The UK after Brexit

Linda Yueh, Adjunct Professor of Economics, discusses the UK's future after the new Trade and Cooperation Agreement

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On 1 January 2021, the Brexit transition period ended. For most of 2020, that had essentially maintained the status quo for UK-EU trade. With the last minute conclusion of talks on Christmas Eve, the new Trade and Cooperation Agreement between the UK and EU now governs. Though negotiations between the UK and the EU are likely to be ongoing, the Agreement forms the basis for the UK to position itself as a trade hub.

Firstly, not everything was concluded. Notably, financial services was left for future negotiations. The issues in this sector include recognising regulations and standards, which both sides are looking to address in a Memorandum of Understanding roughly slated to conclude in March. There have also been numerous reports of frictions at the border due to implementing the Agreement.

Most pertinently, the UK after Brexit will maintain a close relationship with the EU, which will likely lead to ongoing reviews and periodic renegotiations as the economies and thus policies are likely to change over time.

This was a key issue that prolonged the negotiations. The UK and EU’s concerns over a level playing field is centred on significant divergences in labour, social, environment, and subsidy policies. If the impact is significant on trade and investment, then either side can apply rebalancing or corrective measures. If this happens frequently or for more than 12 months, then the UK and EU can seek to renegotiate the Agreement.

In all likelihood, negotiations between the UK and the EU will continue in the years to come. But, the Agreement sets out a trading relationship with the EU that clarifies that relationship which other UK trading partners had sought to understand as they negotiate a free trade agreement (FTA) with the UK.

However, it’s worth noting that Japan, which had been one of those countries, ended up concluding a FTA with the UK prior to this Agreement and indeed was the first country to agree a trade deal with post-Brexit UK.

That trade agreement paves the way for the UK to join the CPTPP (Comprehensive and Progressive Trans-Pacific Partnership), which is the 11 member trade agreement among Pacific Rim countries which was originally part of the President Obama’s Asia Pivot. With the election of President Trump, the U.S. withdrew. The CPTPP accounts for around 13% of world GDP (it would have been 30% with the U.S. who may reconsider under President-elect Biden), which still makes it one of the largest trade blocs in the world.

In addition to Japan, the CPTPP includes Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam. A number of the CPTPP countries such as Australia, Brunei, Malaysia and New Zealand do not have a FTA with the EU. The ones which do, which could include the UK in the future, benefit from being the countries that link two major trading blocs with each other.

The CPTPP excludes China, which has just signed another regional FTA called the Regional Comprehensive Economic Partnership (RCEP), with 14 members of the Asia Pacific region, including Asian members of the CPTPP. India withdrew on the eve of signing.

In a world where regional blocs are emerging due to stalled multilateral trade liberalisation efforts, the UK’s ability to do trade deals that can link trade blocs like the EU and CPTPP would help position it as a trade hub. It is not straightforward. The EU had pursued a FTA with the 10 countries that make up ASEAN, the Association of Southeast Asian Nations. It has proved difficult, so the EU is pursuing bilateral agreements with an eye towards a future EU-ASEAN FTA.

Still, the multilateral trade system is likely to remain fragmented with ongoing U.S.-China and other geo-economic tensions. Post-Brexit Britain would do well to consider how to link trade blocs and position itself as a trade hub.