Boris Johnson has his Brexit and the EU its 27 intimidated “remainer” nations. But the Biden administration may not find the welcome it had been anticipating from a Europe that wants to be defended by the US while ignoring US security interests.
The weekly trade report with L.C.
On Christmas Eve the EU and UK finalized their “Trade and Cooperation Agreement,” which will govern their post-Brexit trade and security relationship. With the UK gone, the two major European powers, France and Germany, are moving to establish closer relations with China and Russia, despite welcoming the incoming Biden administration.
The EU believes it made the UK’s departure sufficiently unpleasant that no other EU country is likely to try to bolt in the foreseeable future.
Meanwhile, trading partners on both sides of the Channel are scrambling to figure out how to make the best of the new complications. The UK-EU agreement is comprised of three parts:
- a traditional free trade agreement,
- a cooperative arrangement on law enforcement and justice issues, and
- a “governance” section.
The free trade agreement that went backward
This is the first comprehensive trade agreement that is a deliberate devolution from broad free trade toward more restricted trade — rather than a liberalization from existing restrictions. As of January 1st, 2021, the former EU-UK trade relationship — with no encumbrances in a single market and customs union — will cease to exist. Inevitably, this will entail an increase in trade barriers.
Many of these barriers will take the form of cumbersome paperwork, inspections, tax adjustments, licensing and certification requirements, and border customs declarations and checks. That situation won’t be temporary. The UK Road Haulage Association warned of “vast amounts of new paperwork processes” that could lead to backups at the borders. In anticipation of that – or of a no-deal exit – many businesses have been stockpiling products to ease their way into the new system.
Last minute US-UK trade deal or pipe dream?
Some possible good news for the UK: Breitbart reports that “America’s Ambassador to the United Kingdom, Woody Johnson, has suggested that U.S. and British negotiators are close to securing a trade deal before the end of President Trump’s term in office.” But time is short even for a limited trade deal that wouldn’t have to be approved by Congress.
British business associations including the American Chamber of Commerce in the EU are warning that companies aren’t ready to comply with requirements announced just a week before they take effect. They are urging that the agreement be phased in to give time to adjust. The Confederation of British Industry suggests a six-month grace period. But an EU official, asked about this, told reporters, “there is no grace period in this agreement…. We think that companies have had a lot of time to prepare for this.”
Limited EU help for Biden’s “Build Back Better”
Incoming President Biden may not have the friendly welcome from the EU that he had been anticipating after speaking against Brexit during the presidential campaign. As Dominic Green, British historian and deputy editor of the US edition of the Spectator, puts it in the December 28th Wall Street Journal:
While the U.S. pushes for economic decoupling from China, Germany continues its strategic decoupling from the U.S. Germany, the biggest European investor in China, is open to Chinese 5G technology… Ms. Merkel also remains committed to the Nord Stream 2 gas pipeline from Russia, which is nearly complete and would… damage Europe’s energy independence…. The [EU] agenda contains no EU commitment to reducing ties to Russia, China or Iran. It expects the U.S. to support European powers as they subvert American interests and undermine America’s global position.
The UK-EU trade agreement nevertheless was welcomed all around since the alternative was a “hard Brexit” — with Britain “crashing out” of the EU on January 1st with no bilateral arrangements in place and trade shifting to “WTO rules.” Under these rules, each side would impose on the other its schedule of most-favored nation tariffs, services restrictions, quotas, and other non-tariff barriers as committed to at the WTO.
A potential source of friction
The Agreement does allow the UK and EU to impose antidumping and countervailing duties and safeguards against each other’s products in line with WTO rules. This could become a source of friction.
But the UK-EU Agreement is much better than operating under only WTO rules. It seems to be in line with other free trade agreements concluded among developed economies, in terms of its broad but by no means complete coverage. The UK gave up many benefits it had as part of the bloc, but the UK administration argues that this is the price for regaining its full sovereignty and independence from EU regulations and rulings by the EU Court of Justice.
From that standpoint, the UK appears to have fulfilled its main goals: winning tariff- and quota-free trade (at least for goods) while not having to follow EU rules and regulations. However, to the extent its own rules or standards are out of line with the EU, tariffs could be reimposed, and trade will be burdened heavily with non-tariff barriers.
Trade in services to be completed later
Although UK and EU officials didn’t stress this, the negotiations haven’t been completed. In certain areas, including services, the deal might be adjusted later to include more coverage and liberalization once the two sides see how it is working. As one optimistic commentator said, “this is a baseline agreement and framework for new cooperation to build upon going forward.”
Most commentators report that London conceded the most to get a deal. A failure leading to a crash-out would have led to chaos at UK borders and a political crisis for the government of Prime Minister Boris Johnson. The EU, on the other hand, had a clear reason not to give in: it wanted to make sure that leaving the bloc wouldn’t appear to be an attractive option for other EU member-states or their domestic political oppositions.
Ratification expected on both sides of Channel
The text of the agreement runs around 1,300 pages. The British Parliament is scheduled to vote on December 30th and will almost certainly easily approve it. Arch-Brexiteer Nigel Farage also gave his approval.
EU ratification will be more complicated. The European Parliament must vote on it, but it is expected to come into force provisionally with the assent of the 27 EU member-country governments, who are set to meet on December 28th. The E.P. will then approve it retroactively early in the new year.
It remains to be seen how the new agreement positions the UK for its stated objective of entering major new free trade agreements with countries around the world and how it impacts the ongoing talks for a US-UK FTA. That it has settled the Irish border question without jeopardizing the Good Friday Agreement gets one obstacle out of the way, but it is unclear how the UK’s adoption of standards enabling it to trade easily with Europe will impact its negotiations with the US and others.
Tariff-free, quota-free trade preserved
Most significant is that tariff-free and quota-free trade was preserved between the parties. This was a life-saver for many manufacturers involved in exporting, but especially so for the auto industry. Automotive groups on both sides of the English Channel were quick to applaud.
But the agreement isn’t as “tariff-free” as UK officials proclaimed. The Rules of Origin appear to be especially onerous for many food processing industries, who are also hit hard by border safety checks. The rules also hit automotive manufacturing hard. For example, cars must have at least 55% UK or EU content.
The “level playing field”
The toughest obstacles that were resolved at the end were the “level playing field” issues and fisheries. Level playing field refers to EU demands that London be restricted from granting benefits to its businesses that could give them a competitive advantage over EU counterparts, such as state aid (e.g., subsidies), tax breaks, lower environmental, health/safety, or labor standards, or other easier regulatory burdens. The UK argued that these are matters that impact its sovereignty and it left the EU in part to avoid being subjected to standards made elsewhere.
It appears that a compromise was reached under which, according to an EU fact sheet, “Both parties can engage in cross-sector retaliation in case of violations of the agreement.
In regard to state aid, a British report states that “The Agreement ensures that each Party will have in place its own independent system of subsidy control and that neither Party is bound to follow the rules of the other.” So it is not clear, and probably won’t be until the agreement is in effect and has been tested, just how it will be judged that one party is violating the level-playing-field terms and how the other will respond.
Fish, geographical indications, and Ireland
On fish – a small part of bilateral trade but among the most politically sensitive issues of particular importance to France – the agreement sets a new quota system for how much EU fishermen can catch in British waters. The EU will have a quota 25% below what its fishermen have been harvesting — a concession from the UK, which wanted a 60% cut.
On Geographical Indications (brand protection for place names), the agreement lets each side make their own rules, which appears to be an EU concession though both the EU and UK have been aggressive in defense of GIs.
The crucial issue of the Ireland-Northern Ireland border was basically settled with a recent protocol, and the problem is greatly eased by the new agreement keeping UK-EU trade tariff- and quota-free. Under the deal, which is apparently acceptable to all parties, Northern Ireland stays in the EU customs union and there won’t be any sort of “hard border” between the two parts of the Irish island.
But hard as the Brexit negotiations appear to have been in retrospect, the departure of the UK from the EU presents the US with a perhaps greater challenge — facing a hostile Chinese-Russian axis with an EU that may be an even less dependable ally than before.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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