Brexit trade deal sets up EU, U.K. to avoid chaotic rupture

The U.K. clinched a historic trade deal with the European Union, avoiding a bitter breakup and preparing the ground for a new relationship with its biggest commercial partner.

Negotiators finalized the accord to complete Britain’s separation from the bloc on Christmas Eve, just a week before the country leaves the EU’s single market and customs union.

It brings an end to more than four years of tortured divorce proceedings, triggered by a referendum that transformed British politics and the country’s connections to the rest of Europe. But there are still risks for U.K. businesses as the new rules come into effect in the days ahead, and the government faces a long-term battle to prove the painful separation was worth it.

Securing a deal has “resolved a question that has bedeviled our politics for decades,” Prime Minister Boris Johnson told a press conference on Thursday. “We were told we couldn’t have our cake and eat it,” the premier said when asked about the compromises that had to be made. “I’m not going to claim that this is a ‘cakeist’ treaty, but it is I believe what the country needs at this time.”

“It was a long and winding road—but we have got a deal to show for it,” European Commission President Ursula von der Leyen said. “It is fair, it is a balanced deal and it is the right and responsible thing to do for both sides.”

The agreement, which runs more than 400 pages with an additional 800 pages of annexes, will be put to a vote in the U.K. parliament on Dec. 30, and with the opposition Labour Party promising to back it, Johnson’s accord is virtually certain to become law. EU government envoys in Brussels on Friday unanimously endorsed a statement notifying the European Parliament that the trade deal with the U.K. will go into effect on a provisional basis on Jan. 1, a spokesman for the German presidency of the bloc said in a tweet.

Formal ratification will take another four months, and is subject to approval by the EU Parliament. The backing of government representatives at the Christmas Day meeting confirms that no EU member state objects to the deal, thus eliminating the risk of a chaotic separation at the end of this month.

“This Agreement establishes the basis for a broad relationship between the parties, within an area of prosperity and good neighbourliness characterised by close and peaceful relations based on cooperation, respectful of the Parties’ autonomy and sovereignty,” according to a draft seen by Bloomberg.

The deal radically overhauls the framework for businesses on both sides of the Channel and frees the British Parliament from many of the constraints imposed by EU membership. It 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.

Finally Done

For Johnson, the architect of Brexit and the third prime minister since the 2016 vote to leave the EU, it marks another landmark a year after he won a decisive election victory 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 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.

Banking Doubts

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 softens the immediate economic blow of leaving the EU, even if Britain’s long-term growth is set to be hit. 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 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.

What Bloomberg Economics Say…

“The key question for the near-term outlook is how well companies adapt to the change in trading arrangements on Jan. 1. A lack of preparedness has the potential to cause a material, but short-lived hit to the economy in the first quarter of 2021, exacerbating the damage from the spread of Covid-19.”

—Dan Hanson, economist. Click here for full INSIGHT.

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.

Fish

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 halted talks and told the country to get ready for life 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.