Although there is no shortage of news in late 2020 and early 2021, Brexit, an ongoing saga dating back to a 2016 referendum, looks stunning all the way to the finish line. For better or worse, we will soon be talking about Brexit in terms of history rather than an ongoing concern thanks to a deal reached in the final weeks of December 2020.We’ll look at the Brexit deal being rolled out and what it means for markets and global trade.
Key points to remember
- The recently signed Brexit deal brings some certainty to EU-UK relations going forward.
- Unlike a traditional trade agreement, this one marks a step back in the free movement of goods.
- A great deal of uncertainty remains in the financial services sector, and this could be the biggest risk to London’s economic outlook.
Brexit: the good
The best thing about the Brexit deal is that it’s the beginning of the end after nearly five years of uncertainty. Businesses know they will face more red tape at borders, but now they can start adjusting their plans accordingly. Many of them would have preferred a bit more time to make the necessary adjustments, as the deal came just weeks before its implementation, but they can still buy and sell goods in the EU with zero prices and zero quota.
Beyond certainty, the other potential gain for the UK is its new ability to negotiate trade deals around the world without the EU. This could allow the UK to sign agreements with countries that have not yet concluded agreements with the EU. That being said, much of the UK’s focus in the coming months will be on re-signing deals with countries it previously had access to through EU-brokered deals.
The deals with Japan and Mexico both aim to restore post-Brexit access, but there is a potentially huge trade deal with the United States that London will be eager to sign as soon as possible. The hope of Brexit supporters is that growth in global access will offset any decline in EU trade.
Brexit: the worst
The EU-UK deal is by no means a traditional trade deal. Rather than negotiate better terms and freer trade, the UK sought freedom from regulation while maintaining a high level of market access. The EU, for its part, sought to ensure that its member countries could still trade with the UK without enticing members to leave in order to circumvent standards and regulations aimed at undermining EU countries while always having access.
So it’s no surprise that both sides aren’t entirely happy with the deal. On the one hand, companies must adapt quickly to the reimposition of customs friction when shipping goods to and from the UK. This will slow the flow of goods as businesses and bureaucracy readjust to new demands.
There is also the question of a fractured UK in the future. The status of Northern Ireland’s checkpoints given Ireland’s status as an EU member was a significant concern throughout Brexit, and it overshadowed discontent in Scotland over Brexit . According to the Suitcases, Scotland’s possible exit from the UK to join the EU is called Scexit.
Scexit is another political hot potato for Prime Minister Boris Johnson to juggle a pandemic, a stimulus plan and renegotiate the trade deals the UK left behind under Brexit.
Brexit: the villain
The most troubling aspect of the deal is that London’s financial services hub is still awaiting a deal. The complexities of the financial services market have largely left it out of trading primarily focused on physical commerce and the movement of people. While EU regulations and standards on physical goods and stemming the flow of people were key issues for Brexit supporters, the impact on financial services could eclipse any small economic gain or loss in terms exports, imports and labor.
Prior to Brexit, London was an attractive location for financial firms to base their European operations, as licensing in London gave a business automatic access to sell throughout the EU.
The EU-wide access that UK-based companies have enjoyed so far is far from guaranteed. About 40% of UK financial services trade currently depends on the EU, and this figure is likely to suffer. Equivalence can be granted by the European Commission without going through member countries for ratification, but so far the only equivalence is an 18-month period granted for the clearing of euro-denominated securities. derivatives. The UK Treasury seems to hope for equivalence in most areas and has proactively granted it to EU companies.
The problem is that even when the equivalency is granted by the board, it can be revoked with 30 days’ notice. This level of uncertainty could push more financial firms to shift their services to the European continent, thwarting London’s plans to overtake New York as a global financial center. We can expect a strong push from the UK to formalize some type of deal in financial services, but the question is what the UK is willing to give up to stem financial investment outflows and ensure stable access to the EU market.
It is far too early to call the Brexit deal a success or failure. The UK has undoubtedly benefited from this during its time in the EU, but the driving force behind Brexit has never been purely economic. The UK wanted more control over immigration and freedom from EU regulations. It can reach the first, but it will always have to stay in line with the second to access its most important market.
In exchange for increased control over immigration and the freedom to sign trade deals with the rest of the world, the UK will pay in terms of bureaucracy and reduced economic growth in the short term. Whether this trade-off is worth it in the long run remains to be seen.