Brexit – time to reach a trade deal is running out

Cornelia Meyer

As the saying goes, breaking up is hard to do. This also holds true for the divorce between the UK and the EU. If things were not complicated enough in ending a 45-year partnership, the coronavirus disease (COVID-19) and a recession not seen in a lifetime have certainly made matters worse.

In 2019, political and economic pundits were obsessed with Brexit. Not so in 2020, when the pandemic, global economic downturn, US-China trade frictions and tech wars have dominated the agenda.

Nevertheless, Brexit has not gone away. There are some 50 days left to reach a trade agreement between the UK and the EU or they will have to live without. By order of magnitude, the EU accounted for 51 percent of Britain’s imports and 45 percent of its exports in 2019. Japan, with which the UK recently signed a free trade agreement, accounts for under 2 percent of the country’s trade. The US, where the Boris Johnson government is eager to reach an agreement, constitutes 9.9 percent of imports and 15.5 percent of exports.

Self-imposed deadlines in the UK-EU trade negotiations have come and gone with the EU chief negotiator Michel Barnier and his UK counterpart David Frost alternatively sounding despondent and optimistic.
The issues remained the same: Access to the UK’s rich fishing grounds, EU concerns over a level-playing field, and state aid as well as the jurisdiction of the European Court of Justice.

While these negotiating points may seem minor in the scope of things, they are emotionally charged, especially the topic of fisheries. (Never mind that UK fishermen also need access to EU markets to sell their catch.)
State aid matters a great deal to the EU because they do not want to see on their doorstep a nation that subsidizes its industries beyond reason and ignores EU rules on labor and the environment.

There was optimism when the two parties signed the Brexit Withdrawal Agreement, which had a provision for the border between Northern Ireland and the Republic to remain open. The government papered over the fact that this would in turn make necessary a hard border down the Irish Sea, between Ulster and Britain. The rationale of the arrangement was to maintain an open border on the Irish isle between the north and the south and, with it, to protect the Good Friday Agreement, which ended decades of sectarian strife and terrorism in 1998.

Come autumn of this year, the government backtracked on the Withdrawal Agreement with an Internal Market Bill, arguing that a border across the Irish Sea was not acceptable. The bill necessitates border checks on the Irish Ulster border, going against the agreement signed and valid under international law in 2019. A government minister conceded in the House of Commons that the bill would breach international law in a “specific and limited” way. He faced the wrath of former Prime Minister Theresa May, among others. Still, the bill passed, which resulted in European Commission President Ursula von der Leyen sending a letter of formal notice to London, marking the first step in legal action.

In the meantime, unlike Donald Trump, the incoming Joe Biden administration is no fan of Brexit. Biden is fiercely proud of his Irish roots. In September, he voiced concerns over the Internal Market Bill’s disregard for international law. Since then he tweeted: “We can’t allow the Good Friday Agreement that brought peace to Northern Ireland to become a casualty of Brexit. Any trade deal between the U.S. and U.K. must be contingent upon respect for the Agreement and preventing the return of a hard border. Period.” This bodes further headwinds for London.

Biden’s words could hardly be any clearer, and all the niceties of shared values on climate change will not alter that. Johnson may have been the second leader the president-elect called, but Biden’s message on Brexit and the Irish border was no less firm.
On Monday night, the House of Lords turned down parts of the Internal Market Bill, voting by 407 to 148 to remove the contested clauses allowing ministers to redraw parts of the Withdrawal Agreement. The government vowed to put the initial bill again to the House of Commons for final approval.

Quite apart from what the breach of international law means for the UK’s standing in the international community, time is running out as Dec. 31 approaches. If there is no agreement, neither Her Majesty’s Revenue and Customs nor UK importers and exporters will be ready to deal with the increased paperwork a no-deal Brexit would necessitate — not to mention what it would mean for air traffic, financial services and the standing of the City of London as a financial center.
As December 31 draws perilously close, the room for maneuvering becomes smaller by the day.
Chancellor of the Exchequer Rishi Sunak showed farsightedness by a raft of unilateral decisions designed to ease EU firms’ access to the UK’s financial markets after 2020.

This may be useful, but it would really need to be followed up by the EU’s granting equivalence to UK institutions and the City of London. Brussels so far has not made any move in that direction, and it is doubtful it will in the absence of a trade agreement. Switzerland, which faces its own set of challenges in its negotiations for a framework agreement with the EU, had equivalence suspended last year.

As December 31 draws perilously close, the room for maneuvering becomes smaller by the day. A trade agreement between the UK and the EU matters to both sides. It is more important to the EU because of the large weight of EU-UK trade. In the EU, Britain is important for many countries, particularly Germany, France and The Netherlands. However, the UK is one of many countries for them — not a trading bloc of 27 nations. Irish Foreign Minister Simon Coveney said on Wednesday that he felt the two sides were still too far apart to reach an agreement within this week.

The writer is a PhD-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.