‘Twas the night before Christmas, when the UK and European Union agreed a Free Trade Agreement covering goods [1]. And while that may not be the Christmas story you expected, the markets have largely taken this news positively. However, there are still several points of uncertainty, not least the lack of provision for UK service sector access, especially important for professional and financial services [2]. Although this will be resolved in 2021, as the UK has a trade surplus in services the EU will feel less urgency to reach an agreement than with goods, where the EU is the net exporter.
While the agreement came into force on 31st December 2020, and was passed by the House of Commons and House of Lords [3], the European Parliament is not likely to formally approve it until January or February. However, the short notice provided for businesses to act, especially during the festive holiday period, means that the structural transition is unlikely to be seamless.
Goods and travel
The Free Trade Agreement that has been reached means there will be no additional charges (tariffs) or restrictions on the amounts of goods that can be traded (quotas). However, there will be additional paperwork such as customs declarations and inspections. The EU has stated that it will introduce full border controls from the 1st January 2021, although the UK has stated it will have a six-month delay on controls for goods coming from the EU.
While the most visible sign of a border has been the French government’s requirement that truck drivers have a negative Covid-19 test before entering France [4], although restrictions were already in place before the UK had finished its transition period due to the recent spike in the more aggressive Covid-19 strain [5]. Similarly, the loss of the freedom of movement means that UK citizens will face the same restrictions as much of the rest of the world to enter the EU [6]. In line with countries such as the USA or Japan [7], UK travellers will need a visa in order to stay in the EU for longer than 90 days in any 180 day period, and won’t be able to use the EU passport line at the airport.
Fishing
Fishing has been a politically important area, albeit economically small, which was a persistent obstacle to finding agreement between the two sides. While the UK will be able to decide on access to its waters and fishing grounds, there will be a transition period over the next five and a half years where 25% of EU boats’ current fishing rights in UK waters will be transferred back to the UK. This is below the 80% which was originally proposed by the UK, although the change will occur much sooner.
Services
Crucially for the UK, financial services firms will not be able to simply take a blanket approach to their authorisations in all EU countries. Going forward, permissions will be required on a country-by-country basis, dramatically increasing the administrative burden. However, this will come as no surprise to firms operating in the region, as they’ve had several years to plan for an outcome such as this.
Key points:
- It is worth noting that the UK ran a services surplus of £18bn with the European Union.
- The EU is unlikely to unconditionally grant access to its single market to a third country, although the UK initially will have less access than the USA or Japan do at present.
- Many professional qualifications will no longer be automatically treated as equivalent [8].
- Since financial services are outside of the agreement, any firms without an EU branch will requiring one to maintain access.
- Another point of contention was the implication of a “level playing field”, which would require the UK not to diverge significantly from the EU on regulatory matters and vice versa.
- There’s a six-month grace period allowed for private data flows between UK and EU companies.
- The UK is likely to adopt a British data protection standard that will satisfy the EU that the protections afforded are equivalent or stronger.
How does this impact my Plan?
This deal is largely in line with our, and much of the markets’, expectations. Put bluntly, this is quite possibly as hard a Brexit that could have occurred within the scope of a deal. Importantly for your investments, the UK stock market, outside of the financial services sector, has reacted positively to the removal of uncertainty and the impact of any potential “Brexit” cliff. What is far more important for your plans is global economic health which will be driven by progress and subsequent resilience against Covid-19, most importantly the successful vaccine roll-out, which will allow economies to reopen. An environment where government mandated lockdowns can be definitively ended will provide a much larger boost to sentiment and greater certainty to the economic outlook across the globe than the end of this chapter in the Brexit saga.
References:
1: https://www.carols.org.uk/twas_the_night_before_christmas.htm
2: https://www.politico.eu/article/10-key-details-uk-eu-brexit-trade-deal/
3: https://www.bbc.co.uk/news/uk-politics-55478513
6: https://www.etiasvisa.com/etias-requirements
7: https://www.gov.uk/government/groups/uk-point-of-single-contact
8: https://ec.europa.eu/growth/tools-databases/regprof/index.cfm
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
