Marshall's Thoughts

Brexit: A Less-than-Perfect Union?

Jonathan Loke

The coming Tuesday will mark 2000 days since the United Kingdom voted to leave the European Union. In this time, lawmakers have striven to translate a popular mandate for ‘Brexit’ – an ambiguous and loaded concept – into executable policy. While the country’s journey of redefining its ties with the continent has come a long way from vague slogans of a ‘deep and special relationship’ or ‘Brexit means Brexit’, it is by no means complete. It is instructive to review the arrangements between the EU and UK today to understand the issues still plaguing this new and tentative relationship.

The current EU-UK relationship is governed by the Trade and Cooperation Agreement, applied provisionally since 1 January 2021 and formally ratified by end-April this year. It maintains zero tariffs and quotas between both parties – a free trade area – leaving the UK free to set its own external trade policy. But the agreement does not eliminate customs formalities like value-added taxes, excise duties, charges for online payments, or technical barriers to trade like border inspections. And adapting to these delays and added costs is no small matter given the closely woven supply-chains between the two trading partners; in 2020, UK exports to the EU constituted 42% of the total, and imports from the EU 50%.

Boris Johnson’s government appears unwilling to fully expose local businesses and consumers to these disruptions – not least during a pandemic. Instead, it seems content with delaying border checks on EU imports indefinitely. Requirements for EU agricultural products due to take effect in October this year were postponed to January 2022, and export health certificates and other safety declarations delayed until July 2022. Proposed digital solutions to streamline border restrictions, bandied about as an alternative to a hard border between Ireland and Northern Ireland, remain far from implementation. The House of Lords EU Select Committee estimates a workable ‘smart’ border will only be ready after 2025. In contrast, EU customs protocols have been applied on British exports since the beginning of this year. It is difficult to isolate the long-term impact of Brexit on trade in goods amid short-term shocks, like supply-chain disruptions related to the pandemic and uncertainty over the UK’s brinksmanship in negotiations with the EU. But November figures from the National Audit Office strongly suggest Brexit has not helped: even though the UK has spent US$1.4 billion on smoothening trade with the EU, EU-UK trade declined by 15% in Q2 2021 on Q2 2018. The Office for Budget Responsibility has estimated the long-term impact of Brexit on the British economy would be twice that of the pandemic, causing a “4 per cent reduction in long-run potential productivity”.

Still more problematic is the absence of any mutual recognition of services, which employed 82% of all Britons in Q2 2021. Unlike the earlier policy of automatic recognition, professionals like doctors, nurses, architects and engineers must have their qualifications recognised in the particular member state they wish to practise in. A sector particularly affected is financial services, a £132 billion industry that has been synonymous with the City since the mid-19th century. The UK is not part of the continent’s passporting system for financial services, which permits firms authorised in any EU or European Economic Area (EEA) state to trade freely in any other member state with little additional authorisation. Today, the UK’s access to financial markets in the EU is subject to the discretion of individual member states. The UK had formerly qualified for ‘equivalence’, whereby member states allow firms from ‘third countries’ with similar regulatory standards some access to EU and EEA markets, though privileges are not as extensive as passported firms’. But since the UK’s temporary equivalence status expired in June 2021, the EU has held off on making a lasting equivalence decision. Concerns about diverging regulations have led to a leakage of capital and trading to the continent. On 1 January this year – the day the EU-UK Trade and Cooperation Agreement came into force – the Financial Times estimates €8bn-a-day of EU equities trading had shifted from London to Amsterdam and Paris nearly overnight.

In response, Chancellor of the Exchequer Rishi Sunak’s July 2021 Mansion House speech charts a post-Brexit vision of finance that pivots away from regulatory sync with the EU to reclaim lost ground from jurisdictions like New York. The government blames EU regulations like Solvency II in the insurance sector and MiFID II for financial markets for creating inefficiencies, causing funds to bleed into more liberal regulatory regimes. Outside the EU, the UK can more nimbly enact legislation to lure business from Wall Street, such as dual-class shares, or a lower limit on a free float of shares before a public listing. It is unlikely the EU readily grants the UK equivalence status and unleashes competition on EU firms without wresting concessions. Through that lens, Mr. Sunak’s pivot is a rational hedge to diversify beyond a barrier-filled continental market. Yet given his proposed rulebook’s further divergence from the EU’s own, this makes equivalence even more elusive, and his pivot away from the UK’s largest commercial partner a dangerous gamble.

The end to the common market also marked the end to free movement of persons to work, study, start a business, or otherwise live in both territories. Perhaps its most palpable result is the food and fuel shortage precipitated by a shortage of heavy-goods vehicle (HGV) drivers. European drivers who returned to their home countries after 31 December 2020 have to apply for an employment visa, and the declining value of the pound relative to the euro since the 2016 referendum has made working in the UK less attractive. Pandemic lockdowns have resulted in delays in administering heavy-haulage tests, amounting to 25,000 fewer candidates passing in 2020 than in 2019 and a wider reluctance to work far from home. In October, the Road Haulage Association estimated a shortage of over 100,000 HGV drivers, with only 20 temporary visa applications approved. And perhaps the 2.7 million job vacancies in October, concentrated in hospitality, logistics and construction – a job openings rate of 8.4% – has something to do with the 200,000 EU citizens who left the UK from 2019-2020.

The one pitch by Brexiteers to voters was of a UK free to strike trade deals around the world. As of October, 63 of the 69 trade deals negotiated since June 2016 have been rollover deals from the UK’s time as an EU member. And Brexit may in fact be hindering progress on a US-UK trade deal, which the Prime Minister has promised to deliver before the 2024 general election: Washington is reportedly concerned that disputes over post-Brexit trading rules in Northern Ireland will jeopardise the Good Friday peace.

Of course, Brexit means more to those who voted for it than simply having higher export statistics or a robust financial sector. There are certainly legitimate concerns about national sovereignty when decisions on issues affecting the UK – from refugees to the environment – are made jointly with 27 other countries. But unilaterally defining a relationship shaped by millennia of geography and shared history carries with it economic trade-offs, just as EU membership once did, that the country must be prepared to accept.

This week's thought was by Jonathan Loke

Jonathan Loke is a second year economics undergraduate at the University of Cambridge.

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