LONDON (PA) – The latest trade deal between the UK and the European Union means businesses will be exempt from new tariffs and border disruptions at the start of the new year – an economic shock that would have exacerbated employment and financial problems caused by the pandemic.
News of the agreement on Thursday brought sighs of relief from the offices of bosses and corporate politicians, as well as from consumers who anticipate a lack of production and who transport workers facing the potential for long backups at border crossings.
Bank of England Governor Andrew Bailey recently warned that the failure to secure a UK-EU trade deal would have a greater long-term impact on the UK economy than the long-term impact of the coronavirus pandemic, which has led to the deepest recession of the country. in more than three centuries.
The agreement must continue to gain the approval of the British and European parliaments. Here’s a look at future changes and their likely implications.
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WHAT DOES BRITAIN LEAVE ON JANUARY? 1?
Although the UK left the EU on 31 January, it is following the bloc’s rules until the end of this year, as part of a transition to the new economic relationship. The problem was, what comes next?
The United Kingdom is leaving the European single market, which will leave about 450 million people after its departure. At its heart, the single market aims to make trade as simple as possible, regardless of where a business is located in the European Economic Area, which in addition to the 27 EU Member States includes non-EU nations, including Iceland and Norway. . The rules governing trade are the same in the single market and are based on the free movement of goods, services, capital and people.
The UK is also leaving the customs union, which has eliminated tariffs between members and created a common external tariff for non-members. Within the customs union, the EU negotiates international trade agreements on behalf of its members – giving it a share in the global economy that no member would have.
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What is the new relationship?
Under the terms of the new agreement, there will be no tariffs for goods traded between the UK and the EU. For car manufacturers, for example, it is a relief, because without a transaction a 10% tax would have been applied from 1 January. There will also be no quotas, which means that exporters can still transport as many vehicles as they want.
However, trade will not be as uniform as until the United Kingdom leaves the single market and the customs union. Companies will have to submit customs forms and declarations for the first time in years. There will also be different rules on product labeling, as well as health checks on agricultural products, for example.
The government has estimated that the new bureaucracy will lead to an additional 215 million customs declarations at an annual cost of about £ 7 billion.
But a deal predicts what could have been considerable chaos and a deeper blow to trade, as the new tariffs would have added to the cost of doing business between the UK and the EU for many different categories of goods. Many of them consider Thursday’s agreement to be the best of a bad business situation.
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WHAT WILL BE THE IMMEDIATE IMPACT?
It may take time to adjust, which will likely lead to additional blockages on both sides of the English Channel, as well as delays in ports in the days and weeks after January 1st. Early expectations are that some food prices, especially imported meat and dairy products, will rise in the coming weeks.
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HOW WILL THE NEW BUSINESS RELATIONSHIP AFFECT ECONOMIC GROWTH?
Economists agree that the deal is better for the UK economy than an outcome without a deal and will help it recover from the coronavirus recession, which is expected to have a reduced economic output of around 12% by 2020. The impact is much smaller. for the EU and other countries around the world, which would have faced some financial market volatility if there had been no agreement.
The EU accounts for about half of UK exports, so avoiding tariffs will help many companies. Managers can begin to implement investment decisions they have made in the last years of Brexit uncertainty. However, the agreement with the EU does not cover the entire field of activity of the services sector. As they make up about 80% of the UK economy, those businesses that rely heavily on business with the EU, such as banking and finance, face a more bleak future. This is particularly bad for the huge banking sector in the UK.
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WHAT ABOUT THE LONGER TERM?
In the longer term, most forecasters believe that the British economy will become a few percentage points lower in the next few years than it would have been if it had remained in the EU. This may not sound like much in the context of this year’s recession, but it does mean that living standards would have been lower than they should have been.
Economists at Berenberg Bank have written that “leaving the EU and the customs union’s single market will reduce Britain’s growth potential, affecting its export prospects and reducing the flow of foreign direct investment and skilled labor from the EU.” They estimated a maximum growth potential of 2.0% per year as an EU member, compared to 1.7% with the agreement on Thursday and 1.5% without the agreement.
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WHAT WILL BRITAIN DO DIFFERENTLY?
The whole point of Brexit was to allow the United Kingdom to set its own rules and do things its way. Therefore, the turning point in the months of tense trade negotiations was to determine what to do when and if the UK deviated from EU rules.
The EU has long feared that Britain will undermine the social, environmental and aid rules of the bloc state in order to gain an unfair advantage with its exports to the EU. Britain said compliance with EU rules would undermine its sovereignty. The agreement reached a compromise by accepting a key request from the United Kingdom that the European Court of Justice not be involved in resolving disputes. Instead, it allows for the possibility of trade arbitration or countermeasures if both parties feel that they are affected by labor measures, policies or employment. If these measures are overused, either party can trigger the reopening of trade aspects of the treaty.
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WHAT ABOUT TRADE OUTSIDE THE EU?
Until 31 December, the United Kingdom remains bound by the approximately 40 international trade agreements that the EU has negotiated in recent years. In the run-up to the end of the year, the UK has tried to extend those transactions, such as with Japan and Mexico, but some have yet to be concluded. At the beginning of 2021, the UK will be able to conclude its own commercial transactions with anyone it wants. Negotiations with the United States have already begun, although President-elect Joe Biden has indicated that trade transactions are not the most important when he takes office later in January.
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Associated Press writer David McHugh contributed from Frankfurt, Germany.
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