LONDON (AP) – The last-minute trade deal between the UK and the European Union means that businesses will be spared new tariffs and border disruption at the start of the new year – an economic shock that would have exacerbated employment and financial hardships from the pandemic .
News of the deal on Thursday brought sighs of relief from the offices of corporate bosses and politicians, as well as from consumers anticipating production shortages and transportation workers who have the potential of long backups at border crossings.
Bank of England Governor Andrew Bailey recently warned that a failure to negotiate a UK-EU trade deal would have a greater long-term impact on the UK economy than the long-term impact of the coronavirus pandemic, which led to the deepest recession in the country. in more than three centuries.
The deal has yet to be approved by the UK and EU parliaments. Here’s an overview of the upcoming changes and their likely implications.
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WHAT IS THE UK GOING ON JAN. 1?
Although the UK left the EU on January 31, it will follow the rules of the bloc until the end of this year as part of a transition period to the new economic relationship. The problem was, what comes next?
The UK is leaving the European internal market, which will comprise approximately 450 million people after its departure. In essence, the internal market is designed to make trade as easy as possible regardless of where a company is located in the European Economic Area, which includes non-EU countries in addition to the 27 EU member states, including Iceland and Norway. The rules for trade are the same throughout the internal market and are based on the free movement of goods, services, capital and people.
The UK is also leaving the customs union, which abolished tariffs between members and created a common external tariff for non-members. Under the customs union, the EU negotiates international trade agreements on behalf of its members, giving it a weight in the global economy that no member would have.
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WHAT IS THE NEW RELATIONSHIP?
Under the terms of the new deal, there will be no tariffs for goods traded between the UK and the EU. For car manufacturers, for example, this is a relief, because without a deal, a surcharge of 10% would have applied from 1 January. There will also be no quota, meaning exporters can still transport as many vehicles as they want.
Still, trade will not be as seamless if the UK leaves the internal market and the customs union. Companies will have to file forms and customs declarations for the first time in years. There will also be different rules for product labeling and hygienic controls for agricultural products, for example.
The government estimates that the new red tape will result in an additional 215 million customs declarations per year at an annual cost of about £ 7 billion.
But a deal prevents what could have been significant chaos and a deeper blow to trade, as new tariffs would have added to the cost of doing business between the UK and the EU for many different categories of goods. Many people see Thursday’s deal as the best out of a bad business situation.
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WHAT WILL THE IMMEDIATE IMPACT BE?
It is possible that it will take some time to adjust, which will likely lead to more congestion on both sides of the English Channel and delays at ports in the days and weeks after January 1. Early expectations are that some food prices, especially imported meat and dairy products, will rise in the coming weeks.
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HOW WILL THE NEW TRADING RELATIONSHIP AFFECT ECONOMIC GROWTH?
Economists agree that the deal is better for the UK economy than a no-deal outcome and will help it recover from the recession of the coronavirus, which is expected to cut economic output by about 12% by 2020. The impact is much smaller for the EU and other countries around the world, which in the event of no deal would have mainly experienced some volatility in the financial markets.
The EU accounts for about half of the UK’s exports, so avoiding tariffs will help many businesses. Executives can start executing investment decisions that they have been delaying in recent years of Brexit uncertainty. Yet the deal with the EU does not cover the full scope of the service sector. Since it makes up about 80% of the UK economy, companies that rely heavily on business with the EU, such as banking and finance, face a more bleak future. This is especially ominous for the UK’s massive banking sector.
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WHAT ABOUT THE LONGER TERM?
In the longer term, most forecasters believe the UK economy will be a few percentage points smaller in the coming years than it would otherwise have been if it had stayed in the EU. That may not sound like much in the context of this year’s recession, but it does mean that living standards would be lower than they would otherwise have been.
Berenberg Bank economists wrote that “leaving the EU internal market and customs union will reduce the UK’s potential growth by harming export prospects and reducing the influx of foreign direct investment and skilled labor from the EU. Reduce.” They estimate a maximum growth potential of 2.0% per year as an EU member, up from 1.7% with Thursday’s deal and 1.5% without a deal.
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WHAT WILL THE UK DO DIFFERENTLY?
The whole point of Brexit was to let the UK set its own rules and do things its own way. That’s why the sticking point during the months of tense trade talks was figuring out what to do when and if the UK deviated from EU rules.
The EU has long feared that Britain would undermine the bloc’s social, environmental and state aid rules in order to take an unfair advantage of its exports to the EU. Britain has said complying with EU rules would undermine its sovereignty. The agreement negotiated a compromise by agreeing to a major demand from the UK that the European Court of Justice would not be involved in the resolution of disputes. Instead, it provides the opportunity for arbitration or trade remedies in case either party thinks they are being damaged by labor, policy or employment measures. If those measures are overused, either side could lead to the reopening of the trade aspects of the treaty.
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WHAT ABOUT TRADE OUTSIDE THE EU?
Until December 31, the UK will remain bound by the approximately 40 international trade agreements the EU has concluded in recent years. Leading up to the end of the year, the UK has sought to take over those deals, such as with Japan and Mexico, but there are still a few to close. In early 2021, the UK will be able to conclude its own trade deals with whoever it wants. Negotiations with the United States have already begun, although President-elect Joe Biden has indicated that trade deals will not be at the top of his list when he takes office later in January.
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Associated Press Writer David McHugh contributed from Frankfurt, Germany.
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