- New trade barriers are likely to weigh on economic growth for years
- Deal could prompt a rebalancing of the UK economy
- Domestically focused UK stocks may be most vulnerable
Four and a half years after British voters narrowly backed a departure from the European Union, the two sides reached a trade agreement just days before the UK’s withdrawal from the EU’s single market and customs union on 31st December. The deal avoids punishing tariffs and quotas on goods, but it still represents a significant rupture in the UK-EU economic relationship.
One of the most immediate effects will be new trade friction as border checks and customs declarations are introduced on 1st January. The UK has said it will phase in border checks over the first six months of 2021, while the EU plans to impose full checks in January. These hurdles will cost UK companies an estimated £7 billion ($9.4 billion) a year. In the short term, the UK may struggle to avoid logjams at key border crossings, while many businesses remain unprepared for the red tape.
This friction could depress UK-EU trade by around a third and reduce UK gross domestic product by about 5% to 7% over 10 to 15 years, relative to what it would have been had the country remained in the European Union, according to UK government estimates. The EU also faces an economic hit, especially in countries with deep trade ties to the UK. Ireland, France, Germany, Italy, Spain, the Netherlands and Denmark are all likely to see a negative impact on their trade with the UK.
Deal will increase regulation
The free trade agreement is one of the most extensive that the EU has signed with a major trading partner. It avoids tariffs and quotas for all goods and aims to limit the regulatory burden in some key sectors, such as chemicals.
Still, the UK will face significantly higher regulation overall. Goods will be subject to rules of origin, which specify the extent to which inputs from another country can be embedded in UK products exported to the EU. This will be particularly important for cars and manufactured food and beverages.
The agreement only partially covers services, such as transportation, with little regarding financial and professional services. The EU has said it will consider equivalence for these sectors, which would allow more access to the single market. However, this is much less favourable than “passporting” rights, which allow financial services companies with regulatory authorisation in one EU country to conduct business freely throughout the bloc.