Brexit is done but now, the stiffest 
of challenges await Britain, says A L I Chougule

After months of torturous talks and last minute deadline extensions to negotiate the nature of their post-Brexit economic relationship, the European Union and the United Kingdom clinched a broad free-trade deal on the Christmas Eve, thus narrowly averting the hardest of all potential Brexit options. With that, the 11-month transition period of Brexit came to an end on December 31 and the new post-Brexit agreement, which was unanimously approved by the European Union (EU) nations and passed by Britain’s parliament in an emergency one-day session on December 30, became a law from January 1. However, the trade deal will be applicable on a provisional basis till it is ratified by the EU parliament, a process which will take several weeks.

The UK-EU Trade Cooperation Agreement was negotiated in nine months and respects the major red lines of both parties. Britain hailed the agreement as a ‘clean break’ with the EU, which will allow UK to set its own agenda, while the EU bloc also welcomed a ‘good deal’ that will let the 27 member-nations to move on, after nearly four-and-a-half years of uncertainty.

Though there are still unfinished parts that will require more negotiations, Britain is now out of the EU, its single market and customs union. The question is: what’s in the trade deal between EU and UK that has ‘pleased’ both sides? The EU has avoided a hard border on the island of Ireland and preserved the ‘four freedoms’ of its single market: free movement of goods, services, capital and people. The UK has achieved ‘zero tariff, zero quota’ goods trade and avoided the role of the European Court of Justice in settling trade disputes.

'Managed divergence'

On fisheries, a major sticking point, the EU agreed to give 25 per cent of its existing quotas in UK waters over a transition period of five-and-a-half years, after which there will be annual renegotiations. The question of how to ensure a level playing field in future trade relations, the main sticking point, was resolved by the principle of ‘managed divergence’. This means both sides reserve the right to retaliate, after a judicial review process, if one side believes that the other has gained an unfair competitive advantage. But freedom comes at a price and the problems with implementing what is both a rushed and a complicated set of arrangements are bound to arise, which will have to be addressed within the new structures the agreement has created. Even in terms of relationship with the EU, there are many issues unsettled – like the EU’s ‘equivalence’ decision for financial services and an ‘adequacy’ decision for free flow of data.

Since the UK has formally left the EU’s single market and customs union, trade in goods and services will become burdensome. While there will not be any tariffs and restrictive quotas on goods, there will be many new customs and regulatory checks. Notably, there is also the likely negative effect on trade in services, where the UK has a comparative advantage – services make up 80 per cent of the UK’s economy.

Chancellor Rishi Sunak has acknowledged and reassured that dialogues were continuing with the EU over equivalence decisions, which will determine how easily financial services firms could trade with the EU. But the more Britain emphasises its desire for divergence from EU rules, particularly for financial services, the less likely EU authorities are to grant the equivalence it seeks. Therefore, the trade-offs between autonomy and market access inherent in Brexit have not gone away.

High price

Though there will be an end to the freedom of movement of people from EU to the UK and reintroduction of temporary visas for EU citizens for work-related purposes, the price the UK will pay for leaving EU, its single market and customs union is estimated to be quite high: 6.4 per cent of the UK GDP per person over the next 10 years. Thus despite a trade deal, Brexit is far from over; the two sides have agreed to review the entire trade deal every five years. As the UK moves from prophecy to reality, the material impact of Brexit, which was not visible earlier, will be difficult to hide, for a long time.

In the immediate future, the Brexit effect will be masked by disruption caused by the coronavirus pandemic; in the long run, according experts, Brexit will sap UK’s economy and its effects will become clearer when the pandemic recedes into the past. Since the trade agreement provides only limited benefits for the UK, friction with the EU is likely to remain and the post-Brexit relationship with the EU may not be much more stable than what preceded it.

The European Union is essentially an economic union and a political project in the making. Brexit was never an economic project but an emotionally charged political proposition about ‘taking back control’ and sovereignty. It was about a lot of lies about the ‘advantages’ of leaving the EU, over the manufactured disadvantages of being a member of the world’s largest market of nearly 450 million people, the economic backbone of the world’s largest trading bloc, which Britain has lost in its desire for freedom from EU rules and justice system. It is a self-inflicted injury that is a threat to the political union of United Kingdom; the Scottish government has attacked the deal, arguing that it strengthens the case for Scotland’s independence.

Never an easy fit

The European Economic Community (EEC) was formed in 1957, against the backdrop of the second World War, from the fractious states of Europe, to promote trade, defend human rights, protect the environment and repel threats. The UK waited 16 years to join the EEC, but it was never an easy fit for Britain’s citizens and the Conservative Party. Prime Minister John Major’s government almost fell after he signed the Maastricht Treaty, which deepened economic and political cooperation and created the European Union in 1993. Euro-skepticism prevented Britain from joining the single currency when Euro was launched in 1999. The EU added eight eastern European countries – the poorer former communist states – in 2004, which triggered a wave of migration to richer EU countries.

In the years before the Brexit vote, Britain’s economic growth was twice the pace of the Euro-zone. Since the free movement of citizens is one of the basic tenets of EU law, the share of foreign-born residents in England and Wales had reached 13.4 per cent in 2011, roughly twice the level in 1991. The only way to stem the flow of people leaving the EU, for the UK, was the only way for Britain. The referendum was held in June 2016; the result shocked the world: 52 per cent of voters chose to leave the EU. It took four-and-a-half years to complete the process, cost two prime ministers their jobs and caused several delays to the deadline to come up with a deal. Now, with a formal end to the transition period, the stiffest Brexit challenges await Britain.

The author is an independent senior journalist

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