UK and EU agree to trade deal

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The trade agreement provides for tariff-free bilateral trade in goods, but little is arranged for services, which cover 45% of overall UK external trade.

The United Kingdom’s withdrawal from the European Union was completed 31 December 2020 when the transition period came to an end. Following extensive bi-lateral discussions between the UK and the EU regarding their future trading relationship, a Free Trade Agreement was finally achieved just days before the final deadline, thus avoiding automatic default to WTO trading terms for intra UK/EU trade.

The trade agreement alleviates a long period of uncertainty and compared to the alternative of ‘no deal’ represents a positive outcome. However, the ‘good news’ is somewhat tempered by the attendant economic costs and the resultant logistical challenges for trading firms. Further, a number of areas within the negotiations are not addressed by the Agreement.  

The Free Trade Agreement provides for tariff-free bilateral trade in goods and also has provisions on issues such as security cooperation. However, little is arranged for services, which cover 80% of the UK economy and 45% of overall UK external trade. The UK had to make important concessions on the money it owes to the EU, on the Irish border and EU demands for a level playing field. On the other hand, the UK achieved its demand of keeping the European Court of Justice out of the trade deal. Both sides had to make concessions on the politically sensitive dossier of fishing rights, with outcome leaving areas of concern for the fishing industry.

Meanwhile, changes to customs practices deliver additional challenges for exporters and importers across all industries and there will inevitably be disruption and increased bureaucracy, for example, country of origin relating to assembled goods is a significant issue.  Delays at ports began in December albeit that travel restrictions related to the pandemic exacerbated the position. The short crossings from Kent saw a sharp fall (50%) in traffic in the post-Christmas period, while the volume of traffic crossing from/to UK ports during early January has been lower than the average recorded for the same period in 2020. Concerns over logistics in the longer term remain, with businesses reporting difficulties with access to transit documentation and the UK’s custom’s authority (HMRC) conducting a review into software issues. However, customs delays are only part of the story, with the need for hauliers to present a negative Covid test also contributing to the overall picture.

The full economic implications of Brexit are also overshadowed by the continuing impacts of Covid-19, particularly in the UK but across Europe also. With the virus still affecting large swathes of the population, containment measures continue to impact economic activity on both sides of the channel. However, extensions in government support measures continue to obscure forecasts, with the true impact of the pandemic yet to be evidenced in insolvency figures. GDP growth in the Eurozone is expected to rebound only partially this year to 4.2%, after a very deep recession in 2020 (-7.1%). In the UK, after a 10.9% contraction in 2020, the UK economy is likely to see a relatively modest economic rebound of +4.2% in 2021. UK business investment is expected to expand moderately in 2021, after a steep contraction in 2020. The negative effects of higher trade barriers will be larger for the UK than for the EU in total. Nevertheless, a number of European countries have close trade and investment linkages to the UK. Ireland and Norway stand out in terms of exports, while the Netherlands stands out in terms of foreign direct investment. Luxembourg, France, Germany, Spain, Switzerland and Belgium also have close investment linkages with the UK.

The Covid-19 legacy together with post Brexit trade frictions will likely lead to a sharp rise in insolvencies in the UK in 2021. Similarly, we can expect to see a rise in business failures throughout most of Europe in 2021, albeit at a more moderate rate, with those countries with the closest trading ties to the UK more likely to be at risk, for example Ireland. The impact on insolvencies for other important trading partners, such as Belgium, the Netherlands and Denmark, as well as the rest of Europe, is expected to be visible but more limited. However, the climate remains volatile. Industry sectors with strong reliance on exports to the UK, such as automotive, textiles and high-tech goods can be expected to be more significantly impacted.

While the overall economic outlook remains subdued, individual businesses continue to report success stories and the opportunity for trade growth, both during and beyond the transition period, should not be underplayed. One of the keys to success is a robust risk management strategy that combines access to reliable business intelligence to enable informed decision making and the ability to protect the business from trading risks.