And now for the British economy with the UK-EU trade agreement reached?

LONDON (AP) – The last-minute trade agreement between the UK and the European Union means that companies will be spared new tariffs and border disruptions at the beginning of the new year – an economic shock that would have aggravated employment and financial problems. inflicted by the pandemic.

News of the deal on Thursday brought sighs of relief from the offices of corporate and political chiefs, as well as from consumers who anticipated a shortage of products and transportation workers facing the potential for long backups at border crossings.

Bank of England Governor Andrew Bailey recently warned that failure to secure a trade agreement between the UK and the EU would have a greater long-term impact on the British economy than the long-term impact of the coronavirus pandemic, which led to the country’s deepest recession in more than three centuries.

The agreement has yet to be approved by the British and European parliaments. Here is a look at the changes that will come and their likely implications.



Although the United Kingdom left the EU on January 31, it is following the bloc’s rules until the end of this year, as part of a transition period for the new economic relationship. The problem was, what comes after that?

The United Kingdom is leaving the European single market, which after its departure will cover around 450 million people. In essence, the single market aims to make trade as simple as possible, regardless of where a company is located in the European Economic Area, which, in addition to the 27 EU member states, includes non-EU countries, including Iceland and Norway. The rules governing trade are the same across the single market and are based on the free movement of goods, services, capital and people.

The United Kingdom is also leaving the customs union, which eliminated tariffs between members and created a common external tariff for non-members. Under the customs union, the EU negotiates international trade agreements on behalf of its members – giving it a weight in the global economy that no single member would have.



Under the terms of the new agreement, there will be no tariffs on products marketed between the UK and the EU. For car manufacturers, for example, it is a relief, since without a deal a 10% rate would be applied from January 1st. There will also be no quotas, which means that exporters can still transport as many vehicles as they want.

Even so, trade will not be as uniform as before, as the United Kingdom leaves the single market and the customs union. Companies will have to submit customs forms and declarations for the first time in years. There will also be different rules on product labeling, as well as health controls on agricultural products, for example.

The government has estimated that the new bureaucracy will result in 215 million extra customs declarations each year, at an annual cost of about £ 7 billion.

But an agreement avoids what could have been considerable chaos and a deeper blow to trade, as new tariffs would have increased the cost of doing business between the UK and the EU for many different categories of goods. This has prompted many to see Thursday’s deal as a way to make the best of a bad business situation.



It may take some time to adjust, probably leading to more congestion on both sides of the English Channel, as well as port delays in the days and weeks after January 1. The first expectations are that some food prices, notably imported meat and dairy products, will increase in the coming weeks.



Economists agree that the deal is better for the British economy than a result without a deal, and will help it recover from the coronavirus recession, which is expected to have reduced economic production by about 12% in 2020. The impact is very lower for the EU and other countries around the world, which would have mainly experienced some volatility in the financial markets in case of non-trading.

The EU accounts for about half of UK exports, so avoiding tariffs will help many companies. Executives can begin to implement investment decisions that they have kept waiting in the past years of Brexit uncertainty. Even so, the agreement with the EU does not incorporate the entire scope of the service sector. Since it represents about 80% of the British economy, companies that rely heavily on business with the EU, such as banks and finance, face a darker future. This is particularly threatening for the UK’s huge banking sector.



In the long run, most analysts believe the British economy will end up being a few percentage points lower in the coming years than it would have been if it had remained in the EU. This may not sound like much in the context of this year’s recession, but it does mean that living standards would be lower than before.

Economists at Berenberg Bank wrote that “exiting the EU’s single market and customs union will reduce the UK’s potential growth, damaging its export prospects and reducing the flow of foreign direct investment and skilled labor from the EU”. They estimated a maximum growth potential of 2.0% per year as an EU member, compared to 1.7% with Thursday’s agreement and 1.5% without agreement.



The aim of Brexit was to allow the UK to set its own rules and do things in its own way. Therefore, the critical point during the months of tense trade negotiations was to find out what to do when and if the UK diverged from EU rules.

The EU has long feared that Britain would undermine the bloc’s social, environmental and state aid rules in order to gain an unfair advantage with its exports to the EU. Britain said that having to comply with EU rules would undermine its sovereignty. The agreement reached a compromise by granting a fundamental requirement by the UK that the European Court of Justice should not be involved in dispute resolution. Instead, it allows for the possibility of arbitration or commercial countermeasures in the event that either party feels that it is being harmed by labor, political or employment measures. If these measures are used in excess, either side could trigger a reopening of the commercial aspects of the treaty.



Until December 31, the United Kingdom remains bound by the approximately 40 international trade agreements that the EU has negotiated in recent years. In the period leading up to the end of the year, the United Kingdom has sought to roll over these businesses, such as Japan and Mexico, but some have yet to be completed. At the beginning of 2021, the United Kingdom will be able to make its own trade agreements with anyone it wants. Negotiations with the United States have already started, although President-elect Joe Biden has indicated that trade deals are not at the top of his tray when he takes office in late January.


Associated Press writer David McHugh contributed from Frankfurt, Germany.


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