Wealth Management: Strategy blog – The last minute deal

Strategy team: Kevin Gardiner

After changing the "last minute" several times, the UK and its EU partners signed a lengthy Trade and Co-operation Agreement on December 24th, averting a no-deal or "WTO rules" Brexit.

The TCA represents what is effectively a Free Trade Agreement for trade in goods, a speedy outturn given that EU FTAs are usually several years in the making.

"Free trade" means zero tariffs and zero quotas. It differs from a Customs Union in that it requires careful "Rules of Origin" checks to ensure that the goods are mostly produced in the UK and not just forwarded from elsewhere (e.g from countries with whom the EU has tougher restrictions in place).

The extra bureaucracy will add friction to business, but is unlikely to be a game changer. The outcome overall is a much better result than the feared "no-deal" or "WTO rules" outcome that could have added more checks, and (in some sectors) significant tariffs.

One aspect of the deal that has perhaps been less widely reported than it might have been is that the agreement is to be policed by international law, not EU or UK law: specifically, there is no role for the European Court of Justice. In this respect at least the UK Government can claim a "win" in its Quixotic campaign to reclaim lost sovereignty.

To put our cards on the table (again), we did not see an economic rationale for leaving the EU, but thought that the costs would be manageable (indeed, after a while, they might even cease to be noticed). We think the economy will likely remain one of the most dynamic (least sclerotic?) in Europe.

To say in a few years' time that the UK would be even more prosperous had we stayed in will, if we're not careful, sound like sour grapes. The trauma associated with suppressing COVID-19 also places Brexit in a less dramatic perspective.

This is not the definitive end of the Brexit debate (alas). The TCA has many loose ends, not least the fact that the details of trade in services have yet to be decided. There is much talk in the TCA of continuing access for the UK and EU to each other's markets, but no detail of the terms on which such access will proceed.

Financial services are thought to be particularly at risk, as "passporting" ends and the UK's regulatory "equivalence" as a "third country" to the EU is largely unclarified (though the UK government has offered more guidance on areas in which EU financial service firms are likely to enjoy equivalence – and, hence, ease of access closer to what it was).

However, the omission of services is not quite the harbinger of doom that many suggest. Yes, services account for roughly four-fifths of the UK economy (they comprise the bulk of most big economies). But most services are traded locally – the clue is in the name – and they account for less than half of our current business with the EU. It would certainly be more reassuring if the agreement covered services, but it was never likely to at this stage and the absence of an agreement does not mean the end of existing cross-border business – or of potential service-sector opportunities in future.

Another loose end that may be more likely to unravel perhaps is the continuation of the Northern Ireland protocol (the sticking point, remember, in the earlier transition negotiations). There is to be no reintroduction of border controls on the island of Ireland, making the entire island part of the EU custom union, necessitating an effective customs/regulatory border between Great Britain and Northern Ireland – that is, in the Irish Sea.

We also don't know yet just how painful will be the loss of freedom of movement – the reduced job opportunities, and the added frictions faced by tourists, ex-pats and second-home-owners. Within the UK, the "Shared Prosperity Fund" that will replace EU structural support faces some regional challenges. Farmers have to adjust to life without the subsidies and higher food prices of the Common Agricultural Policy.

And of course, obsessives on both sides will continue to hog the screens and op-ed pages. Political tin-ear awards over the holiday season went to an angry remainer pundit ("I was one of the millions who opposed Brexit: I've seen nothing here to change my mind") and to the "star chamber" of senior Tory Eurosceptics who took legal advice on the deal.

Nonetheless, the deal has likely done enough to put Brexit to bed for the time being. We can move on.


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