Brexit is a test of de-globalization in a Covid-19 world

0

The impending economic divorce between the United Kingdom and the European Union has become an experiment in rapid de-globalization in the context of a global pandemic.

Britain officially left the world’s largest trading bloc in January, but the country remains in the EU’s customs zone and single market until the end of the year, allowing time for trade talks. On Monday, British and European Union negotiators will begin to step up their attempts to secure an unusual type of deal: one that erects new barriers to trade.

Governments around the world are using the Covid-19 crisis to promote protectionist policies and repatriate production chains to protect strategic industries. The Brexit talks represent a twist on that theme, with Britain severing ties in its most important trading relationship in part to win the freedom to strike deals with other nations, including the United States.

Brexit trade talks, conducted mainly by videoconference, have so far proved tense, with both sides seeking to exert pressure ahead of an end-of-year deadline.

Officials on both sides say a deal is possible. But the question is no longer whether negotiations will lead to more bureaucracy or trade friction, but rather how much, says Raoul Ruparel, who previously advised the UK government on Brexit negotiations. “Much of the economic pain has already been priced in,” he says.

SHARE YOUR THOUGHTS

Which challenges in the Brexit trade negotiations are the thorniest? Join the conversation below.

British Prime Minister Boris Johnson last year scaled back ambitions for a trade deal so as not to keep the country tightly integrated into the EU. Instead, the UK government says it wants a basic deal that ensures it is not beholden to rules dictated by Brussels, allowing it a freer hand to control domestic policies.

Under such a deal, Britain’s vast services sector, including its vast financial, legal and accounting centre, will no longer have seamless access to EU customers. There will be more limited security cooperation, with Britain excluded from some shared crime databases. And there will be customs controls for goods for the first time in decades.

Negotiators must resolve a complex trade-off: how far the UK should remain aligned with the EU to gain preferential access to the bloc. The EU fears the UK is undermining European businesses with looser standards and government subsidies. He wants to bind Britain to a set of regulatory standards – on the labor market, the environment and state aid – from which it cannot easily deviate.

Both sides want a deal in place by the fall so businesses have time to adjust. The two hope a deal will eliminate the need for tariffs and quotas on trade in goods. If no deal is struck, a series of tariffs automatically kick in, hitting bilateral trade flows worth $800 billion a year.

It is unclear whether a deal can be fully implemented on January 1. The UK has said it will not initially impose full border checks on imports from the EU to give businesses affected by the coronavirus more time to complete new paperwork. The EU said it would not reciprocate.

Covid-19 hangs over the talks. Analysts initially believed the economic havoc caused by the new coronavirus would force the UK to seek an extension of the talks for up to two years. He had until the end of this month to do so, but said he would not.

Instead, British officials doubled down, hoping the EU wouldn’t want a trade battle amid a pandemic.

“We will be able to meet our economic needs in creative and constructive ways, looking at regulation and looking at the ways in which we support industries in ways that we haven’t been able to do before,” he said recently. Mr Johnson in Parliament. . “Let us not delay this moment; let’s go.

“We will be able to meet our economic needs creatively and constructively,” British Prime Minister Boris Johnson told parliament recently.


Photo:

Chris J. Ratcliffe/Getty Images

The EU, meanwhile, says it won’t sell access to the trading club on the cheap. “We are ready to work on an operational and shrewd compromise but never at the expense of the single market,” Michel Barnier, the EU’s chief negotiator, recently declared.

The EU wants arrangements that weaken Britain’s role as a major EU services hub or manufacturing entry point into the single market, Mr Barnier said.

He said the EU would not agree to flexible rules of origin – limits on how much of a product’s value must be purchased domestically to achieve zero tariff status – which would allow the UK United to gather materials from around the world at a lower cost than its European competitors and to export. duty free in the block.

Deal or no deal, the way parties do business will change dramatically. According to the UK government, UK businesses importing and exporting to the EU will have to complete an additional 215 million customs declarations every year.

UK exports of animal products, for example, will have to be accompanied by health certificates and enter through special inspection posts where half will undergo physical inspections. The free movement of workers between economies will end. A range of professional qualifications, including those for lawyers and accountants, seem unlikely to be recognized by the EU.

The EU runs a trade surplus with the UK and officials say a breakdown in trade talks is one of the biggest economic risks the bloc currently faces.

However, because the proportion of UK trade with the EU is so much higher than EU trade with the UK, the UK will be the hardest hit, according to most economists. Britain’s economy is expected to grow 3.1% less than it would as an EU member by 2030 even if a trade deal is struck, according to research by Oxford Economics.

UK companies risk being shut out of EU supply chains, which will likely squeeze manufacturing output and investment. A fall in services trade, which accounted for 43% of UK exports to the EU in 2019, and the arrival of fewer migrants will inflict the most damage on the economy, says John Springford, an economist at the Center for European Reform , a London-based think tank.

The CER sees the value of UK financial services exports to the EU fall by almost 60% under a trade deal and exports of transport services fall by 15%.

SHARE YOUR THOUGHTS

Which challenges in the Brexit trade negotiations are the thorniest? Join the conversation below.

Some potential trade-offs emerge. The EU has signaled it may possibly scale back its demand for the UK to keep state aid rules, which govern government support for industries, in line with those in Europe.

An idea raised by negotiators would allow the EU to impose significant sanctions, including tariffs on British goods, if the UK deviates from the bloc’s regulatory standards, EU officials say, although A top British negotiator said on Thursday that Britain would be exposed to too many savings. uncertainty.

On fisheries, the EU has indicated it may agree to UK demands for the UK to take a larger quota of fish caught in UK waters, but will likely push for multi-year deals , not the annual talks that London wants.

Among the big remaining differences, the UK wants mini-agreements on different sectors while the EU wants a comprehensive agreement, with an arbitration panel, giving it a way to impose sanctions in one area for breaches. elsewhere.

While the economic blow of Brexit will likely be more than offset by the pandemic, the Brexit blow could be long-term. “Trade barriers are permanent. Hopefully Covid-19 is a temporary shock,” Mr Springford says.

Write to Max Colchester at max.colchester@wsj.com and Laurence Norman at laurence.norman@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Share.

Comments are closed.