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Many UK companies fear the impact of any post Brexit trade deal
on their supply chains, the increased red tape, and their sales to
the EU.
UK services could be worst hit sector when the UK leaves the EU
Single Market, implying deep economic costs.
Failed EU-UK trade talks will spark a new UK recession during
2021.
We advocate a cautious assessment for prospects for UK growth in
2021-22. The UK faces a new spike in COVID-19 infections; the
return of tough containment measures, alongside incurring
inevitable economic costs from when it leaves the EU Customs Union
and Single Market on 31 December 2020.
A free trade agreement (FTA) for goods between the European
Union (EU) and UK should be concluded by end-2020 despite talks
floundering on the issue of regulatory alignment and how to achieve
it. EU insists that it will only allow the UK
"zero tariff, zero quota" access to the EU Single
Market if the UK commits legally to a set of "level playing field"
principles that minimize the risk that it will undercut the EU on
environmental regulation, workers' rights and state aid to
business.
A slimmed down Brexit trade deal is a likely outcome, which
broadly excludes most services. However, there could be some access
to the Single Market for some UK services based on equivalence.
This is not a stable outcome, with equivalence at risk of being
withdrawn at short notice as a result of regulatory divergence.
Many UK firms not ready for the new EU trading
relationship
UK exporters will face additional checks for safety and security
documentation, customs papers and, in some cases, regulatory
compliance from the start of 2021. This is likely to apply whether
there is a trade deal or not.
Business surveys suggest that many UK firms are not fully ready.
The Institute of Directors' survey conducted last September reveals
that only 60% of business that expected to be affected by the end
of the transition period thought they would be fully prepared by
end-2020. Many UK firms admit COVID-19 has halted preparations.
The Confederation of British Industry warns that many UK
companies have "already had their resilience stripped away" by
COVID-19, and are concerned about "their supply chain, the
bureaucracy, the red tape they're going to have to deal with, the
markets they lose".
UK manufacturers could encounter new non-tariff barriers in the
face of any regulatory divergence between the UK and the EU,
implying new checks and delays to verify compliance with EU
rules.
The Bank of England's Decision Maker Panel confirms that many UK
businesses remain uncertain about the EU-UK future trading
relationship.
Fears of UK port disruptions
A new system called the Customs Declaration Service (CDS) is to
be introduced but the UK Association for International Trade warns
that the new 'untested, incomplete' IT system is likely to cause
widespread chaos at UK ports. The new system has been designed to
handle the transit of more than 17,000 goods every day but the new
network is said to take 45 minutes longer than currently for a
single customs declaration.
Th National Audit Office said that although the government had
made progress updating customs systems and other infrastructure it
still expected 'widespread disruption' after the transition period
ends.
The lack of focus on UK services in trade
talks
The EU-UK trade talks deal has focused on UK manufacturing,
given its large export base, while the services sector has received
less attention. Indeed, Catherine McGuinness, head of the City of
London Corporation's policy and resources committee warns that UK's
services industry is emerging as the "neglected child" of the EU-UK
talks on a future relationship and could be worst hit sector.
UK services are vital to its economy, accounting for 46% of its
total exports, with the EU by far being its largest market,
particularly for its financial services.
The EU is removing the regulatory barriers to trade in services
by mutual recognition of member states' rules alongside setting
supranational rules to regulate some sectors. The European Court of
Justice (ECJ) settles any dispute between cross-border service
providers and public policy requirements of a member state.
A comprehensive trade deal including services will be difficult
to achieve if the UK insists on full sovereignty of its parliament
and precedence over the sovereignty of all other parliaments and no
jurisdiction of the ECJ in English law. This suggest any EU-UK
trade deal will struggle to address regulatory compliance and
non-tariff barriers to the trade in services, implying UK services
providers will face obstacles when trading with the EU member
states.
Failed EU-UK trade talks will extend UK economic
pain
The failure of the UK to reach a trade agreement with EU will
damage the UK economy. The Bank of England warns that that the
long-term effects "would be larger than the long-term effects of
COVID." Meanwhile, our no-trade deal assessment is similarly
gloomy, with the UK likely to face a new recession during 2021
after tougher COVID-19 containment measures set to spark new GDP
losses in the final quarter of 2020. Our no-trade scenario assumes
that UK GDP would contract both in 2021 and 2022 before growth
returns in 2023.
Posted 02 December 2020 by Raj Badiani, Economics Director, Europe, IHS Markit