Brexit, the EU-UK agreement, and the economic impact
Some politicians promise an El Dorado if you vote them into power. Others tell stories, some true and some not so, to get the voters to believe them. In modern times, we've seen how charismatic leaders cast their spell on the electorate and lead them to an unknown world as did the Pied Piper of Hamelin. One can relate to these fables by looking at the recent history of the United Kingdom.
On January 30, 2020, the UK left the EU after 45 years, having been influenced by the leaders of the "Leave" movement, including the current British Prime Minister Boris Johnson. Previously, on June 23, 2016, the voters in the UK decided in a referendum to leave the EU. Those who wanted to leave believed that the benefits of belonging to the unified monetary body no longer outweighed the costs of free movement of immigration. The vote was 17.4 million in favour of leaving versus 15.1 million who voted to remain. After UK officially left EU on January 31, 2020, both sides agreed to keep many things the same until December 31, 2020, to allow enough time to agree to the terms of the post-Brexit rules to define how the parties would live, work, and trade together.
Since the Referendum, known commonly as the "Brexit" vote, there has been much speculation on the shape of trade and economic cooperation between EU and UK in the post-Brexit era. Negotiations had been going on since March 29, 2017, and the final treaty, known as EU–UK Trade and Cooperation Agreement (TCA), agreed upon on December 24, went into effect on 11 PM GMT on December 31. The House of Commons overwhelmingly endorsed the post-Brexit pact by 521 votes to 73, including the overwhelming majority of the Labour Party.
From the 1200-page treaty we can glean the outline of a future of the European landscape. As with any trade pact, there is something for each of the parties, and it is too early to determine who the ultimate winner is. For the British public, rather the 52 percent who voted for it, the main benefit they foresaw is jobs, freedom from the rule-makers in Brussels, and ability to get away from the "newcomers". When Britain joined in 1974, it was a small group and the British were comfortable hobnobbing with their fellow Europeans. After the Eastern European countries joined the bloc, public sentiments shifted. There was much debate whether UK would gain financially after leaving, but there was an expectation that it would do better if it was free from Brussels.
The TCA will enable UK to have, as before, zero-tariff and zero-quota access to the European single market. We have already seen reintroduction of border controls and an end to free movement of labour and capital between the UK and EU member states. Brexit would hurt Britain's younger workers. Germany is projected to have a labour shortage of 3 million skilled workers by 2030. Those jobs will no longer be as readily available to UK's workers after Brexit. The massive British financial services sector will still have access to the EU market, but it will no longer be unfettered. Many UK firms will need to open affiliates in the EU to continue doing business there.
Other aspects of the relationship, including foreign policy, defence, and development still remain to be negotiated.
With TCA both parties have agreed to some identical rules for now to define how the parties would live, work, and trade together. But they don't have to be identical in the future, and if there is a dispute, each side can resort to using tariffs. And British Prime Minister Boris Johnson has openly talked about using taxes and subsidies to encourage companies to step up spending, as well as to draw foreign direct investment (FDI).
The first and immediate impact of TCA will be some tailbacks at ports where trucks enter from EU and more red tape: customs processes, certificates for goods and health, and safety checks. The "vast amounts of new paperwork, administration, checks" and certifications will cost businesses time and money. But the PM was upbeat. "There is some bureaucracy and we're trying to remove it," Johnson said when asked about the red tape. "We have a massive opportunity to expand our horizons, and to think globally, and to think big," he said.
Officials expect thousands of trucks bound for EU countries to stack up in the southern English county of Kent, with delays of up to two days. Many of the officials are hopeful of a smooth start to the new era but are braced for possible delays with government estimates suggesting that more than half of smaller businesses have not yet prepared for the end of the free movement of goods and services. Some businesses, particularly in the manufacturing food business, will be hurt by the non-tariff barriers.
Many economists expect that more paperwork and barriers to trade will hurt economic growth just as the coronavirus pandemic damaged output. This slowdown will be felt in the first quarter of 2021, and linger throughout the year. However, the public probably will not notice much difference nor blame it on Brexit because the UK economy contracted by 20.4 percent in the second quarter of 2020, compared to the previous three months, as coronavirus-induced lockdowns hammered activity.
Economists at the American research group at Citi estimate the disruption will reduce UK's gross domestic product in 2021 by about 2 percent, compared with what it would have been if it had remained in EU. Regardless of the relatively favourable trade agreement in place, the GDP is still expected to grow more slowly over the coming decade as a result of Brexit.
On the positive side, the Tory government is hoping to use the levers of taxes and subsidies to boost trade with the rest of the world, draw more foreign investment, and promote economic sectors that have lagged. "Leaving the European Union is an opportunity for the UK to use taxes and subsidies to encourage companies to step up spending," Johnson said. He plans to use the UK's new autonomy to boost science and "level up" the struggling economies of the deprived parts of the country.
In addition to regulatory change, "you can use tax systems and subsidies to drive investment," he said in an interview with BBC television on January 2. The PM has to tread very carefully since the question of state aid proved to be a sensitive issue during the Brexit trade negotiations. Under the terms of the deal, either side can impose tariffs on the other if it is clear that any country is aiding its own businesses at the expense of the others'.
UK is expected to work to boost trade and foreign FDI. The EU is Britain's biggest trading partner, accounting for 47 percent of its trade in 2019. However, it had a trade deficit of 79 billion pounds (USD 104.86 billion) with the EU, a surplus of 18 billion in services outweighed by a deficit of 97 billion pounds in goods. The government expects that Brexit will be a boon for the exporters. It has been in negotiations with the USA, New Zealand, and many others to promote trade. The UK could make better deals with the US, Japan, and other countries, said Professor Ellen McGrattan of the University of Minnesota. "If they did that, they could gain overall from Brexit."
The main investment partners of the United Kingdom (in terms of FDI stocks) were the United States, the British offshore islands (Channel Islands and Isle of Man), the Netherlands, Luxembourg, Belgium, Japan and Germany. UK expects to increase FDI from the US, Japan, and Switzerland. "We've taken back control of our laws and our destiny," Johnson said last week. "For the first time since 1973, we will be an independent coastal nation with full control of our own waters." It needs to be seen if all this talk from the PM means much for the coffers of Her Majesty the Queen or her subjects, or the outcome will be as disastrous as those for the people of Hamelin.
Dr Abdullah Shibli is an economist and currently works in information technology. He is also Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.