What now for the UK economy with the UK-EU trade deal?


LONDON (AP) – The last-minute trade deal between the UK and the EU means businesses will be spared new tariffs and border disruptions at the start of the new year – an economic shock that would have worsened the employment and financial problems inflicted by the pandemic.

News of the deal on Thursday brought sighs of relief from the offices of business leaders and politicians, as well as consumers anticipating product shortages and transport workers facing the potential of lengthy safeguards at border crossings .

Bank of England Governor Andrew Bailey recently warned that a failure to secure a UK-EU trade deal would have a bigger long-term impact on the UK economy than the long-term impact of the coronavirus pandemic, which led to the country’s deepest recession. in over three centuries.

The deal has yet to gain the approval of the British and European parliaments. Here is an overview of the upcoming changes and their likely implications.



Although the UK left the EU on January 31, it is following bloc rules until the end of this year as part of a transition period to the new economic relationship. The problem was, what comes after that?

The UK is leaving the European single market which, after its departure, will bring together around 450 million people. At its heart, the Single Market is about making trade as easy as possible, regardless of where a business is located in the European Economic Area, which, in addition to the 27 EU Member States, includes non-EU countries, notably Iceland and Norway. The rules governing trade are the same throughout the single market and are based on the free movement of goods, services, capital and people.

The UK is also leaving the customs union, which eliminated tariffs between members and created a common external tariff for non-members. As part of the customs union, the EU negotiates international trade agreements on behalf of its members – giving it a weight in the global economy that no single member would have on its own.



Under the new agreement, there will be no tariffs on goods traded between the UK and the EU. For car manufacturers, for example, this is a relief because without an agreement, a charge of 10% would have been applied from January 1. There will also be no quotas, which means that exporters can still transport as many vehicles as they want.

However, trade will not be as smooth as before, as the UK will leave the single market and the customs union. Businesses will have to file customs forms and declarations for the first time in years. There will also be different rules on product labeling as well as sanitary controls on agricultural products, for example.

The government has estimated that the new bureaucracy will result in 215 million additional customs declarations each year at an annual cost of around £ 7 billion.

But a deal avoids what could have been considerable chaos and a deeper blow to trade, as new tariffs would have added to the cost of doing business between the UK and the EU for many categories of goods. Many see Thursday’s deal making the most of a bad situation for business.



It is possible that it will take time to adjust, which will likely lead to further traffic jams on both sides of the Channel as well as delays at ports in the days and weeks after January 1. Early forecasts are that some food prices, especially imported meat and dairy products, will increase in the coming weeks.



Economists agree the deal is better for the UK economy than a no-deal outcome, and will help it recover from the coronavirus recession, which is expected to have cut economic output by around 12% by 2020. L The impact is much smaller for the EU and other countries around the world, which would have mainly experienced some volatility in financial markets in the event of no deal.

The EU accounts for around half of UK exports, so avoiding tariffs will help many businesses. Leaders can begin to implement investment decisions they had kept on hold during the last few years of Brexit uncertainty. Yet the agreement with the EU does not capture the full scope of the service sector. With around 80% of the UK economy, companies that rely heavily on doing business with the EU, such as banking and finance, face a bleak future. This is particularly worrying for the huge UK banking sector.



Longer term, most forecasters believe the UK economy will end up being a few percentage points smaller over the next few years than it would have been had it remained in the EU. That may not seem like much in the context of this year’s recession, but it does mean living standards would be lower than they would have been otherwise.

Economists at Berenberg Bank wrote that “exiting the single market and the EU customs union will reduce the UK’s potential growth by hurting its export prospects and reducing direct investment inflows. foreigners and skilled labor from the EU ”. They estimated a maximum growth potential of 2.0% per year as an EU member, up from 1.7% with Thursday’s deal and 1.5% without a deal.



The purpose of Brexit was to allow the UK to set its own rules and do things its own way. Therefore, the sticking point during months of tense trade negotiations has been figuring out what to do when and if the UK deviates from EU rules.

The EU has long been concerned that Britain will undermine the bloc’s social, environmental and state aid rules so it can gain an unfair advantage with its exports to the EU. Britain has said the obligation to obey EU rules would undermine its sovereignty. The deal found a compromise by conceding a key UK demand that the European Court of Justice not be involved in dispute settlement. Rather, it allows for the possibility of arbitration or trade countermeasures in the event that either party feels aggrieved by labor, policy or employment measures. If these measures are overused, either party can trigger a reopening of the trade aspects of the treaty.



Until December 31, the UK remains bound by the 40 or so international trade agreements the EU has negotiated in recent years. In the run-up to the end of the year, the UK has sought to renew these agreements, as with Japan and Mexico, but a few have yet to be concluded. At the start of 2021, the UK will be able to make its own trade deals with whoever it wants. Negotiations with the United States have already started, although President-elect Joe Biden has indicated that trade deals are not high on his agenda when he takes office later in January.


David McHugh, Associated Press editor, contributed from Frankfurt, Germany.


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