Possibly the Last GED-Blogpost about Brexit: Deal or No Deal, EU-UK Trade Will Suffer

Brexit has brought us much excitement since 2016. With a trade deal or without, the UK will lose the benefits of EU membership on December 31^st. This blogpost looks back on the Brexit process and forward on how EU-UK relations might evolve from here and why it still makes sense for both to collaborate, especially on trade issues. 

Deal or No Deal Cliffhanger: What it means for EU-UK Trade

At the time of writing (December 18), it is still not clear whether there will be a trade deal between the UK and the EU before the end of the year. At that time the transition period in which the UK continues to enjoy trade with the EU on beneficial terms despite its membership having ended with the end of 2019 comes to an end. A trade agreement can still happen, but it is by no means guaranteed. There are two ways in which this can go:

• There will be a trade agreement, but it will be a relatively shallow one, mostly consisting in not establishing tariffs and quotas and some regulatory cooperation. This is the best realistic outcome but certainly not the best possible outcome. Such a trade agreement will have severe disruptions for UK-EU trade, in particular in the long run when the regulations begin to diverge. The pain will be felt over time, not immediately. Our forecasts expect the long-run loss in real income for this scenario to range between 1.53-2.79 percent for the UK and 0.23-0.36 for the EU.
• There will not be a trade agreement. Then the two partners trade on WTO terms. This means the introduction of tariffs, some quotas and hardly any regulatory cooperation. This will hit certain sectors in which tariffs are high – such as agriculture, machinery, chemicals – particularly badly. Expect long term welfare losses between 1.62-2.98 percent for the UK and 0.23-0.36 for the EU.

Note that the difference between the two scenarios is quite small – but that is in the long run. In the short run, the disruption is far larger under the WTO scenario. A deep trade agreement or a continued membership of the UK in the EU’s single market would have been much better at minimizing the losses of both sides. These options were taken off the table from successive UK governments and hence

The Sad Process of Taking the Eggs out of the Omelet

Pascal Lamy once likened Brexit to the process of taking the eggs out of the omelet – underlining the legal and economic difficulties to disentangle the integration that resulted from 40 years of British EU membership. It was not only a very complicated process; it was also one that seemed to be taking a turn for the worse at every possible turn. Brexit would have enough drama for several seasons of a Netflix series, so I’ll focus on the main turning points.

Since the result of the referendum was relatively narrow, with 52 percent for “leave” and 48 percent of “remain”, my expectation was that some kind of solution would be found that honours the result of the referendum but also reflect the fact that nearly half of the population wishes to remain in close contact with the EU. Alas, that is not what happened.

Possibly the most decisive moment in the negotiations was when Theresa May lost her majority in the 2017 parliamentary elections and subsequently led a minority government. After that, she was at the mercy of the hardline Brexiteers in her own party and DUP, the small Irish unionist party tolerating per government. Her government never recovered from the result of the 2017 elections – after that the negotiations were doomed as there was no way to reign in the ultra-Brexiteers and their extreme demands.

May’s successor, Boris Johnson, managed to get the Withdrawal Agreement across the line – and to win a large parliamentary majority in the 2019 elections. That should have given him more political room for manoeuvre than May ever had. But he did not use it. The second most decisive moment passed mostly unnoticed in 2020. Until the end of June, there would have been the possibility to extend the transition period to have more time to negotiate a trade deal.

It would have been sensible to do so, especially given the impact of the Covid-Pandemic on the economy and on the dynamics of the negotiations. But Johnson decided against it, making the end of 2020 the hard deadline that it is. Negotiating a trade deal is a complicated businesses, no major trade deal has been accomplished within a single year. It would have been wise to give the process more time – and given Covid, it doesn’t seem unrealistic that most people would have understood the delay.

The UK and the EU in a Frosty Trade Environment

Still, we are in the Brexit process where we are. It will be over at the beginning of 2021. But 2021 and the years to come are not going to be easy years, neither for the UK nor the EU. Currently, much of the economic fallout of the pandemic is still dampened by support measures, furlough schemes, etc.

These will be gradually retracted in 2021, possibly leading to increased bankruptcies, rising unemployment and a deteriorated state of public finances. At the same time, geoeconomic tension between China and the US will likely increase, with possibly adverse effects on the UK and the EU. The centre of gravity of the global economy will gradually continue to move to Asia.

The best response to all these challenges would be increased collaboration between the UK and the EU which have converging interests in many of these areas. As an optimist I hope that sense and pragmatism will prevail, and we will indeed see closer cooperation between the trading partners. But whether this will actually materialise, remains questionable, given the continued dominance of arch-Brexiteers in British politics.