How is Brexit for you?

A couple of months after Britain finally took its great leap into the unknown, many businesses are still waiting to see where they will land. Others fear they have lost their footing for good
February 27, 2021

Nothing much has changed. At least that is the view from sitting in lockdown in my flat in West London, as winter gives way to the first stirrings of spring.

My local supermarkets (in London, not Belfast) still have a decent supply of fresh fruit and vegetables from Spain. There’s been no need to modify my winter tangerine- or broccoli-buying habits. There are not obviously any more “out-of-stock” signs now than pre-Brexit or pre-pandemic. I haven’t tried to order anything online since Christmas, so for me at least, nothing’s gone awry there. Walking around the park, there still seem to be substantial numbers of EU citizens who haven’t joined the exodus from London. My brother got a blue-black passport when he renewed his old burgundy one, though he hasn’t had a chance to use it yet. 

Casting my eyes up from my flat, some of the starkest problems that we were warned could arise have not come to pass. The 7,000 lorries backed up in Kent, a possibility laid out in Michael Gove’s “reasonable worst case scenario” last autumn, have not dominated our screens. The only time there were any newsworthy logjams was when we were still in the EU single market, in December, and those were seemingly due to a combination of pre-end-of-transition stockpiling and the French border closure, which was down to the new Covid variant rather than our breach from the EU. In one sense, Brexit proved handy: thanks to earlier fears of a disorderly no-deal departure, we had some overspill lorry parks prepared.

But the experience of a coddled think-tanker should not disguise the fact that the Trade and Cooperation Agreement, reached with the EU on Christmas Eve, is the first free trade agreement in history whose objective is to make trade less free—and on that score it has been an undeniable success. It has erected some very real barriers between the UK and the EU, as well as between Great Britain and Northern Ireland. The important question about how Brexit is going concerns the experience in and around these new barriers.

Freight pain

Businesses are already reporting a range of difficulties in moving stuff into the EU. There are lots of new forms to fill in and new systems to get to grips with. They were advised by the government to appoint a customs agent (advisers with knowledge of trade—not the people who check your suitcase at the border) to help navigate such procedures. But these are private businesses. Some exporters will be unable to shell out for relevant expertise, even if they can find it. Businesses that have only previously traded within the EU have not had to use such agents before, and now all of a sudden need similar help at once: there aren’t yet enough agents with the necessary know-how to go round. Over time, however, the number of experienced agents and exporters will grow. This may be a genuine example of what the government dubs “teething problems.”

Other issues are not. The first piece of reality to dawn on many businesses was that “tariff free” does not necessarily mean tariff free. Exporters now have to ensure that their goods meet the “origin criteria” to qualify for preferential treatment, and some have discovered that they don’t. Among the businesses most immediately affected are those that used Great Britain as a place from which to distribute goods into the single market. They are finding that sourcing stuff from other parts of the world, even if it is then repackaged in the UK, means there is not enough value added locally for it to count. That was not something you needed to worry about when we were in the customs union, which eliminates “rules of origin” checks on intra-European trade. 

This British distribution business now looks doomed: warehouses will move across the Channel. Meanwhile, all sorts of firms will have to think through their supply chains to ensure their goods pass the origin test—and will need to have the paperwork to prove it. In some sectors with low tariffs the hassle may not be worth it: the heavy practical costs of avoiding the duties could outweigh the benefits of exporting tax-free.

What about the agricultural sector? Agri-food confronts some particular problems. One of the few Brexit effects I did notice firsthand was a jam of seafood trucks converging on Whitehall to protest their valuable loads of crab and lobsters being held up at ports. Defra’s fisheries minister, Victoria Prentis, was criticised for failing to read the fisheries part of the Brexit deal (see Speed Data, p13) when it was published on 24th December, opting to go on a local nativity trail instead. But that was not what she needed to read. She needed to focus on the broader fact that Great Britain has failed to negotiate away a battery of border checks for animal and plant produce—checks that the EU is applying in full. The delays are particularly harmful for those trying to sell perishable products. British shellfish catchers report that their loads are rotting before they can reach the European market. Other British vessels are finding it easier to land their catches directly in EU ports. 

“The first piece of reality to dawn was that ‘tariff free’ does not necessarily mean tariff free”

Another—separate—restriction concerns the end of more personal imports of meat or dairy products. That was why the lorry driver had his ham sandwich confiscated in a now-notorious incident with Dutch customs. As one EU representative told me, you don’t expect to take fruit into Australia. But neither am I likely to be taking a sandwich in the cab of my truck from Dover to Darwin. 

The real killer for businesses moving animal products (which could include a cheese sauce in a ready-meal lasagne) is the need for costly Export Health Certificates to accompany their loads, documents that have to get an official sign-off, usually from a vet. The EU has a long record of being wary of UK regulatory standards—memories of BSE linger on. It will have seen ministers limbering up to do a trade deal with the US and be worried about exposing its market to hormone-boosted beef. It might be possible to reduce checks with a veterinary agreement, but this is not yet in the bag, and the EU would only dispense with the paperwork if the UK signed up to full alignment to the letter of its rules—and supervision by its institutions. That is out of kilter with London’s sovereignty-first approach. 

Ultimately, where volumes are large, it should be possible to absorb the extra fixed costs of exporting into Europe. Big businesses that are used to exporting can adapt—though some may question whether the business model that worked when the UK was in the EU still makes sense. Small businesses that took advantage of the fact that it was as easy to send goods to a customer in Marseilles as Manchester are finding life harder. For some, such exports may no longer be worth it—and even if they’d like to keep them going, their European customers may decide it makes for an easier life to choose a local supplier instead. As for frictionless, just-in-time supply chains that seamlessly straddle the Channel, they are no longer the safe bet they once were. 

The same regulatory issues also apply at the new non-border “border” between Great Britain and Northern Ireland. Boris Johnson’s withdrawal agreement means Northern Ireland still operates as part of the EU’s single market for goods, and straddles both the UK and EU customs areas—a complicated arrangement designed to avoid a land border on the island of Ireland while also protecting the single market. There have been early problems on this front—even though the first months have been cushioned by a delay in the full application of EU rules. This is beginning to expire. The grace periods for agri-food paperwork for supermarkets and customs declarations for parcels will lapse in April; the amnesty for sausages and chilled meats crossing the Irish Sea is also due to end in the summer; for medicines the end of the year. Some of these dates could stretch—negotiations on what happens next, and when, are ongoing—and the UK could have secured further easements by the time you are reading this. But absent agreement to the contrary, goods moving from the British mainland to Northern Ireland will be treated, for regulatory purposes, as third country imports into the single market.

Interrupted service? 

All of this is before we have got to the bulk of the economy that doesn’t deal in “stuff” at all. It now looks as though the EU will agree that the UK meets the requirements for data adequacy, avoiding the need for costly workarounds. But that decision is not part of the trade agreement and can be withdrawn unilaterally if the EU decides the UK is no longer meeting its standards.  

The UK is also waiting to see if the EU will grant a big decision on “equivalence” for financial services firms, allowing them to continue to serve EU customers from the UK without finding clever workarounds. The Governor of the Bank of England, Andrew Bailey, has warned that the EU would be self-harming by shutting itself out of London’s deep capital market, while also insisting that there is no need for the UK to stick to EU rules. But London’s continuing talk of divergence will make the EU more reluctant to grant City regulation equivalence with its own.

Meanwhile, Frankfurt, Paris and Amsterdam will spy an opportunity to lure business into the eurozone, where many EU leaders thought it always belonged. Expect more stories suggesting a drift of business activity, assets or jobs from the UK to some of the EU’s wannabe financial centres, like the Financial Times’ splash on Amsterdam overtaking London as Europe’s premier share trading centre. Those benefits explain why some member states see an advantage in deferring or even denying an equivalence decision.

Other rising barriers are currently cloaked by Covid. In the Zoom age, cross-border business travel seems to belong to a past era. But, pandemic permitting, it will come back. When it does, the absence of a general agreement on mobility means that employers will have to check the rules in each member state to see what qualifies for work-permit-free business travel. Attending conferences looks OK, but fulfilling contracts to provide consultancy will become far more complicated, as will going on concert tours—a problem that has grabbed more headlines. The failure to agree a general mutual recognition of qualifications means that some professionals will find their credentials are not accepted. The UK and EU have set up a process to try to agree some future recognition, but thus far the only exception the UK has achieved is a carve-out for lawyers practising UK or international (but not EU) law. 

There will be problems when people can start travelling for fun, too. British holidaymakers will find that they need to line up with Australian and Chinese visitors for passport checks to see that they are not spending too much time in the EU—potentially bad news for second home owners who winter in the Costa del Sol or summer in the Dordogne. Fluffy, the cockapoo, will become a more expensive travel companion with no pet passport. The government did manage to negotiate continued access to healthcare as provided for pre-Brexit by the EHIC card (now renamed a UK Global Health Insurance Card), but British prescriptions will no longer be recognised by local pharmacies. 

Of course, the effects are not all one way. One of the benefits of leaving the EU is regaining the ability to conclude our own trade deals. So far, the bulk of the effort of the Department for International Trade has been to ensure the UK can continue to trade on the same terms with countries that have deals with the EU. It has done remarkably well in securing them—but that was more an exercise in damage limitation than opening up new markets. 

The opportunity lies in striking new deals—talks are ongoing with Australia, the US and India—but benefits will not be huge and rapid conclusion is far from guaranteed. Perhaps more pertinent is that, as barriers go up with Europe, some British businesses are looking to local suppliers to expand production. “In-shoring,” however, works both ways. And inevitably there is reporting bias—firms that benefit from rising British demand will say nothing; those with problems, as their European contracts dry up, contact the newspapers.

Over time the government may identify opportunities to reduce regulatory burdens. There will be fears that this means reduced protections for workers or lower environmental standards. The government will prefer to focus on the scope for getting ahead of the regulatory game in areas like fintech and AI, and will point to the nimble performance of the UK medicines regulator compared to its EU counterpart on vaccine approval as evidence of benefits to come. 

We will only really know the scale—and balance—of what has happened when we can see official data. But so far, the available evidence has done nothing to undermine the expectation of most economists that a settlement that puts significant barriers in the way of trade will reduce how much trade there is. This comes from external forecasts: the government has refused to publish any assessment of its own deal. What we do know is that the man Johnson has now put in the Cabinet to manage relations with the EU—David Frost, the principal negotiator of the agreement—is sceptical of those economic assessments. In Brussels last year he argued: “all these studies exaggerate… the impact of non-tariff barriers. They exaggerate customs costs, in some cases by orders of magnitude.” His appointment does not signal any rapid hunt for easements. 

“Securing trade deals has been more an exercise in damage limitation than opening up new markets”

All the annoyances and impediments are the result of the deal that he negotiated for the Prime Minister, where the UK chose to prioritise sovereignty over easy access to a single market whose protection was the EU’s reddest of red lines. London has won the right to diverge from EU standards and to throw off almost all jurisdiction of the European Court of Justice—the promise to “take back control of our laws” has been fulfilled. But at a cost. The frictions we now face are the inevitable result of choosing a trade agreement suitable for two geographically distant and unintegrated economies—like the EU and Canada—and imposing it on an established relationship as close as that of the UK and the EU.  

For many Brexit believers, this is a price worth paying: we can now hold our own politicians accountable for what they do. British laws will be made by British people (except in Northern Ireland). Brexit sceptics would say that the inescapable economic costs of that political choice are becoming only too apparent. The other part of Frost’s brief is to look for opportunities from Brexit. To convince those sceptics, he will need to start identifying them—and soon.

Now read Lisa O'Carroll's four Brexit red tape horror stories