UK clinches historic post-Brexit trade agreement with European Union

Negotiators finalized the accord, which will complete Britain’s separation from the bloc, on Christmas Eve, days before the country is due to leave the bloc’s single market and customs union.

The agreement will allow for tariff and quota-free trade in goods after Dec. 31, but that won’t apply to the services industry — about 80% of the U.K. economy — or the financial services sector.

Firms exporting goods will also face a race to prepare for the return of customs and border checks at the year-end amid warnings of disruption at Britain’s ports. The deal comes after three days of chaos at the main crossing between Britain and France offered a reminder of how quickly blockages at the border can choke international trade.

More than five turbulent years after a general election set off a chain reaction that would transform British politics and the country’s connections to the rest of Europe, the deal establishes a new framework for businesses on both sides of the Channel and frees the British Parliament from many of the constraints imposed by EU membership.

For Boris Johnson, the architect of Brexit and the third prime minister since the 2016 vote to leave the EU, it marks another landmark just over 12 months after he claimed a decisive mandate from voters with the promise to “get Brexit done.”

With the electorate divided, public finances battered by the Covid-19 pandemic, and Scots pushing for a split from the rest of the U.K., the prime minister’s next challenge is to prove that the U.K. can flourish outside the EU’s single market and customs union, a status that puts it behind other non-members such as Norway and Switzerland when it comes to EU access.

Businesses will still face border checks for which surveys have shown that they are unprepared, and consumers in Northern Ireland face the prospect of shortages of some goods as firms adjust to the new paperwork.

In a worst-case scenario, Johnson’s government itself has warned of a 7,000-long line of trucks, enough to stretch from the Port of Dover to the Palace of Westminster.

The U.K. got a taste of the potential chaos this week after France closed its border in response to an outbreak of a new strain of the coronavirus in Britain, leaving hundreds of lorries bound for the port of Dover backed up on local roads. To mitigate the risk, the government has built lorry parks and drivers entering Kent will require a permit or risk a fine.

Read More: Isolated U.K. Seeks to Reopen Trade Route After Days of Chaos

Outside the EU’s single market, U.K. financial services firms will be deprived of the passport that allows them to offer their services across the bloc and face a wait to see if the EU will grant them access — something that is still far from certain and, even if granted, could be withdrawn at any time.

That has allowed Dublin, Frankfurt, Amsterdam and Paris to start chipping away at London’s dominance as Europe’s financial center. Firms from JPMorgan Chase & Co. to Goldman Sachs Group Inc. are among the companies that have already shifted about 7,500 employees and $1.6 trillion of assets out of the U.K. because of Brexit.

The deal mitigates some of the immediate economic costs of leaving the EU, even if Britain’s long-term growth is set to be stunted. A no-deal Brexit would have cut 1.5% off U.K. gross domestic product in 2021, according to Bloomberg Economics. But growth is still forecast to be 0.5 percentage points lower every year for the next decade than what it would have been had Britain stayed in the bloc.

Against the dollar, the pound is still trading below its level before the Brexit vote. The U.K.’s benchmark FTSE 100 index is one of the worst-performing Western European benchmarks this year.

For the EU, reaching a deal avoids poisoning relations with a key diplomatic and commercial neighbor for years, and provides a basis for further cooperation in future.

Unlike other similar trade deals, the agreement will establish frameworks for common standards in aviation, business subsidies, labor rights and the environment, as well as law enforcement.

The agreement’s wide scope made negotiating it all the more complicated: Britain resisted EU calls to align its rules on business subsidies with those of the bloc, while France pushed for continued access to British fishing waters.

With the two sides at loggerheads on those two issues — and any wider agreement impossible until they were resolved — the negotiations quickly became bogged down.

After the coronavirus stopped the negotiators from meeting in person, Johnson refused to extend the post-Brexit transition period beyond the year-end. That put the squeeze on the teams, with officials working around the clock as multiple deadlines were missed. At one stage in October, the prime minister threatened to walk out without a deal.

Now that he has one, Johnson faces the challenge of governing without the Brussels bogeyman to blame for setbacks, knowing that he and his Conservative party will be judged on how the country fares as an independent nation.

(Adds context in second paragraph.)

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©2020 Bloomberg L.P.

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