“Brexit will be costly for UK society” – according to the official Parliamentary briefing to MPs ahead of yesterday’s proceedings that passed the ‘EU (Future Relationship) Act’ into Law.
The study was checked and re-calibrated in the light of the outcome of the negotiations – the 1246 page ‘UK-EU Trade and Cooperation Agreement’ – which is at the core of the Act.
The introduction of trade restrictions on both goods and services is now estimated to reduce UK GDP by around 4.4% ‘relative to remaining as a member of the EU’.
This is not as harsh a view as other recent analyses – but still forecasts a high cost of reclaiming ‘sovereignty’ – unless the Government can now come up with and rapidly implement ideas about what the UK will do with its new-found freedom.
The estimate, if anything, is likely to be low. The Covid-19 pandemic – far from fading away to nothing at the end of 2020 as expected – is spreading faster and wider than ever. The introduction of ever more severe restrictions on commercial activity and travel is likely to reduce economic output and Brexit has coincided with the onset of a deep global recession – the like of which has not been experienced outside wartime.
The impact of the fall in value of the pound against the euro will be a further potentially economically depressing factor as it makes UK goods and services less competitive in direct proportion to the fall. At Brexit, the pound is already 20% lower than it was at the time of the EU referendum in 2016. Further falls may follow through external forces, such as the patterns in Covid-19, that no Government can influence or control – but to which business and commerce must respond.
It is relatively easy to identify which sectors’ exports and imports will be hardest hit by the non-tariff but ‘Brexit-induced’ trade restrictions – those that heavily export to or import from the EU.
However, the EU has enshrined into the Trade agreement that tariff-free trading is absolutely dependent on ‘Rules of Origin’ – with high proportions of ‘components and value-added services’ proven to originate in the EU or UK. The study incudes analysis of ‘Global Value Chains’ where inputs into UK exports originate outside the UK or EU.
It also quantifies the impact of ‘less trade meaning lower incomes – and hence lower demand’. Any hindering of trade means paying more for imports and earn less from exports. This will have an adverse effect on the balance of trade between the UK and EU in future.
Summary of findings
- The ‘UK-EU Trade and Cooperation Agreement’ provides for tariff and quota free trading. The non-tariff barriers, however: increase UK-EU trade costs; reduce trade between the parties; requires resources for form-filling and additional certification for specified goods; add costs in queuing at ports and customs clearance centres ; double the certification requirements and costs for the new UKCA, NICA and CE requirements. Additional costs mean higher prices – which in turn lead to changes in consumption – which in the long-term reduces corporate contributions to taxes – which in the long-term means less money for expenditure on UK residents’ welfare.
- Exports by value will fall by nearly 5.5% relative to a pre-Brexit scenario.
- UK GDP will fall by 4.4%.
- The biggest losses in UK exports to the EU are predicted to be in motor vehicles, chemicals, and food. These large declines in gross exports of goods reduce the indirect exports of their suppliers of services very significantly
- Brexit will have a major impact in terms of reducing ‘global value chains’. The ‘competitiveness of UK inputs into EU exports will induce a decline in UK multilateral value-added exports – the UK value embodied in other countries’ exports’.
- Reduced production for manufacturers means less opportunity to apply ‘economies of scale’.
- The ‘thin’ Trade Agreement is unlikely to redress any of the identified ‘adverse’ forces.
New EU rules on exports dictate that from 1 January, the following animal products cannot be exported into the EU: Chilled minced red meat; Chilled meat preparations (for example, raw sausages); Minced meat (poultry); Poultry and ratite or game bird mechanically-separated meat; Raw milk from cows infected with Bovine Tuberculosis (TB); Ungraded eggs; Composite products containing dairy products made from unpasteurised milk (for example, a ready meal topped with unpasteurised cheese).
Note that these new rules do not affect exports of raw minced meats to Northern Ireland from Great Britain.
The British Meat Processors Association could see that the issues created for the sector were going to be outside the scope of the Agreement. They “hope [the Government] will be carrying on talking to the EU and that they will push through and create an export health safety certificate for these products so they can go through.”
The BMPA is desperate for more clarity on what businesses need to do so that they can help prepare their members trade in the New Year. They note that the Government had yet to decide on the wording on the new export health certificates and when it is finalised: “that wording tells us what we have to comply with and we hope we are not going to hear that there are things we’re not expecting to be on there”
Wilfred Emmanuel Jones is a British Devon-based farmer and founder of The Black Farmer line of meat products, including raw sausages.
Since he will no longer be allowed to export fresh sausages to the EU, he has decided to send them frozen instead. “There’s a really big opportunity to do premium frozen sausages for the continent.” However, “one problem we have with sausages is that in this country at least, anything frozen is seen as down-market, not a premium product.”
A Government spokesperson said: “We have agreed a deal based on friendly cooperation between sovereign equals, centred on free trade and inspired by our shared history and values. It takes the UK completely out of the EU’s customs union and single market – which means businesses should continue their preparations for changes next year.”