CEO Coriolis Technologies
20th December 2020
Make no mistake, there is now no doubt. The UK is leaving the EU on January 31. There will then be a transition period to the end of 2020, nominally to allow the economy to adjust but actually to allow the future of our trade relationship with Europe to be determined. During this time, it will be possible to strike new trade deals, for example with the United States, but those deals cannot come into effect until the trade negotiations with the EU are finished. Boris Johnson’s government has a majority and will legislate to ensure that there is no extension to the transition period.
Brexit will now turn into a strategic game, whereby the appearance of winning is everything and the fact of leaving the EU is seen as accomplished by the UK electorate. An average voter cares little about the process of leaving; the technicalities now will be dull and dense. Can we agree fishing rights? Can we ensure a level playing field in terms of regulatory alignment across all goods trade? What are the rules of origin? The election demonstrated that the electorate just wants to get Brexit off the front pages, and politics out of their lives. Other things matter – the NHS, crumbling schools, the transport infrastructure, regular employment – and the pact that the public has made with the Conservative Party is that it will deliver on its promises.
However, the reality of an imminent Brexit and a short transition period does not mean that there will be a full and comprehensive trade deal. The government has to deliver on its promises – the Queen’s Speech lays out an ambitious legislative agenda, including Brexit. Most importantly of all, the time period involved means that it will not be possible to put together a complete and comprehensive trade agreement that covers all goods and all regulatory standards which creates a level playing field and ensures the frictionless trade that we have, until now, taken for granted. There will be compromises – there always are, and the first compromise will be that the process of agreeing deals will be phased over much longer than the transition period.
Such an approach has to happen because the UK’s “decoupling” from the EU will necessitate a huge structural change involving everything we do, from our experiences in passport control right the way through to the standards of the food we eat. The last time a sweeping change like this was undertaken was during the Thatcher era. Back then it had a pure economic objective: to reduce inflation and liberalise capital markets. Everyone’s expectations would adapt – if the government said there would be lower inflation, then people would reign in their expenditure and put in lower wage claims.
There is no such grand strategy behind Brexit. Instead, there is the received wisdom that “things will be better as soon as we are not run by Brussels”. Nor is there a simple market-based solution. We aren’t talking about prices, or the speed at which markets will clear. Instead, we are talking about the whole way in which the UK economy interacts with the rest of the world – this is what we buy, what we sell and how we produce. As the Santander Trade Barometer shows consistently, only around 10% of small businesses have no international exposure whatsoever. And as we learned with the Thatcher government’s Monetarist experiment, the economy will always take longer to adapt – the economic dip may be worse or the recovery might be slower. In short, the process of managing this change needs to be undertaken with care.
Trade itself takes only months to falter, but years to adjust. It is, quite literally, akin to turning around a super-tanker. In the short term, there will still be uncertainty around tariffs after December 2020 because we will not be able to negotiate everything before then. We can expect a dip in trade that will be accentuated because uncertainties around tariffs, rules and regulations will impact trade finance deals, which typically cover periods of up to six months ahead. The impacts are far reaching: any uncertainty in mid-2020 will impact trade as far ahead as the first quarter of 2021.
Looking further ahead, unravelling the UK’s Europe-dependent supply chains will require an unprecedented structural adjustment in the productive base of the economies of both sides – fully 60% of UK-EU goods trade is in the five key strategic sectors of aerospace, automotives, pharmaceuticals, engineering and electronics.
Brexit is going to take time. Indeed, it has to take time. Notwithstanding its large majority, the Johnson government cannot afford politically to detract from election promises. It will do a deal by December 2020, but given the time frame involved, the deal can only be a partial one. Something limited to a selection of sectors, or agreeing on the easier parts of the political declaration such as citizens’ rights, will be achieved. A fully comprehensive strategy that limits the damage on both sides will take much longer, but if the government can “win” by ensuring that people get through passport control easily when they go away and fishermen can fish in waters 200 nautical miles off the British coast, then that in itself will be an achievement.
Johnson will, of course, be tempted to play games with EU negotiators, for example by pushing to get deals done and threatening a no deal. Such an approach is directly against the interests of economic security in the UK, however and has the potential to distract from the bigger social agenda he has laid out for himself. It is no longer the EU that is the focus of his tactics – it should be the British public.
It’s impossible not to conclude that so much more will be possible if the Johnson administration shows some understanding of the complexity of the situation and takes its time. In the past, the prime minister has hinted that hitting one deadline does not preclude further discussion or negotiations on other subjects. If he makes the approach properly strategic, with a clearly articulated long-term vision of the UK’s economy and its relationship with EU, then there is every chance of his much-vaunted “Nike swoosh” becoming a reality.
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