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The United Kingdom ceased to be a member of the European Union on 31 January last – just in time for the COVID-19-induced downturn that will cut economic activity by over 10% in 2020, with further weakness likely in 2021 and beyond.
COVID-19 has also diverted attention from the additional economic hit likely from Brexit after January 1 next, when Great Britain (but not Northern Ireland) loses full access to the EU’s single market. It was open to the UK government to seek a prolongation of the transition period beyond that date, but Mr Johnson’s government decided not to pursue the EU’s offer of an extension.
2021 prospects
From January, the UK becomes a third country, no different from any other around the world, unless it secures a free trade agreement with the EU. As a third country, Britain will still have access to EU markets, but with no more privileges than any other member of the World Trade Organisation (WTO), which almost all countries have joined.
This would mean zero, or very low, tariffs for most categories of manufactured goods and raw materials, but potentially severe tariffs and quotas for farm produce and limitations on trade in services. Only if the UK secures a free trade agreement with the EU will Britain be able to trade on different terms than other non-members.
Numerous countries around the world have negotiated free trade agreements with the EU, including Canada, Chile and South Korea. All of these agreements are different, reflecting the interests of the parties involved, and they have often taken many years of patient negotiation.
With the best will in the world, it would have been difficult for the UK and the EU to have finalised a comprehensive free trade agreement this year, envisaged by both parties in the political declaration that accompanied the UK’s final withdrawal agreement in late 2019. There has been no goodwill however, and this week’s discussions in London have failed to find agreement on two key issues.
Key issues
The first is fisheries. Exactly why politicians attach such importance to fisheries is a puzzle – the UK fishing industry, including onshore processing, employs 24,000 people out of a total workforce of 31.2m. For every job in fishing, there are 1,300 people doing something else. Many of those employed in fishing are not British – eastern Europeans work on many of the fish processing units and Filipinos the deep-sea trawlers.
The perception that Europeans are scooping up ‘our’ fish has long been an obsession of Brexiteers, even though the UK is a net exporter of fish products to the EU-27.
A more important concern for the EU is state aid, the policing of which is central to maintaining a level playing field in the absence of trade barriers. The EU is saying to the British, in effect, if you want free and easy access to the European market, you may not dish out subsidies to UK firms, as this would give them an unfair edge over EU firms.
There should be a compromise over fisheries, given its economic insignificance, although economic realism has not been a feature of Brexit. State aid is more likely to be the deal-breaker. Johnson appears to have decided that no surveillance of UK policy can be countenanced and he is inclined to interventionism well beyond the recent traditions of the Tory party. The great disasters of British industrial policy, including the National Coal Board, British Leyland and British Steel, were the Labour party’s political property, gleefully bestowed by Johnson’s Tory predecessors.
Trade costs
If there is no free trade agreement, there will be an extra Brexit bill for both the UK and the EU-27, larger for the UK according to calculations from economists and trade experts. A significant portion of the extra EU cost will be borne by the countries that trade most with Britain, and Ireland is one of those. The special status of Northern Ireland in the withdrawal agreement, signed and binding, will leave cross-border trade uninterrupted, but the Republic’s trade with the UK will face severe disruption. Beef could be the biggest loser, although some side-deals could yet emerge as the full implications come to be understood in Britain.
The Irish supermarkets, their British counterparts and the food processing industries in both jurisdictions, have much to lose, as do primary producers. The Irish farm organisations will be tempted to seek compensation from somewhere, possibly the EU budget or the Irish Exchequer, but that instinctive reaction should perhaps be resisted. Neither potential benefactor is likely to be flush with funds over the next few years and both will have priorities in financing post-COVID-19 recovery.
The potential damage of a no-deal to Britain is so serious that ad hoc deals will have supporters in the UK once sanity begins to return.
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