Brexit agreement remains cliffhanger

EU, UK stare at carrying forward Brexit uncertainty into 2021

Business

December 12, 2020

/ By / New Delhi

Brexit agreement remains cliffhanger

A deal governing post-Brexit relationship between the two sides is crucial for economic, political & social aspects of life on both sides of the English Channel

With British Prime Minister Boris Johnson ruling out an agreement this Sunday on protracted Brexit negotiations with the European Union, the suspense over future of UK’s relationship with the EU is set to continue.

When Boris Johnson left for Brussels on Thursday for a dinner meeting with the President of the European Commission Ursula von der Leyen, both knew that they would have a lot more than just the dinner to chew over as it was the ‘last chance’ to break the deadlock over Brexit negotiations that have been going on for years now between London and Brussels.

On the night of December 31, the United Kingdom will cease to be a member of the EU and the new year will bring an entire set of new regulations that will govern not only the bilateral relations but also impact the rules inside the United Kingdom.

Thus, a deal governing the post-Brexit relationship between the two sides is crucial for economic, political and social aspects of life on both sides of the English Channel. However, ever since the ill-fated referendum called by the then Prime Minister David Cameron in June 2016, questions over the shape of Brexit and life after Brexit has been tormenting Europeans as much as the British.

The negotiations to reach a deal that would govern the post-Brexit relations have been on for over three years now, but little progress has been made, with issues – small and large – dogging the leadership on both the sides and creating large obstacles in the way of an agreement.

One of the biggest hurdles for long was the question over a ‘hard’ border between Ireland and Northern Ireland. A hard border would severely disrupt trade as it would not only lead to the application of customs duties on goods moving between the two sides but also lead to long delays due to customs posts and checks. With the British having remained keen over a hard border, the issue is nowhere near resolution yet.

Another key issue, at least for the UK, is securing London’s position as a key financial services centre even after Brexit. Currently, even though it is outside the Eurozone, London sees the largest trading of Eurobonds and the currency as well, much bigger than within the single currency zone. The Europeans are not keen to continue where the hub of trading of their currency is outside the EU. But if the European Central Bank changes the rules that would make the currency and bond trading to move onshore, it will severely impact the UK’s largest industry. Already a few thousand financial services jobs have moved from London to the EU so far. This could expand rapidly on January 1, if the ECB pushes the rules through.

Farming is another sector where both sides are adamant on getting the upper hand, even though a relatively small proportion of their populations depends on farming as the primary source of livelihood. For the EU, less than 12 million people depend on agriculture for livelihood, but the union spends over Eur 65 bn (including UK’s share) every year on farm subsidies. The UK, for its part, has less than half a million people dependent upon farming, spends about GBP 6 bn a year on farming subsidies.

Another big battle on an issue that concerns a very small part of the population is raging on fishing that employs barely 8000 persons in Britain. But both the EU and the UK have locked horns on fishery agreement, basically over how much fishing to be allowed by one in the territorial waters of the other.

One of the particularly challenging sectors which would feel a huge impact of a no-deal Brexit is manufacturing – the core of European and British goods economy. Over the past four decades, the European and British economies have become extremely intertwined and today hundreds of companies on both sides of the channel source parts or products from several locations and there is a fair bit of back and forth even for the same part. If a hard border is the outcome of Brexit, it would cripple manufacturing industry in both the EU and the UK.

The automotive industry is illustrative of the challenges that will affect all subsectors and it is expected to be especially hard hit by Brexit, with implications for both the UK and the EU automotive industries. The impact will extend to vehicle manufacturers, suppliers of systems and components and, of course, consumers. About 85 pc of passenger vehicles imported to the UK come from the EU, representing about one-third of the EU’s export. While the only 20 pc of the EU’s auto imports are from the UK, this represents approximately half of the UK’s auto exports, says a report by BakerMckenzie, a global consultancy.

Under the EU’s single market, the automotive industry employed complex just-in-time supply chains, and vehicles and parts moved freely. Automotive trade will be disrupted whether or not the EU and the UK agree on a trade deal, but a no-deal scenario is especially fraught. The industry is also concerned that the significant effort required for companies to develop and implement a Brexit strategy will divert resources away from investments in technology and other strategic initiatives to advance the automotive industry. Same is the story with other manufacturing industries.

In the absence of a no-deal exit, both sides will need to discuss under the aegis of the World Trade Organisation, which could take some time and put both the economies at a standstill or at least slow them down even more. Also, in such a scenario, the UK will need to negotiate its own independent trade deals with every other country in the world, while remaining linked to the EU single market in some way could make the process easier as the operative conditions of every deal may remain same or close to the current deal that EU has with these nations.

With just over two weeks to go before the Brexit to fructify, a deal looks even more remote than the possibility of the world getting over the coronavirus pandemic anytime soon. Since the UK is a key trading partner for several nations around the world, including India, the impact of a no-deal Brexit is likely to be much larger than just the UK and the EU. No wonder the global attention is focused on the negotiations.

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