstep with the EU. Instead, it has a “re-balancing mechanism” which will allow either side to retaliate with tariffs if they believe that divergence has given the other party too much of an advantage. Any retaliatory measures will be subject to binding arbitration by an independent international panel (not the European Court of Justice).
The level playing field provisions also cover the issue of state aid. It prevents the parties from giving an unlimited state guarantee to cover a company’s debts or liabilities. In line with EU law, the UK. won’t be able to rescue a failing firm without a restructuring plan, and any aid to failing banks will have to be the minimum necessary to help it wind down. The UK and the EU will also have to disclose the subsidies they award.
Disputes that arise from the operation of agreement must in the first instance be negotiated between the EU and the UK with no role for the European courts. An international arbitration panel may rule on some areas and can order one side to resolve the problem or offer compensation.
The issue of fishing was one of the highest profile issues within the negotiations receiving attention all out of proportion to material importance (the fishing industry contributes only 0.04% to UK GDP). However, access to fishing waters had taken on symbolic importance in Brexiteer claims about regaining sovereignty and taking back control. What was agreed to was that UK fleets will take 25% of the current EU catch in British waters (a significant compromise given Britain’s opening negotiating position called for an 80% increase). There will be a transition period of five-and-a-half years during which reciprocal access rights to each other’s waters remain unchanged. After that point the UK will be in control of its own waters. However, the EU will be able to impose tariffs on UK fish exports if access is restricted.
The UK exit from the EU Customs Union was always going to lead to more customs bureaucracy whether a trade deal was reached or not. Under the terms of the agreement EU and UK committed themselves to following international practices aimed at minimising customs costs for businesses.
The UK won’t have access to the EU’s internal energy market. However, there is a commitment to put new arrangements in place by April 2022 to make sure that trading is smooth and efficient on interconnectors (the huge power cables that run between the UK and Europe).
The agreement means that there will no longer be automatic mutual recognition of professional qualifications. Instead, doctors, nurses, dentists, pharmacists, vets, engineers or architects must have their qualifications recognised in each member state they wish to practice in. This is a loss for the UK which had wanted “comprehensive coverage” across Europe to ensure there were no “unnecessary” barriers to regulated services.
As with manufactured goods agricultural products will benefit from the zero-tariff, zero-quota terms agreed between the two sides. However, the absence of an equivalence agreement on phyto-sanitary rules means shippers will face new hurdles at the border. Agri-food consignments from the UK will have to have health certificates and undergo sanitary and phyto-sanitary controls at member states’ border inspection posts. (1)
Despite the bullish rhetoric from the British government, it is inevitable that the UK’s departure from the EU, the single market and customs union will have a negative economic impact. The most conservative estimates of the impact of leaving the EU suggest the UK economy will grow more slowly in real terms than it would have done if it had remained a member. For example, a study from the Bank of England, suggests that – even with a trade deal in place - there will be a cumulative loss in real GDP for the UK over the next ten to 15 years of between 4-10% of GDP from leaving the EU; or about 0.4% points off annual GDP growth.
While the trade deal is certainly better than a no deal it falls a long way short of the terms that the UK enjoyed as a full member of the EU. Companies are losing unfettered access to the single market. Even though exporters in manufacturing and agriculture have been sparred tariffs on their goods, new import and export declarations alone will cost UK companies £7.5 billion annually. And this is in a best-case scenario. If new custom checks delay goods at the border and disrupt supply chains then costs will rapidly escalate.
As mentioned earlier, one of the glaring holes in the trade agreement is that it does not cover the services industry - which accounts for 80% of UK GDP. While most of this is not exported services exports still contribute 30% to UK GDP (with 40% of that trade with the EU directly). In contrast to goods trade, where the UK runs a huge trade deficit with the EU, the services trade is in surplus. This surplus is accounted for mainly by financial and professional services. Exports (43% of which go to the EU) of UK financial services are worth £60 billion annually compared to imports of £15 billion. The trade agreement does not give UK based financial firms access to European markets. While some third countries receive market access rights from the EU, a standard known as "equivalence", the level of access is worse than what the UK enjoyed as a full member.
It’s also the case that the UK economy was already in relative decline prior to Brexit. Its trade deficit with the rest of the world had widened to around 6% of GDP; and real GDP growth had slid back from over 2% a year to below 1.5%. The UK had weak investment and productivity growth compared with the 1990s and with other OECD countries. Since the referendum of 2016, UK profitability has fallen by nearly 9%, compared to small rises in the Eurozone and the US. The Eurozone AMECO forecast for profitability will leave the UK 18% below 2015 levels by 2022. Investment by British capital is set to plunge and is forecast to be down 60% by 2022 compared to the referendum year of 2016. The under lying reason for this is not Brexit but the fact that the profitability of British capital has been falling. Average profitability was 30% below the level of the late 1990s and, excluding the period of financial crash, was at an all-time low. (2)
It could be argued that Brexit itself was consequence of this as a section of the capitalist class sought freedom from EU regulation as a means to revive profitability. Indeed, this has been made clear in the bullish rhetoric by Boris Johnson about establishing a “Singapore-on-Thames” that would engage in direct regulatory competition with the EU. In this scenario Britain would be turned into a tax and regulation-free base for foreign multinationals. To this end the government is planning for the establishment of “free ports” and “enterprise zones” where standard tax and regulatory codes wouldn’t apply. While such a plan may boost the profits of multi-nationals, using cheap, unskilled labour, it is unlikely to boost growth in the general economy. It is also doubtful that a British government would be able to pursue such a strategy given the restrictions that it signed up to in the trade agreement.
The provisions of the EU/UK trade agreement reflect the relative weight of the two parties involved. Given the imbalances between the EU and UK in terms of GDP and trade the outcome of negotiations between the two parties was always likely to be favourable to the EU. And that is how it has turned out. Despite some symbolic victories for the UK, such as removing the jurisdiction of the European Court of Justice, on the substantial issues the EU achieved its objectives. It demolished the idea that the benefits of membership could be retained outside of the bloc. It has bound the UK into its rules and regulations, and made the central thrust of Brexit – of divergence - very difficult.
The section of the agreement that serves to highlight its one-sided nature is the one on fishing. This was the issue that the British government chose to inflate – due to its symbolic importance - but it is also the one that they capitulated on most spectacularly. Starting a position of demanding complete control over its fishing grounds it ended up agreeing the maintenance of the status-quo for a five-period followed by further negotiations in which the EU reserves the right to impose tariffs if its access is reduced. The assessment by Barrie Deas, chief executive of the National Federation of Fishermen's Organisations, “that the UK has made significant concessions on fish in order to secure a trade deal” was an accurate one.
And it was not just fishing. It was the same pattern across a range of areas with the UK not only conceding to the demands of the EU but agreeing to be subjected to sanctions (in the form of tariffs or restricted market access) if it reneges. In theory each side has recourse to retaliation if they believe there has been a breach but in practice – because of the disproportionally negative impact that such a course of action would have on the UK economy - it is only the EU that can exercise this power. It was the same with the threat of a no deal outcome that was raised by both Teresa May and Boris Johnson. It was an empty threat because it was the one outcome that the UK could not afford. As the French Europe minister Clement Beaune remarked at the conclusion of the trade negotiations: “we needed an agreement less than the British” as “for them, it was a vital need”.
The British government tried various manoeuvres during the negotiations such as trying to divide the member states; putting pressure on the weak link that was Ireland; and appealing to the Trump administration for support. With the EU holding together and Trump being defeated in November election the leverage of the British government in negotiations was diminished even further. The chaos caused by the closure of the channel ports in mid-December – while related to the pandemic –provided a foretaste of a disorderly Brexit and created an additional incentive to reach an agreement.
Brexit not done
There is an assumption that the trade agreement is the final act in the Brexit drama. However, that is far from the case. The reality is that relations with the EU will continue to dominate British politics. This is due primarily to the economic weight of the EU and the degree of integration of the UK economy into Europe that has taken place over the last forty years. It also arises out of the threadbare nature of a trade agreement that not only omits huge areas of the economy but requires ongoing implementation and review of what little has been agreed.
The stage is set for endless negotiations over the operation of the trade agreement and also over future efforts by UK to gain access to the single market for a wider range of products. There is also the potential for conflict if the UK attempts to diverge from EU regulations. The influence exerted by EU – and the agreements that the UK has entered into – makes this very difficult. But what is Brexit about if it is not about divergence? It is inevitable that there will be ongoing tensions both within the UK and between the UK and the EU.
Throughout the Brexit process the working class in Britain have largely been by standers. There was never an independent class position on the question of Europe put forward. Trade unions and the Labour party were largely reduced to rallying support for one faction of British capital. Now that a deal has been done, they have rowed in behind it and abandoned any opposition to Brexit. However, as argued above, the belief that the trade agreement represents some form of resolution is illusory.
The conflict between the historic trends towards integration and the reactionary backlash represented by Brexit will continue and intensity. In this clash the workers movement should be independent but not neutral. The integration of European economies and states should be supported – not out of misguided hope in the EU – but because it contains within it the potential of a unified working class and the foundations of a future socialist society. The critical point is that such a future can only be realised if workers as a class are contesting to guide that process of integration. It will not come about under the leadership of the capitalist class. This is why the historic slogan of a “United Socialist Europe” retains such relevance today.
(1) In Bullet Points: The
Key Terms of the Brexit Deal Analyzed
(2) Michael Roberts - The