12 November 2020

The UK after Brexit and Trump - the price of going it alone

Portrait photo of Fiona Carlin

Fiona Carlin

The absoluteness of national sovereignty is outdated in these hyper-turbulent times, argues Fiona Carlin

There is a diminishing amount of sand passing through the hourglass that measures whether there will be a trade deal with the EU to cushion the end of the UK's Brexit transition on 31 December 2020.    

Despite the grandstanding, a light-touch free trade deal remains doable. Biden's US election victory may prompt the UK government to drop its efforts to rewrite the Northern Irish Protocol to the UK Withdrawal Agreement. It is conceivable that France will concede on fish if the UK accepts the EU's level playing field demands on state subsidies and environmental and social standards.

But EU insistence that the UK commit to dynamic alignment rather than non-regression from existing standards may yet be the straw that breaks the proverbial camel's back, propelling the UK to trade with the EU on WTO terms as of 1 January.   

The next few weeks are the ultimate climax to the drawn-out political drama of Brexit.

Regardless of the level of disruption at the borders on 1 January, the journey is just beginning for the UK to find its place in the world.  The extent of the government's attachment to the notion of national sovereignty will be key to the direction of travel.

Unanswered questions

Trade in goods will be impacted with many unanswered questions, especially in relation to regulated products. If no deal is done, under WTO rules, the average tariff on UK exports to the EU will be around 3% – although the rates for certain goods (such as agriculture, automotive and textile products) will be significantly higher.

Baker McKenzie has estimated (The Future of UK Trade: Merged Realities of Brexit and COVID-19) that UK exports will be reduced by 11% in the long term, compared to a reduction of 6.3% if the UK and EU agree to a free trade agreement. This translates into an estimated 3.9% decline in GDP from a hard Brexit, compared to a 3.1% decline if a deal is reached.  

Non-tariff barriers are as much an obstacle as tariffs to the free flow of goods. Complex mutual recognition agreements (MRAs) are required to ensure acceptance of testing, inspections and product certification standards, especially in regulated sectors like automotive, pharmaceuticals or medical devices. Without MRAs in place, these products will have to be re-tested before entering the UK/EU with attendant delays, higher costs and healthcare security of supply concerns.  

The complexities businesses face are considerable. By way of illustration, companies seeking a Marketing Authorisation (MA) to be able to sell a new medicine in the UK will have to continue to follow EU procedures in respect of Northern Ireland.

As a result of the Withdrawal Agreement, the province will remain subject to EU pharmaceutical and medical devices legislation. It is not yet clear whether a single MA will suffice or whether companies will have to obtain a double (EU+UK) MA to sell throughout the UK.

Nor is it clear whether specific rules, such as the EU Falsified Medicines Directive, will apply in the UK after Brexit. If not, packs of medicines intended for the UK that are not compliant with the directive may not be lawfully dispensed in Northern Ireland.

Services

The UK's competitive services sector will be worst hit. Any Brexit deal is unlikely to extend to the UK’s world-class professional services sector which, contrary to trade in goods, consistently generates a trade surplus for the UK. No other trade agreement facilitates the freedom to provide services as much as the EU internal market rules, however imperfect they remain.  

One of the main consequences of Brexit on financial institutions, to take one example, will be significantly diminished EU market access. The precise effects will vary depending on the type of business conducted and related licensing requirements. 

The UK is prioritising regulatory autonomy over alignment with the EU, while seeking regulatory and supervisory cooperation arrangements, relying on assessments of equivalence where available under EU directives. It is possible that equivalence will only be granted where it is in the EU's short-term interests, for example, on a time-limited basis for derivatives clearing, an area where EU firms are currently dependent on the UK.

Although the City of London will not lose out to any other single EU finance hub, erosion seems inevitable and its unhinging from the EU will do little to strength it in competing with New York or with the Asian money centres that are becoming more self-sufficient in raising capital.  

Trade agreements

Forging multiple bilateral trade agreements was always going to be hard work for modest returns. Although welcome, the recently inked UK-Japan trade deal illustrates the time and effort required for the UK to achieve broadly equivalent trading terms to what it enjoyed as an EU member state.

Until 31 December 2020, the UK benefits from the more than 40 free trade agreements that the EU has concluded with third countries. It will take the UK years to replicate them. With tensions over Hong Kong, the prospect of a UK-China trade deal appears far off. The Biden administration will have other priorities before it turns to negotiate a UK trade agreement.

The UK’s desire to join the Comprehensive Progressive Trans-Pacific Partnership (CPTPP) will require complex, multi-year negotiations with all existing 11 members (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam).

The CPTPP includes provisions on state subsidies, competition, and foreign investors’ ability to sue governments which are the sorts of constraints on unfettered sovereignty that the UK is objecting to in its negotiations with Brussels. The EU already has bilateral free trade agreements in place with CPTPP members with the exception of Australia, Malaysia and Brunei.  EU trade negotiations with Australia have been on-going since July 2018.  

To put all of this in perspective, a recent Baker McKenzie report, supported by Oxford Economics, estimates that the long-term gains in terms of UK GDP from eventual free trade agreements with the US and CPTPP amount to 0.25%.  The Japan deal is expected to boost UK GDP by a mere 0.07%. That is a total of 0.32% to offset an expected Brexit hit to GDP of between 3.1% and 3.9% in a deal or no deal scenario.

National sovereignty

Brexit has come to be synonymous with untrammelled national sovereignty. The key question in the coming days is whether the government prizes it above all else or is prepared to make trade-offs to protect its interests in a world that is rapidly changing and in which strong alliances and scale are going to be increasingly important.

Will it jeopardise close relationships with its largest neighbour for the sake of absolute autonomy over the enactment of domestic laws?    

Ironically, Brexit has prompted the EU to focus on protecting and projecting its own economic sovereignty: nothing pulls the EU together like a good crisis. Because of its pooled sovereignty, the EU is already a global standards setter in many sectors of the economy and that trend looks set to continue.  

By its own admission, Von der Leyen’s European Commission is a geopolitical one. In a joint October declaration, 25 EU member states announced that in close cooperation with the commission, they will act to ensure EU digital and data sovereignty by combining private, national and EU investment efforts to build secure cloud infrastructures and services, to position Europe as a global data hub, to define a European approach on federating cloud capacities.

The commission's work programme foresees a raft of bold new measures including the elaboration of an industrial strategy and measures to control the distortive effects of foreign subsidies.  

Tectonic geopolitical shifts

The EU is determined to play a leading role on the world stage spurred on by Brexit and other tectonic geopolitical shifts. Since the Brexit vote, the liberal global trading order has further eroded and Western hegemony is fading. We are just beginning to grapple with the rise of China, with the planet close to tipping point on climate change, the risks of global health pandemics, and the attacks on democratic institutions from within and without.  

To stand a chance of responding adequately to these multiple challenges, we need multilateral policy frameworks focused on structural reforms, growth, and more effective global institutions.

These things are not incompatible with democratic governments providing their citizens with the security, education, healthcare and infrastructure they need to thrive. Switzerland is the poster child for balancing strong local democratic traditions with the pragmatism required to compromise with its most strategic trading partners. The Swiss know at first hand that such trade-offs come at a price – ‘cakeism’ is not in their lexicon.  

Fiona Carlin is partner at Baker McKenzie’s Brussels office. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any other agency, organisation, employer or company.

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