Brexit Institute News

UK-EU Trade Deal: As of now, a better deal for the EU than for the UK

Anthony Foley (Dublin City University Business School)

 

EU Single Market is a wonderful economic achievement but was very hard to achieve

The EU Single Market, or the Internal Market, is a wonderful economic creation. and an outstanding achievement. 27 separate countries (28 before Brexit) agreed to adjust their individual rules, requirements and regulations to facilitate the free movement of people, capital, goods and services between them. It is the world’s greatest example of economic cooperation and integration between sovereign independent states. The Single Market did not come about easily and required a huge degree of cooperation between the then twelve members of the EU. The European Economic Community (EEC) was established in 1957. A customs union was achieved in 1968 but the Single Market structure did not come about until January 1 1993 following a long process which was initiated in 1985.

The establishment of the Single Market was motivated by economic and political factors. On the economic side there was the realisation that even with the absence of tariffs and quotas, substantial barriers to trade existed between the then 12 members of the EU/EEC in the form of different national regulations and standards, documentation requirements, customs inspections, business rules and tax measures. 282 EU laws were passed between 1985 and 1992 to remove these barriers and to establish the Single Market.

No surprise that new EU-UK trade relationship has increased trade barriers

The change from a customs union to a Single Market removed a range of trade barriers. It is no surprise that the change in the UK’S status from a member to a separate country with a free trade agreement has increased trade barriers between the UK and the EU. This is inevitable.

For example, the EU has a free trade deal with the UK. Consequently, the EU wants to ensure that goods coming from the UK have been produced in the UK and do not come originally from a third country which does not have a free trade arrangement with the EU. It does this by establishing rules of origin for goods. This leads to additional documentation, checking and inspections to “prove” compliance. This creates additional administrative and inspection costs which were absent when the UK was a full member of the EU customs union and Single Market.

EU-UK trade before Brexit

The Brexit agreement includes items such as law enforcement and judicial cooperation, health and cyber security, short term visas and participation in EU programmes as well as trade. This article examines the trade aspects.

In 2019, the EU sold €425.5b in goods and services to the UK while the UK sold €335.3b to the EU. The EU does better than the UK from trade between the two economies but there are substantial differences between goods and services. The UK had a deficit in goods with the EU of €110.5b (exports of €192.5b and imports of €303.0b) but had a trade surplus in services worth €20.5b (exports of €142.4b and imports of €121.9b). From this we can see that, in terms of a trade deal, the EU would have been keen to maintain tariff free access to the UK market for goods and that the UK would be keen to maintain easy EU market access for services.

This view is reinforced by the product mix of the goods and services. The UK’s largest goods export to the EU was petroleum and petroleum products at €22.8b and it imported €9.1b from the EU. This was one of the very few goods sectors in which the UK had a surplus with the EU. In road vehicles the UK exported €19.7b but imported €55.3b from the EU. In medicines and pharmaceuticals, the UK exported €10.5b and imported €20.2b. In electrical machinery the UK exported €7.7b and imported €13.0b. Excluding petroleum, the EU sells much more to the UK in goods than it buys.

In services, the UK has a large deficit in travel trade with the EU, which reflects the large numbers of UK sun seekers. In 2019 the UK sold €19.9b in travel services to the EU and bought €37.3b. Transportation also favours the EU with a trade surplus of €4.8b. However, the UK does very well in other services sectors. Other business services exports from the UK were €47.2b while imports from the EU were €31.2b. Financial services exports were €29.3b and imports from the EU were €6.2b. Telecommunications, computer and information services exports from the UK to the EU were €12.2b and imports were €6.6b. Insurance and pension exports were €3.8b and imports were €1.9b. The UK’S services sector does well out of the EU Single Market.

The scorecard from the trade and cooperation agreement

The agreement allows for free trade in goods which is the absence of tariffs but there are additional costs arising for EU and UK importers and exporters from documentation and customs checks. These are unavoidable since the UK was leaving both the Single Market and the customs union. However, on balance I would consider the free trade in goods element of the agreement to be a good result for the EU because it exports much more to the UK than the UK exports to the EU.

The services element of the agreement is much less precise than the goods element. Clearly the UK would like a very liberal free trade approach given its services performance, especially financial services. Title 11 Services and Investment contains the broad principle that …. ”The Parties affirm their commitment to establish a favourable climate for the development of trade and investment between them.” This is good from the services free trade perspective but the detailed provisions of the agreement fall short of this broad free trade principle.

Financial services are not covered comprehensively in the full trade agreement. The intention is that the EU and the UK will try to agree a memorandum of understanding by March 2021 that could mean recognition of each other’s rules, a process known as “equivalence,” which would allow the finance industry to trade in each other’s area. The bottom line is that the freedom to trade services and especially financial services available to Single Market members is gone for the UK. Further discussion will be needed before the detailed operational rules are known for specific sectors. The UK has not achieved what it would have hoped for in services trade.

The UK has increased its share of fish in its national waters which is a gain. The agreement includes the provision that 25% of EU boats’ fishing rights in UK waters would be transferred back to the UK over the next five and a half years after which the shares would be renegotiated. This compared to the earlier UK demand of cuts of 60% and the EU demand for no change. That the UK regained some of the EU fish quota is not very surprising given the EU treatment of it as a non- member, or third country, and the international conventions applying to national waters.

EU did better than the UK in the trade agreement

A free trade deal was always going to result in barriers to trade compared to staying in the customs union or in the Single Market. A free trade deal is better for both the EU and the UK than no deal. Overall the EU will feel it did better from the agreement than the UK because of the free trade provisions for goods and the more limited free trade oriented approach to services and financial services. The UK improved its fish position but by less than initially hoped for.

Anthony Foley is Emeritus Associate Professor of Economics at Dublin City University Business School

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