As news of the last-minute trade deal with the EU emerged, right-wing commentators in publications such as The Spectator embraced it with cautious optimism. Johnson’s administration will not be leaping into the dark, but the economic costs of the pandemic and Brexit, irrespective of the trade deal, will likely pave the way for a bleak decade.
The prospect of no-deal Brexit was put to rest on the 30th of December 2020 as the EU–UK Trade and Cooperation Agreement was signed just a week before the transition period expires. With it, much of the nation, and the Conservative Party, sighed with relief. Unfortunately, this looks unlikely to remain in the face of mounting debt and stifled growth, even as the Brexiteer dream of decision-making over key policies returning to the national level is satisfied.
The Catalyst to Progress:
The key to this new deal is a collection of tailor-made solutions to problematic issues. These include a level playing field, fishing rights, and a dispute-resolution system. In the end, compromise was key and the catalyst to progress. On the level playing field, the trade-policy term for a set of principles that govern business competition by preventing unfair competitive advantage, regulatory alignment will not be imposed. Instead, a ‘rebalancing mechanism’ will prevent undercutting and gaining an unfair advantage by the U.K. through state aid. On fisheries, a transition period will exist involving substantial EU access but with a quarter of their usual quota given up. The UK and EU will negotiate on access thereafter. On a dispute-resolution system, an independent panel rather than the European Court of Justice will be used, therefore, reaffirming British sovereignty in the eyes of the European Research Group, a prominent group of eurosceptic Conservative MPs.
The Economic Cost:
No-deal would have been a large economic blow; the Treasury’s own Independent Spending watchdog, the Office for Budget Responsibility (OBR), established in 2010 to provide independent analysis of the UK’s public finances, made this clear in their latest report projecting a loss of 6 per cent of GDP over the next 15 years. This report presented a medium-term economic and fiscal forecast drawing on expertise from the staff at both the OBR and across government. Under their expert view, this deal lands a softer blow but will still predispose the country towards slower growth. Rules-of-origin checks, new VAT rules, and other forms of Brexit red tape have already caused some businesses such as the Dutch retailer Bike Bits to halt sales to Britain entirely.
There are clear benefits. The agreement provides tariff and quota-free trade. Economic growth, as some have feared, will not be driven by undercutting social and environmental standards. Nevertheless, terms are more restrictive than previously. In fact, these restrictions will still result in a 4 per cent hit to GDP according to the same report from the OBR. Extra trade friction, paperwork, and customs check will naturally result in some export losses. On the other hand, regulatory flexibility may facilitate the UK embracing new technologies but it is unclear to what extent regulatory divergence will be tolerated until the EU retaliates with tariffs.
Continued Uncertainty
The agreement is notably ‘thin’ on areas such as services, and Britain hopes for a separate statement recognising UK rules relating to financial services, a dominant sector of the economy, as roughly equivalent to EU rules. This would facilitate free trade. In addition, there is an urgent need for a data-adequacy decision to permit the free transfer of data.
The most reliable studies have previously suggested a moderate net economic loss of between 1 to (mostly under) 5 per cent, but this risk is likely underestimated, as tends to occur with economic forecasts. Therefore, any assessment will contain some degree of unpredictability, but based on the best data available, the effect is likely to be at least a moderately negative impact on the economy for the rest of this decade.
Prognosis:
The negative economic impact of the deal will materialise through a slow and challenging recovery after COVID-19 is finally brought under control, rather than through a sharp painful recession. The austerity policies of the Cameronian era are unlikely to be adopted by Johnson, who has ruled out a return to austerity. Nevertheless, some cuts as evidenced by the willingness to reduce the foreign aid budget will likely occur to help balance the books. Most prominently, however, tax rises will necessarily have to follow to finance the economic cost of COVID-19 and to counterbalance the lost revenue due to Brexit.
