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Brexit Has Ended. Long Live Brexit Debate

25 January 2021   |  

Well, they did it: The UK and EU signed a trade deal mere days before a no-deal Brexit would have become official. Beyond avoiding higher tariffs and significant trading delays , the agreement also frees the UK to seek separate trade deals with the US and other major partners—something that has, by and large, been on hold. Both sides won some important concessions:

No Tariffs
Arriving at an agreement without tariffs or quotas was far from a foregone conclusion. But it certainly helps clarify goods movement—especially in Ireland, where incorporating tariffs could have created a hard border between Ireland and Northern Ireland.

This doesn’t mean trade costs don’t rise, though—requirements at the borders will lead to at least some delay while both sides adjust.  For example, rules of origin are in place to help ensure goods from other countries without trade deals with the EU can’t enter via the UK. Confirming goods’ true origin will undoubtedly slow shipping at least some.

A Compromise on Fishing
Fishing was a major concern throughout the negotiations, even though the industry itself represents a relatively small share of economic activity. In the agreement, 25% of EU fishing licenses will transfer back to the UK over a period of five years via a 15% reduction in 2021, then 2.5% reductions over each of the next four years.

A Level Playing Field—for Now
The EU wanted to ensure companies on both sides of the Channel would operate under similar regulatory regimes. But the UK didn’t want disputes heard by the European Court of Justice. So for now, if the EU feels the UK is structuring its environment in an unfairly biased way, the EU can impose tariffs commensurate with the (presumed, estimated) level of UK protections. Whether this means of dispute resolution ultimately satisfies both sides remains to be seen.

Despite the progress made, there are still some sticking points to iron out over time—especially with respect to services and whether and how folks in professions like medicine can offer their services across borders. The UK’s financial services and accounting sectors and employees have also lost the ability to freely operate throughout the EU—credentials for UK professionals operating in the EU will differ by the individual country, making it much more difficult to operate effectively across the entire region. This issue is on the docket and could be resolved as early as March.

Also pending in financial services is how euro-denominated derivatives will be cleared, given the majority currently clear through London-based exchanges. For now, the preexisting arrangement sticks—giving negotiators until June 22 to hash out new rules. The European Securities and Markets Authority has indicated it would like euro-denominated derivatives trading to take place within the EU or somewhere with “equivalent” regulations. And given the volume of business at stake, the UK would seemingly have an interest in finding a path to “equivalence,” too. The EU and UK intend to release a memo in the coming weeks which would outline what equivalent regulations would entail—which could provide some insight into how far apart the two sides are. For now, the negotiations are on a bilateral and individual country basis, which seems a recipe for complexity and could incentivize the two sides to find a broader mutual understanding.

With some pretty weighty matters still far from resolved, it seems we could be in for a potentially extended period of negotiations. Consider fishing, for which the deal only extends to the next five years: After 2026, the UK could theoretically remove all EU boats from its waters. The tit-for-tat that could ensue represents a potential new normal under Brexit.

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