After spending the last four months covering a world-historic public health and economic crisis, writing a piece on Britain’s ongoing duel with the European Union feels like an indulgence.
But despite the inundation of worst-on-record economic indicators caused by COVID-19, Brexit remains a matter of enormous significance for businesses in the UK.
The future relationship between the UK and the EU will not only have a huge bearing on recovery efforts now underway, it will permanently alter the structure of the international system and Britain’s place within it.
The UK left the EU on January 31, 2019, and entered a 12-month transition period during which it was expected both sides would thrash out a free trade agreement that minimised the impact for businesses on both sides.
A global public health emergency and multi-trillion pound economic collapse later, Brexit talks have made little progress.
The latest round of official negotiations ended last Thursday (July 23), with the EU’s chief negotiator, Michel Barnier, and his opposite number, David Frost, both admitting that “considerable gaps” remained in the search for an agreement.
The main source of disagreement at the moment appears to be around what’s being called the ‘level playing field’.
This is a set of regulations and standards on goods and services that every country with tariff-free access to the European single market has to sign up to.
The EU wants to make sure that the UK signs up to the level playing field before granting it access to the common market, but Britain wants to be able to make its own rules on environmental regulations, workers’ rights and particularly state aid (subsidies provided to businesses by Government).
Solutions are in the offing that would reduce the role of the European Court of Justice (ECJ) as per the UK’s wishes and guarantee regulatory alignment on future policy as the per the EU’s, but so far, the level playing field is proving to be a major stumbling block.
Another point of contention is the economically minuscule but politically explosive issue of fishing rights.
The UK fishing industry feels it is at a disadvantage under current arrangements, which give each country national quotas to fish in each other’s waters.
The EU wants to continue with the status quo, whereas the UK wants significant changes on access to British waters.
Although fishing accounts for only 0.1 per cent of UK GDP and less than 1 per cent of EU output, the issue is tied up with the desire to regain national sovereignty – a key driver of Brexit in the first place.
With little progress made in the latest round of negotiations, a no-deal exit, which really means a reversion to World Trade Organisation (WTO) rules on tariffs and quotas, is a real possibility.
Trading with the EU on a WTO basis would have far-reaching implications for British industry. But some sectors would be hit harder than others.
The average WTO tariff for exporting non-agricultural products to the EU, for example, is about 2.8 per cent – an amount that would put pressure on profit margins but that could probably be absorbed.
Agricultural tariffs, however, are much higher, rising to more than 35 per cent for dairy products. This would essentially make it impossible for British farmers to export to the EU.
Of particular concern for the North East is the 10 per cent WTO tariff on car exports, which would make Nissan’s operation in Sunderland untenable. The region’s largest employer has said as much already.
Bearing this in mind, it looks like going from a zero tariff relationship with our biggest trading partner to a WTO regime is a high price to pay for ‘taking back control’. It also means the stakes could not be higher for reaching an agreement in the next six months.
Sarah Glendinning, regional director at the CBI, said: “At a time when every job and every pound of investment is precious, an ambitious deal with the EU is an essential pillar of recovery across the continent.
“With compromise and common sense from both sides, a deal can be done. That’s the way to minimise disruption and protect livelihoods for the whole of Europe during this precarious time
“Nobody sees a cliff edge as a good outcome. So many businesses cannot prepare in the middle of a pandemic.
“Negotiators and politicians can and must find new ways to break through the roadblocks and forge a new, positive relationship between the UK and the EU.”
Tom Kennedy, policy advisor at the North East England Chamber of Commerce, added: “This lack of certainty about the future is a predicament for all businesses that trade with Europe but specifically for the North East region, where 60 per cent of 2019 exports were bound for the EU (joint highest in England).
“Attaining a deal with Europe that protects North East businesses’ access to European markets, while being vitally important, is not good enough on its own.
“It is also vital that the Government makes sure there is enough time between the signing of any agreement and the arrival of changes at the border.
“Businesses want to be ready to trade with our biggest partner come January, but they will not be able to prepare until they know what they need to do.”