FrontierView’s expectations for a timely UK-EU zero-tariff Free Trade Agreement (FTA) deal were met, confirming our base-case assumption first published in our 2018 Brexit Scenarios. Businesses welcomed the landmark agreement with relief, lifting economic optimism. Despite the positive news, the FTA raises EU-UK trade barriers instead of liberalizing trade. Although the agreement allows close cooperation, it opens the door for further divergence and business disruption in the future. Firms should carefully evaluate their exposure to EU-UK trade outside the EU’s customs union, paying special attention to new customs processes and the “rules of origin” procedures for export-oriented products. In addition, firms should build internal systems to effectively detect and monitor future regulatory shifts, potentially impacting UK-EU trade and business operations in the medium-term.
Zero-tariff regime is celebrated, but non-tariff barriers will reduce EU-UK trade
Businesses welcome the Brexit deal, which averts a disruptive no-deal scenario. The UK-EU FTA introduces zero-tariff trade but raises non-tariff barriers to EU-UK trade via customs checks, rules of origin, paperwork and admin, and extra certifications and qualifications. As a result, Brexit will hurt EU-UK trade flows, undermining UK economic growth to a certain extent.
Trade in services is under-represented in the deal, creating risks
The deal extends the current status for certain services but removes mutual recognition of professional qualifications. The deal does not adequately cover trade in services; negotiations will continue and will greatly depend on the UK’s desire to diverge from regulation. The deal gives the freedom to the UK to diverge by paying the price of tariffs on goods and additional non-tariff barriers in the future.
Trade with third countries cannot substitute EU trade
The UK has accelerated the process of grandfathering trade agreements it held via its EU membership. Certain countries that do not hold a trade agreement with the UK will immediately face tariffs on specific goods in accordance with the government’s UK Global Tariff (UKGT) program, published in June 2020. The increase of trade links between the UK and third countries will fail to offset trade losses from reduced EU-UK trade.
Actions for business professionals operating in the UK
- Determine how to best adapt strategies across various functions of your company and take advantage of Brexit changes to create or enhance your competitive advantage and increase business agility against your competitors.
- Ensure that your local partners can support your strategy despite the challenging macroeconomic environment.
- Determine how to best adapt strategies across various functions of your company, focusing on sectors and customer segments that are positioned to record strong growth or be more resilient to the disruption.
For more insights on Brexit and the impact that the uncertainty and upheaval will have on multinationals and domestic firms, watch the recording of our latest webinar with The Wall Street Journal, WSJ frontier markets editor Dan Keeler, FrontierView’s global head of research, Martina Bozadzhieva, and director of Europe research, Mark McNamee. Click here to watch.
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