The post-Brexit Trade and Cooperation Agreement (TCA) between the UK and the EU is nominally a free trade agreement for goods. Bob Hancké, Laurenz Mathei and Artus Galiay examine in more detail what the agreement does and does not mean for trade. They argue the agreement falls some way short of establishing ‘free trade’ and that the combination of Brexit, wider secular societal and industrial trends, and the pandemic are creating a perfect storm for British exporting companies

Galiay, Artus

Hancké, Bob

Mathei, Laurenz

English

LSE Research Online

Dancing	in	the	dark:	What	Brexit	means	for	UK-EUtrade	and	UK	industryThe	post-Brexit	Trade	and	Cooperation	Agreement	(TCA)	between	the	UK	and	the	EU	is	nominally	a	free	tradeagreement	for	goods.	Bob	Hancké,	Laurenz	Mathei	and	Artus	Galiay	examine	in	more	detail	what	the	agreementdoes	and	does	not	mean	for	trade.	They	argue	the	agreement	falls	some	way	short	of	establishing	‘free	trade’	andthat	the	combination	of	Brexit,	wider	secular	societal	and	industrial	trends,	and	the	pandemic	are	creating	a	perfectstorm	for	British	exporting	companies.Five	years	ago,	the	UK	voted	to	leave	the	EU.	After	four	years	of	complicated	negotiations,	and	three	PrimeMinisters	later,	the	UK	and	the	EU	concluded	the	Trade	and	Cooperation	Agreement	(or	TCA,	also	known	as	thepost-Brexit	Treaty)	in	December	2020.	The	TCA	was	heralded	as	a	free	trade	agreement	with	the	best	possiblepositive	effects	for	British	industry	in	general	and	exporting	companies	in	particular.Since	June	2016,	however,	the	wider	economic	background	to	Brexit	and	the	economic	losses	that	followed	in	itswake	have	changed	significantly.	The	transition	towards	a	green	economy	(with	significant	structural	changes	ininnovation,	industry,	and	markets)	and	the	Covid-19	crisis	(a	large,	but	hopefully	temporary	supply	and	demandshock)	have	shifted	the	goal	posts	for	all	developed	economies.While	economies	everywhere	face	adjustment	problems,	Brexit	has	made	life	for	UK	businesses	structurally	harderand	disproportionately	more	so	than	for	companies	in	the	EU.	The	reason	is	that	the	TCA	did	not,	in	fact,	produce	aflat	free	trade	area,	but	a	very	bumpy	one	at	best.	A	simple	list,	as	in	the	table	below,	of	the	key	areas	where	Brexithas	changed	things	helps	understand	the	nature	and	extent	of	the	problem.Table:	Impact	of	the	Trade	and	Cooperation	Agreement	on	exportersLSE European Politics and Policy (EUROPP) Blog: Dancing in the dark: What Brexit means for UK-EU trade and UK industry Page 1 of 4		Date originally posted: 2021-07-13Permalink: https://blogs.lse.ac.uk/europpblog/2021/07/13/dancing-in-the-dark-what-brexit-means-for-uk-eu-trade-and-uk-industry/Blog homepage: https://blogs.lse.ac.uk/europpblog/Note:	Compiled	by	the	authors.Any	market	needs	basic	rules	to	trade,	such	as	who	owns	what;	what	can	be	traded;	and	how,	where	and	withwhom	you	can	trade.	Naturally,	the	provisions	in	the	TCA	are	symmetric	in	the	sense	that	they	apply	equally	to	allsignatories.	However,	one	key	point,	often	ignored	in	the	official	British	reading	of	the	TCA,	is	that	the	same	rulesmay	have	very	different	effects	on	different	parties.LSE European Politics and Policy (EUROPP) Blog: Dancing in the dark: What Brexit means for UK-EU trade and UK industry Page 2 of 4		Date originally posted: 2021-07-13Permalink: https://blogs.lse.ac.uk/europpblog/2021/07/13/dancing-in-the-dark-what-brexit-means-for-uk-eu-trade-and-uk-industry/Blog homepage: https://blogs.lse.ac.uk/europpblog/The	reason	is	painstakingly	simple:	the	UK	is	proportionately	a	much	smaller	market	for	the	EU	than	the	other	wayaround.	Almost	50%	of	all	UK	exported	goods	in	2019	went	to	the	EU,	while	the	UK	made	up	only	6%	of	all	EUmanufacturing	exports	that	year.	Even	though	some	sectors	and	regions	in	the	EU	are	more	exposed	than	others,because	of	these	relative	weights	the	same	rules	have	quantitatively	different	aggregate	effects.	Put	differently,	theasymmetry	in	effects	was,	as	it	were,	built	into	the	TCA	itself.In	part	this	also	reflects	the	uneven	distribution	of	power	in	the	negotiations.	The	TCA	between	the	UK	and	the	EU,concluded	in	late-2020,	was	never	meant	to	be	‘fair’	in	the	conventional	sense	of	the	word.	Instead,	it	pitted	onesignificantly	smaller	player	against	the	largest	single	market	(with	free	trade	within	it)	in	the	world.Dual	shock	I:	Rules	of	origin	and	the	green	economyBut	requirements	associated	with	rules	of	origin	(RoO)	–	a	major	part	of	the	TCA	–	make	the	effect	even	morelopsided.	A	UK	company	exporting	to	Germany	is	subject	to	RoO	thresholds;	a	French	company	doing	the	same	isnot.	The	French	company	could,	therefore,	import	cheap	parts,	ingredients	and	textiles	from	across	the	globe,assemble	or	mix	the	final	product	and	sell	it	on	as	an	EU	product	(subject	to	some	basic	safety	standards).	TheBritish	company	needs	to	make	their	product	with	a	higher	share	of	locally-sourced,	and	thus,	all	things	being	equal,more	expensive	components.The	automotive	industry’s	green	transition	is	an	interesting	example	of	how	Brexit	has	made	adjustment	to	analready	hefty	challenge	even	more	complex.	In	line	with	other	very	ambitious	governments,	Boris	Johnson	hasrecently	announced	that	the	UK	will	ban	the	sale	of	new	petrol	and	diesel	cars	from	2030	onwards.	While	necessaryfrom	a	macro	political-economic	view,	it	does	imply	that	products,	production	and	services	have	to	be	rethought	–often	from	the	ground	up.Electric	vehicle	(EV)	production	is	a	case	in	point.	The	planned	widespread	introduction	of	EVs	over	the	nextdecade	will	require	massive	investments	in	the	existing	UK	plants	to	reorient	production	from	internal	combustionengines	to	vehicles	propelled	by	electricity.	Very	few	parts	are	the	same	or	at	least	very	similar,	while	new	partssuch	as	batteries	require	local	state	of	the	art	production	facilities.	The	latter	is	particularly	important:	without	afunctioning	battery	supply	chain,	EV	production	won’t	take	off	in	the	UK,	potentially	leading	to	a	demise	of	theindustry	and	a	loss	of	more	than	100,000	jobs.To	make	matters	worse,	the	TCA’s	RoO	requirements	put	a	due	date	on	the	establishment	of	this	new	supplychain.	From	2027,	55%	of	the	final	value	of	a	car	must	be	‘originating’	components	(i.e.,	produced	in	the	UK	or	EU)for	exports	of	domestically	produced	cars	(i.e.,	those	made	in	the	EU	or	the	UK).	If	either	do	not	meet	thatrequirement,	exported	cars	face	a	10%	tariff.	More	than	80%	of	all	UK-made	vehicles	are	exported,	and	since	morethan	half	of	exported	UK	cars	go	to	the	EU,	the	cost	of	RoO	will	disproportionately	be	felt	in	the	UK.Batteries,	which	can	make	up	more	than	50%	of	the	value	of	a	car,	are	currently	mainly	produced	in	Asia.	Cars	builtin	the	UK	with	batteries	produced	in	China	or	South	Korea	thus	fall	foul	of	the	RoO	requirements	in	the	TCA.	So,how	likely	is	it	that	the	UK	will	succeed	in	establishing	a	large	enough	domestic	battery	supply	chain	before	the	TCAdue	date?The	Japanese	carmaker	Nissan	has	recently	announced	its	plan	to	increase	its	battery	production	in	Sunderland	topotentially	6-9	GWh	and	the	UK	government	is	in	talks	with	large	manufacturers	(including	Ford,	Samsung	and	LGChem)	about	building	battery	‘gigafactories’	in	the	UK.	However,	it	is	unclear	if	talks	are	progressing	quickly	enoughto	meet	the	2027	deadline	(such	factories	take	years	to	build	and	reach	operating	capacity,	even	after	a	speedyapproval	process).	In	addition,	a	recent	report	warns	that	the	planned	annual	battery	production	capacity	of	45	GWhfrom	2030	is	almost	100	GWh	short	of	the	forecasted	demand	in	2040	(140	GWh).Dual	shock	II:	Services	exports	and	Covid-19LSE European Politics and Policy (EUROPP) Blog: Dancing in the dark: What Brexit means for UK-EU trade and UK industry Page 3 of 4		Date originally posted: 2021-07-13Permalink: https://blogs.lse.ac.uk/europpblog/2021/07/13/dancing-in-the-dark-what-brexit-means-for-uk-eu-trade-and-uk-industry/Blog homepage: https://blogs.lse.ac.uk/europpblog/For	a	long	time,	the	UK	has	been	Europe’s	poster	child	in	the	services	sectors.	In	2019,	services	accounted	for	80%of	the	total	UK	economic	output	(in	Gross	Value	Added)	and	around	30	million	jobs.	This	includes	a	wide	array	ofsectors	including	finance,	legal	and	business	services,	transport,	information	and	communication	technology	(ICT),medical	and	social	care,	creative,	hospitality,	environmental,	and	other	non-tradeable	services.	But	services	arealso	crucial	for	the	UK’s	trade	balance.	In	2018,	services	accounted	for	46%	of	all	UK	exports,	(40%	of	which	wentto	EU	member	states)	but	only	for	34%	in	France	and	a	mere	17%	in	Germany.	Additionally,	while	the	UK	had	atrade	deficit	in	goods,	it	ran	a	substantial	surplus	of	£28bn	(€32)	in	services.While	the	financial	services	sector	is	likely	to	lose	business	to	other	global	financial	centres	because	of	the	limitedfinancial	equivalence	granted	by	the	EU,	Brexit	will	hit	many	other	service	suppliers	once	the	Covid	travelrestrictions	are	lifted	(on	top	of	other	non-tariff	trade	barriers	such	as	mutual	recognition	of	qualifications	that	willcome	into	play).	While	business	travel	and,	therefore,	physical	service	provision	in	the	EU	was	impossible	duringthe	pandemic,	the	lack	of	services	commitments	in	the	TCA	will	ground	many	previously	successful	British	servicesexporters	also	in	the	future.The	main	reason	for	this	is	the	arduous	new	visa	and	work	permit	requirements	for	UK	business	visitors	whenproviding	a	paid	service	in	the	EU.	A	band	of	five	musicians	on	a	tour	through	six	EU	countries,	for	instance,	willlikely	need	to	fill	in	up	to	60	individual	forms	(5	people	X	6	countries	X	2	forms,	for	visas	and	work	permits)	andoften	deal	with	multiple	national	authorities	with	varying	abilities	of	swift	application	processing.TCA	governance	and	the	way	aheadThe	complicated	and	last-minute	negotiations	of	the	TCA	means	that	both	parties	have	ample	flexibility	to	amendthe	new	rulebook	gradually.	The	TCA	foresees	19	specialised	committees	–	sitting	under	a	ministerial	level	jointpartnership	council	–	which	cover	almost	every	aspect	of	the	agreement	and	can	suggest	(marginal)	changes	to	thedeal.	Conceivable	‘upgrades’	in	the	future	could	include	a	formalised	arrangement	of	the	mutual	recognition	ofprofessional	qualifications	or	(parts	of)	the	border	check	requirements.However,	such	progress	will	require	significant	changes	in	the	political	attitude	on	both	sides,	and,	as	the	Centre	forEuropean	Reform	warns,	the	flexibility	of	the	TCA	could	also	leave	it	falling	apart	slowly.	Not	only	can	both	partiesterminate	the	agreement	unilaterally	following	a	12-month	notice	period,	but	breaches	of	TCA	commitments	couldnegatively	influence	trade	and	investment	flows	between	the	UK	and	the	EU.	A	unilateral	reintroduction	of	EU	tariffson	British	exports	as	punishment	for	UK	divergence	in	labour	or	environmental	standards	is	just	the	most	prominentexample	among	many.Given	the	current	state	of	mistrust	between	the	UK	and	EU,	not	to	mention	the	evident	lack	of	political	will	on	eitherside	of	the	Channel,	British	exporters	cannot	take	anything	for	granted,	even	if	they	reshuffle	their	processes	to	fullyadhere	to	the	new	rules.	Which	brings	us	full	circle	–	or	in	the	words	made	famous	by	the	lead	Brexit	negotiators:‘Nothing	is	agreed	until	everything	is	agreed’.Note:	The	research	for	this	article	was	partly	funded	by	Nord	France	Invest	and	Région	Hauts	de	France.	Thearticle	gives	the	views	of	the	authors,	not	the	position	of	EUROPP	–	European	Politics	and	Policy	or	the	LondonSchool	of	Economics.	Featured	image	credit:	Arron	Hoare	/	Number	10	(CC	BY-NC-ND	2.0)LSE European Politics and Policy (EUROPP) Blog: Dancing in the dark: What Brexit means for UK-EU trade and UK industry Page 4 of 4		Date originally posted: 2021-07-13Permalink: https://blogs.lse.ac.uk/europpblog/2021/07/13/dancing-in-the-dark-what-brexit-means-for-uk-eu-trade-and-uk-industry/Blog homepage: https://blogs.lse.ac.uk/europpblog/

Dancing in the dark: what Brexit means for UK-EU trade and UK industry

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Dancing in the dark: what Brexit means for UK-EU trade and UK industry

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