A lot of speculation has taken place in the past five years around the impact of Brexit on the EU and UK economies, societies, and politics. Much of the debate took place in a politically heated and acrimonious context, which was not conducive to a level-headed analysis of what the impact of Brexit might be. Five weeks after the end of the Brexit transition period, stories start emerging about the actual impact of Brexit on the British and EU economies, societies, and politics. Until we have enough data to carry out systematic scientific studies, these news stories will be an important source of information. Little by little these stories will form a picture that will allow us to assess the accuracy of the promises made and fears expressed in a hugely emotional and political process since the referendum campaign was launched in early 2016. By keeping track of these stories, the Brexit Impact Tracker seeks to contribute to this important task.
This blog does not pretend to be exhaustive, but collects those stories that seemed particularly important, interesting, unexpected, and consequential to us (comments on stories we missed out on are of course welcome). We focus on news items, expert and journalistic comments, and emerging academic work and seek to summarise the key developments while providing some comment to contextualise them.
This first post of the BIT summarises some of the key stories that have emerged since the end of the transition period on 1 January 2021.
Short-term trade disruption due to new non-tariff trade barriers and taxes
The first accounts of disruption to cross-Channel trade emerged soon after the end of the transition period. Various online retailers stopped exporting to the UK altogether due to increased costs and/or uncertainties around value-added tax (VAT); and UK consumers complained about unexpected additional charges on goods ordered from the EU. Some companies stopped trading across the Channel in the short term to get to grips with the new trading regime, for which they only had seven days to prepare. More worrying are stories about the possibility of UK companies having to establish warehouses and sales hubs inside the EU to service the EU market more efficiently. At least in one case this has led to the scrapping of plans to invest in warehouse capacity in the UK. Of course, this trend may be counterbalanced by EU firms deciding to adopt a similar strategy to service the UK market and avoid increased VAT payments. The overall impact on employment in the UK will not be known for a while.
Northern Ireland Protocol
The by far most serious event around Brexit in the past week or so were political tensions arising from the Northern Ireland Protocol (NIP), which aimed at avoiding a new physical border between the Republic of Ireland and Northern Ireland. Such a border was deemed a key threat to the achievements of the peace process and the Good Friday Agreement. Two major events in the past week exposed the fragility of the solution enshrined in the NIP:
In the midst of a row between the EU and one of the main Covid-19 vaccine producers over the delivery of vaccines to EU member states, the EU Commission decided to trigger Article 16 of the NIP, which allows either party to override the NIP and thus impose customs control between NI and the Republic. This decision was motivated by the fear that vaccines could leave the EU via the land border between the Republic and NI. While this drastic step was taken without broad consultation and quickly reversed, the political damage of this ‘blunder’ is considerable, because it undermines the EU’s own insistence throughout the Brexit process that establishing a board between NI and the Republic would be disastrous.
At the same time, local councils in NI temporarily suspended new border checks at Belfast and Larne ports after menacing behaviour and threats by unionists sparked concerns over safety of customs staff. Simultaneously, the DUP and other unionist forces urged the UK Government to invoke Article 16 of the NIP to guaranteed that there would be no non-tariff barriers impose on trade between NI and the Great Britain and thus no boarder in the Irish Sea would be established. However, the existence of such checks is a necessary for NI to remain inside the EU customs Union and for a border between NI and the Republic to be avoided.
This week’s events around the NIP show how fragile and potentially devastating for the Union the solution is that had been a crucial element in sealing the Brexit Deal.
The Environment
Another news story that emerged soon after the end of the transition period was that the UK Government – contrary to reassurances prior to Brexit – decided to temporarily lift a ban on certain pesticides banned in the EU due to their known negative impact on bees and other wildlife. This decision contrasts to some extent with the New Agriculture Act 2020, passed in November 2020, which marked a departure from the EU’s environmentally harmful Common Agricultural Policy (CAP). Most importantly, the Agriculture Act makes it possible for farmers and landowners to receive public money not just for food production, but also for the delivery of public goods – such as wildlife. This may provide a glimpse of things to come in the area of environmental protection: Freed from the constraints of the CAP the UK has leeway to significantly improve its approach to the environment and wildlife, but is also more likely to adopt policies to please small, but vocal interest groups such as sugar beet farmers and the British Sugar when it seems political opportune.
Financial Services
The Financial Services industry was largely neglected in the TCA. Instead, the UK government and the EU currently rely on a so-called ‘equivalence regime,’ where mutual market access depends on both partners recognising the other’s regulatory regime to be of equivalent standard. If the UK decided to depart from the current standard to go its own way after Brexit, Brussels could unilaterally withdraw market access to London-based financial services firms.
Interestingly, a similar ‘equivalence regime’ between the EU and Switzerland had let to a ban on trading in Swiss stock in the EU, after the EU revoked the recognition that Swiss supervisory regulation was equivalent to EU regulation in 2019. It was announced this week that after Brexit, the will lifted the ban and trading in Swiss stock in London is expected to resume.
For the UK, the Swiss example may provide a cautionary tale in terms of regulatory competition with the EU in the area of financial services. However, in an interesting interview, Barclay’s CEO Jes Staley made the case for the UK not to go down the deregulation route. Indeed, while the government has repeatedly promised a “bonfire” of red tape and regulations as one of the main benefits of Brexit, Staley insisted on the competitive advantage a high level of regulatory standards provides for the City of London. Indeed, he insisted that he “wouldn’t burn one piece of regulation.” This is an interesting development and challenges the wide-spread idea that less regulation is always better for business. For some business strategies, regulations are necessary to deliver high-quality services and products. This insight seems generally accepted by British businesses not just in the financial industry but also in manufacturing, but not amongst politicians, which may lead to interesting discussions after Brexit.
Fish & Seafood
Fisheries – and specifically fishing quotas in British waters – were high up on the Brexit priority list and one of the key sticking points of the TCA negotiations. Ironically, while agreement on quotas was key to making the TCA possible, the deal does not seem to do the industry much good. Rather, the Seafood and Fish industries seem to be among the hardest hit sectors by the new trading arrangements between the UK and the EU. The new non-tariff trade barriers in the form of customs declarations and checks, affect the perishable seafood exports strongly, as time to market has increased from between 12h to 24h to a multiple of that. Stories have emerged o British Seafood delivers arriving in EU countries in bad condition, which has started adversely affecting the reputation of UK companies in the sector. The new regimes involving large amounts of paper work, also implies increased costs for businesses. The increased workload may of course also lead to companies that can afford it creating new posts for administrators dealing with the paperwork, although given the small size of the sector, this is unlikely to have any significant impact on employment at a national level.
Cars
For the car manufacturing industry, the UK-EU Trade and Cooperation Agreement (TCA) concluded on Christmas Eve 2020 has secured continuation of tariff-free exports under certain conditions. The key condition are so called Rules of Origin (RoO) whereby for electric- and hybrid vehicles a minimum of 40% of a finished car’s value needs to be produce inside the EU or UK (increasing to 55% bey 2027); for internal combustion engine vehicles (ICEVs) the corresponding figure is 55%.
The conclusion of the TCA has led Nissan to announce their commitment production at its Sunderland plant, whose survival was threatened by a no-deal Brexit. This good news story, has to be qualified however: Nissan decision was made possible by its exclusive contract with battery producer Envision, which is crucial for the company to be able to produce within the RoOs contained in the TCA. Yet, the UK’s capacity in EV batteries is limited and will be a crucial challenge for most other car manufacturers operating in the UK. Given the RoOs and the important contribution of batteries to the overall value of EVs, the future of UK EV manufacturing will crucially hinge on the UK’s ability to build its own capacity in battery production for EVs, rather than relying on imports from Asia or the US. Here, the TCA may provide some opportunities in the sense that foreign car manufacturers may be incentivised to move their battery production from non-EU countries to the UK in order to continue benefiting from tariff-free exports to the EU market. The urgency to build battery manufacturing capacity is increased by the government’s announcement of a ban on internal combustion engine vehicles from 2030, which will likely lead to a rapid decline in traditional car manufacturing.