Week six after Brexit continues to be dominated by discussions about the implementation of the Northern Ireland Protocol (NIP), stories about disruptions to exports, and changes in patterns of trading in financial products; but also the emergence of stories about companies benefiting from the UK’s exit of the single market.

The Northern Ireland Protocol

Discussions between the British Government and the EU Commission continued about the implementation of the NIP. The tone continues to be ‘robust’ on both sides with the FT citing one EU diplomat’s rather undiplomatic statement that ‘[i]t would already be a step forward if Britain put as much energy into the implementation of the NI protocol as it puts into complaining about it,’ while Michael Gove blamed the EU to follow an ‘integrationist theology.’ A joint statement following a meeting on Thursday 12th of February, between Gove and the Commission’s vice president Maroš Šefčovič, unsurprisingly did not hint at much progress in the talks, with the EU insisting on a full implementation of the protocol and the UK appealing to ‘pragmatism.’

The substantial issues seem to remain unsolvable. The best the UK side currently seems to be hoping for is an extension to the various ‘grace periods’ accorded to certain products before full custom checks are introduced. The EU side makes such extensions dependent on the UK first fully implementing the existing rules. Meanwhile, unionists in Northern Ireland remain hostile to the NIP and the post-Brexit trade agreement in general. DUP leader and First Minister Arlene Foster stated that a ‘more rigorous implementation of the Northern Ireland Protocol is “not going to work”.’ It is currently difficult to see how the UK government can successfully navigate between the imperative of not jeopardising the Good Friday Agreement, reducing disruption to trade between the UK and Northern Ireland, while delivering on the promise of the UK exiting the single market without overstepping Brussel’s read lines.

Non-tariff trade barriers: Rotting fish and meat

Stories about the impact of the new non-tariff barriers to trade also continue to emerge, from tons of rotting UK meat at the EU boarders, to continuing problems with seafood and fish exports, notably due to insufficient water quality in parts of the UK.

Simultaneously, several industry bodies have started producing member surveys that give a sense of the impact of Brexit on trade during the first month after the end of the transition period. The Road Haulage Association (RHA) reports a drop of 68% of volume of trade compared to January 2020. Similarly, the British Chambers of Commerce’s (BCC) member survey found that 49% of UK exporters surveyed face problems with the new rules.  

The Government contests some of these figures and speaks of teething problems, while suggesting export levels were nearly back to normal by February. At the same time, the lorry queues many feared would form in Kent following Brexit did not materialise, although this may precisely be due to the decreased economic activity due to Covid19 and the anticipation of disruptions.

One interesting figure that has been widely reported, is that 50 to 60 per cent of lorries returning to the EU from the UK are empty. This hints at a certain imbalance in the impact of Brexit on the two parties, with EU firms exporting more goods to the UK than UK exporters sending back to the EU. This of course may be due that the UK has adopted a gradual approach to introducing boarder checks with full checks only to be in place by July 1st, 2021.

Equity trading and finance

Another story that hit the news was the shift in trading of European shares and derivatives from London to Amsterdam and other stock exchanges inside the EU. For the first time, the value of stocks traded on Euronext Amsterdam surpassed the volume traded on the London Stock Exchange. This is a highly symbolic moment that observers and some industry insiders see as the beginning of London losing its status as undisputed financial centre in Europe. Others, however, do not see this shift as much more than symbolic and do not consider it having a major impact on jobs in the City of London.

The change in trading patterns of financial products does indicate though that the UK is now facing a crossroads and has to decided whether it will seek to negotiate a formal agreement with the EU that would re-establish and enshrine the recognition of regulatory equivalence of its financial sector in a formal agreement, or whether to go its own way by deviating from EU financial regulations to attract business that cannot take place inside the EU. One example of the latter has been provided by the UK allowing trading in Swiss stocks currently banned from EU exchanges.

The Winners

Finally, while the media are dominated by negative news about the impact of Brexit, we should not forget that not all sectors are negatively impacted and that there will necessarily be winners as well as losers. The FT reported an interesting geographical effect of Brexit, whereby ports in the North of the country benefit from changing shipping routes following Brexit, as exporters from the EU are seeking to avoid congested ports in the South.

Another element potentially leading to a positive effect of Brexit on certain sectors and locations, relates to the fact that wherever trade barriers are erected, incentives to establish operations ‘behind’ the barriers are increased. In other words, the new trade barriers may create incentives for Foreign Direct Investment (FDI) in the UK. Indeed, all the negative headlines about disruption to exports and trade may presage that companies will look into restructuring their supply chains to avoid such disruptions. There have already been reports of UK companies setting up shop inside the EU and thus reducing their operations in the UK accordingly. However, EU companies will of course consider doing the same thing in the opposite direction. With a population of nearly 67m people, the UK remains an attractive market for many consumer and manufacturing goods destined for the UK market, which may encourage EU companies from certain sectors to set up operations in the UK to avoid the trade barriers.

It is unlikely that this effect will completely off set the expected decline in FDI, which is mainly driven by the loss of attractiveness of the UK for companies from outside the EU who establish operations in the UK to export to the EU single market. Nevertheless, for certain sectors and regions, the increased trade barriers may mean an increase in FDI. The precise pattern of these changes in motives for FDI and its differential impact on different sectors and regions will depend on the evolution of the trade arrangements and will take time to materialise.