In practice, it has caused economic disruption and political instability. The NI Court of Appeal found that its implementation in law has suspended the parts of the Act of Union that promise equality in trade between Great Britain and Northern Ireland . Early in 2022 the Democratic Unionist Party withdrew from the devolved government in NI, and implementation of the protocol by local agencies and officials has been beset with legal and political challenges . This has destabilised the institutions of the GFA that the Protocol was designed to protect.

The macroeconomic effects of the Protocol have been difficult to separate from the effects of Brexit generally and the Covid pandemic. It is clear that the costs of dealing with the new trade barriers run into hundreds of millions of pounds and there are many reports of products becoming unavailable or more expensive, with little evidence so far that the benefits from continued participation in the single market outweigh such costs.

Since the Protocol was agreed, the UK and the EU have been working to implement it and manage its impacts, both through a dedicated joint committee and through unilateral measures.

The UK published proposals in July 2021 for what it considers to be a durable solution. This involved amending the Protocol in a way that the UK believes would avoid border controls between NI and Ireland, while protecting the single market and also respecting the constitutional integrity of the UK and the economic interests of NI. The EU responded in October 2021, with a much more limited and heavily conditioned set of proposed mitigations.

This briefing paper summarises the provisions and effects so far of the Protocol, then considers each side’s proposals to improve it. Finally, it suggests how the British government could proceed.

To read the full report by the Institute of Economic Affairs, please click here. 

Victoria Hewson | Institute of Economic Affairs

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Last month, our cost of Brexit model showed that leaving the single market and customs union had reduced the UK’s total goods trade by 11 per cent in March. Using the recently-released data for April, we estimate that total goods trade is once again 11 per cent, or £7.9 billion, lower.

To estimate the effect of single market and customs union exit, we use trade data from other advanced economies. An algorithm chooses – from a ‘donor pool’ of 22 advanced economies – a smaller selection of countries with economic characteristics that most closely matched those of the UK over the last decade. Those countries are combined into a ‘doppelgänger UK’, with the relative weighting of the selected countries chosen to create the smallest possible deviation from the real UK goods trade data between 2016 and 2019. By comparing the UK’s actual goods trade performance from January 2021 to that of the doppelgänger, we can assess how leaving the single market and customs union has affected Britain’s trade in goods. (For more details on how the model works, see the estimate for January.)

COVID-19 does not significantly affect our model, because we only use it to evaluate the UK’s performance from January 2021, when goods trade in advanced economies had largely recovered to pre-pandemic levels. The countries in our doppelgänger UK are chosen using pre-pandemic data, which also reduces the impact of the virus on our estimate.

To read the rest of the article on the Centre for European Reform, please click here.

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Last month, our cost of Brexit model showed that leaving the single market and customs union in January 2021 had reduced the UK’s total goods trade by 22 per cent. Using the data for February, which was released today, we estimate that goods trade is now 5 per cent, or £3.5 billion, lower. That is a significant improvement on the January data, as we expected, partly because businesses had built up stockpiles to cope with disruption at the EU border in January, and were replenishing them in February, and partly because volatile trade in precious metals rose sharply. Furthermore, the value of trade in ‘doppelgänger UK’ – a group of countries whose trade performance matched that of the UK between 2016 and 2019 – fell slightly in February. Monthly trade data is volatile, so it will take several more months for the impact of Brexit on the level of UK goods trade to become clear.

To read the full insight piece by the Centre for European Reform, please click here. 

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The EU-UK trade and co-operation agreement (TCA) was negotiated in record time, concluding dramatically on Christmas Eve. But in truth, the negotiations could have been wrapped up by the end of the summer, had it not been politically necessary for the EU to fight the good fight over access to UK fishing waters, and for the UK to leave as little time possible for domestic parliamentary scrutiny. The eventual compromises on the contentious issues of level playing field, governance and fish were both predictable and predicted. The TCA’s late arrival left resource-constrained businesses with only days to adjust to new arrangements, but it should be broadly welcomed as a significant improvement over the January 1st default of no trade agreement. The question that now needs answering is not if the agreement can evolve – it can – but rather if it can endure.

The new trade deal between the EU and the UK could evolve over time into something more substantial, but first it must endure.

The TCA removes tariffs and quotas (conditional on the exported products meeting the agreement’s rules of origin criteria) but does little to facilitate trade in services, or negate the need for new bureaucracy and checks at the border. But this was expected – once the UK government prioritised regulatory autonomy, ending freedom of movement, and gaining a free hand on trade policy, its economic ambition was limited to a trade agreement with the EU similar to what the bloc has with Canada and Japan (at least for Great Britain; Northern Ireland has a deeper trade relationship with the bloc under the terms of the Withdrawal Agreement). Importantly, the TCA does include broader co-operation on issues such as law enforcement and social security, although not on foreign policy. One unexpected benefit is that temporary visitors to each other’s territory can retain access to state-provided healthcare, as is current practice among EU countries.

Yet, even taking into account the UK’s limited ambition, there are notable gaps and omissions in the agreement. The UK failed to convince the EU to include ambitious provisions on the mutual recognition of professional qualifications or match the UK’s ambition on the temporary movement of services suppliers, particularly intra-corporate transferees. Nor did the EU accept broad-brush mutual recognition of conformity assessment (whether UK-based testing labs could continue to certify that UK produced products meet EU requirements) or binding commitments to a reduced frequency of border inspections carried out on food products. The TCA also kicks the can on a number of important issues: it does not include provisions for a financial services regulatory dialogue (unlike the EU’s trade deals with Canada and Japan), instead moving the discussion into a potential future memorandum of understanding. The agreement buys more time for the EU to unilaterally decide whether the data of its citizens can continue to be stored and processed on UK-based servers for up to six months. And it leaves open the possibility of the UK linking its own emissions trading scheme to the EU’s.

Thankfully, the provisions written into the agreement are not the end of the story. Sitting beneath a ministerial level joint partnership council, the TCA includes 19 specialised committees covering near every aspect of the agreement – from sanitary and phytosanitary measures to public procurement – which can suggest improvements. And while it is unlikely that the EU or UK will want to fiddle with the agreement in the immediate future, over time and as the political spotlight moves elsewhere, it is possible that the TCA will be incrementally upgraded. Additional provisions on the mutual recognition of professional qualifications or of conformity assessments are conceivable, for example. You could also imagine the UK seeking to revisit the question of border checks on products of animal origin, simply to reduce the burden placed on traders navigating the new internal trade border between Great Britain and Northern Ireland.

However, substantial improvements to the agreement will not be possible unless there is a notable shift in domestic opinion in the UK. Unlocking a relationship of similar depth to Switzerland’s with the EU, for example, would require the UK to accept free movement of people, regulatory harmonisation, and most probably a role for the European Court of Justice. And while it is conceivable that British public and political sentiment on these issues could soften in the future, in the short to medium term that seems unlikely. This also poses a problem for the opposition Labour party, which will instinctively want to deepen the trade relationship, but fears turning off those potential voters with more eurosceptic inclinations. In the immediate aftermath of the treaty being signed, Keir Starmer, Labour’s leader, has rejected free movement of people and ruled out extensive re-negotiating of the TCA were Labour to come into power. Positions will inevitably change in the coming years, but the built-in possibility for evolution of the TCA does not mean evolution will happen.

Moreover, the TCA also contains many reasons to think it could crumble away. Along with the ability for both parties to terminate the agreement following a 12-month notice period, the TCA is littered with review clauses and dispute settlement processes that could lead to parts of the agreement being suspended. Take the commitments on subsidies, for example. The UK succeeded in seeing off the initial EU attempt to bind it to EU subsidy rules both now and in the future. But the UK still signed up to binding high level principles on subsidies and accepted that benefits of the agreement could be suspended in the event either party breaches them, and those breaches impact trade and investment flows between the two. The same is true of commitments made on the environment and labour rights, where future regulatory divergence could see the re-imposition of tariffs.

The concept of preferences being suspended in the event of the signatories to a trade agreement breaching their commitment is pretty common in trade agreements (although the particular approach taken in the TCA is very much unique), but the political climate, particularly in the UK, makes the TCA uniquely unstable. Those MPs who have long harboured grievances towards the EU are unlikely to ever be satisfied by a treaty that keeps the UK, even loosely, in the EU’s orbit. They will probably agitate for symbolic divergence, no matter the consequences. Some may even want to tear up aspects of the treaty, as they are already doing with respect of the Withdrawal Agreement, to force further confrontation with the EU. While the current UK government is unlikely to pander to the more extreme voices in the short-run, this could change if it feels it is starting to lose voters to parties to its right. And so long as the UK remains geographically proximate to Europe, there will always be someone harbouring a desire to torpedo the relationship.

So long as the UK remains geographically proximate to Europe, there will always be someone harbouring a desire to torpedo the relationship.

There are also a number of events scheduled for 2021 that could create political tension in the EU-UK relationship. The EU still needs to decide whether the UK’s financial services rule book is equivalent to its own, and if so whether to allow certain financial products to continue being sold into the EU from the UK’s territory. Technically speaking, as a recently departed EU member with all of the same rules, the UK should be able to easily meet the EU’s criteria. But the EU’s decision will inevitably be influenced by its political desire to onshore more financial activity and build an integrated European capital market on the continent; it is unlikely that it will grant UK-based firms across the board access, and instead will only grant equivalence in the areas deemed to be of ‘systemic importance’ to the EU’s financial markets. On a separate note, many of the derogations and waivers, currently in place to facilitate trade between Great Britain and Northern Ireland, will expire through the first half of 2021, potentially creating further difficulties for the UK’s new internal trade border. Either of these issues, and many others, could put extreme pressure on the relationship and the sustainability of the TCA.

Whether the TCA stands the test of time is yet to be seen. Much will depend on the nature of UK politics over the coming years, and whether Brexit has put the so-called EU question to bed, or not. Regardless, for better or worse, the EU’s relationship with the UK will not remain static, and in ten years’ time will inevitably look very different from what it does today. 

Sam Lowe is a senior research fellow at the Centre for European Reform.

To read the full brief, please click here. 

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While the EU as a whole might be better placed than the UK to absorb the economic shock of a no-deal, the fallout within the EU will be uneven, resulting in winners and losers. The asymmetrical impact and differential capacity and willingness of national governments to mitigate the shock could exacerbate regional disparities and unbalance the EU’s internal level playing field. As the economic realities of Brexit will be felt differently across the Union, it might become more difficult to maintain the same level of EU unity post-no-deal.

The EU-UK relationship can be expected to become more conflictual and competitive, particularly in the absence of common rules under a no-deal. Regardless of whether a deal is reached, the UK government’s willingness to breach international law is likely to have a lasting effect on trust and has brought an element of precariousness into the relationship. This lack of trust and predictability will also affect the EU’s and UK’s ability (and willingness) to amplify the other’s voice in the geopolitical and security sphere, at a time when the UK’s departure is weakening both sides’ respective weight and capabilities.

All these negative repercussions will be intensified should the talks end in an acrimonious divorce. In any case, the potential for a no-deal by accident or design remains high. The only way to secure a deal at this point is for Boris Johnson to make a double U-turn on his red lines and the Internal Market Bill. Nevertheless, even so, the deal would be a thin and precarious one with low levels of trust, while the threat of further treaty breaches would impede the normalisation of the EU-UK relations. The EU, therefore, must anticipate a much more conflictual and difficult relationship, no matter the eventual outcome.

To download the full paper, please click here.

Jannike Wachowiak is a Junior Policy Analyst in the Europe’s Political Economy Programme at the European Policy Centre.

© 2019, European Policy Centre

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2.On 31 December 2020, at the end of the transition period provided for in that agreement, the UK willfully recover its economic and political independence. The UK will no longer be a part of the EU Single Market or the EU Customs Union.

3.Against that background, this paper sets out the UK’s approach to the negotiations with the EU that will begin shortly.It does not deal with issues relating to the implementation of the Withdrawal Agreement.

4.The vision for the UK’s future relationship with the EU has already been set out, successively, in the manifesto on the basis of which the Government won the 12December 2019 General Election, and, subsequently,in the Prime Minister’s speech in Greenwich on 3 February and his written Ministerial statement on the same day.

5.It is a vision of a relationship based on friendly cooperation between sovereign equals, with both parties respecting one another’s legal autonomy and right to manage their own resources as they see fit.Whatever happens, the Government will not negotiate any arrangement in which the UK does not have control of its own laws and political life.That means that we will not agree to any obligations for our laws to be aligned with the EU’s, or for the EU’s institutions, including the Court of Justice, to have any jurisdiction in the UK.

6.The parameters for that future relationship are set out in the UK / EU Political Declaration of 17 October.As that Declaration makes clear, a Comprehensive Free Trade Agreement (CFTA) should be at its core. This Agreement should be on the lines of the FTAs already agreed by the EU in recent years with Canada and with other friendly countries, and this paper sets out the structure and the policy content of such a CFTA in some detail. The CFTA should be supplemented by a range of other international agreements covering, principally, fisheries, law enforcement and judicial cooperation in criminal matters, transport, and energy, and once again this paper sets out the content of such agreements in detail. All these agreements should have their own appropriate and precedented governance arrangements, with no role for the Court of Justice.

7.The Government will work hard to agree arrangements on these lines.However, if it is not possible to negotiate a satisfactory outcome, then the trading relationship with the EU will rest on the 2019 Withdrawal Agreement and will look similar to Australia’s.

8.The Government agrees that all the areas of policy set out in the Political Declaration will be relevant to the UK’s future cooperation with the EU.But the Government does not agree that that requires every area to be incorporated into a negotiated Treaty or similar arrangement.Many policy areas –for example foreign policy or immigration policy –are for the UK Government to determine, within a framework of broader friendly dialogue and cooperation between the UK and the EU: they do not require an institutionalised relationship.That approach is reflected in the arrangements set out in this paper.

Read the full report here

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To view the original report, please click here

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Recent Developments and Possible Scenarios

On October 17, 2019, EU and UK negotiators reached a new withdrawal agreement altering the Northern Ireland backstop provision, which was a main sticking point to Parliament passing the original deal. Under the new deal, Northern Ireland (part of the UK) would maintain regulatory alignment with the EU (essentially creating a customs border in the Irish Sea) to maintain an open border with the Republic of Ireland (an EU member state) while safeguarding the rules of the EU single market. At the end of a transition period, the UK (including Northern Ireland) would leave the EU customs union and pursue an independent national trade policy. The UK and EU have sought to avoid a no-deal Brexit, a scenario in which the UK leaves the EU without a negotiated withdrawal agreement, due to concerns that it could cause considerable disruption with regard to the economy, trade, security, Northern Ireland, and other issues.

UK Prime Minister Boris Johnson encountered difficulties in attempting to secure Parliament’s approval of the new deal, however. Seeking to break the deadlock, the UK Parliament agreed to set an early general election for December 12, 2019. The dynamics of Brexit are likely to evolve in relation to the election’s outcome. Possible scenarios include Parliament approving the new withdrawal agreement by the January deadline; a new government shifting to a soft Brexit, in which the UK remains in the EU customs union; continued political deadlock; another extension; and a no-deal Brexit.

Brexit, Trade, and Economic Impact

The various Brexit scenarios have considerable implications for the UK’s trade arrangements. Outside the EU customs union, the UK would regain an independent national trade policy, a major selling point for many Brexit supporters who advocate negotiating new bilateral trade deals around the world, including with the United States. The UK likely would seek to negotiate a free trade agreement (FTA) with the EU. A Brexit in which the UK remains a member of the EU single market or customs union would provide more barrier-free access to the EU, but the UK would have to follow most EU rules without having a say in how those rules are made. Analysts predict the disruption resulting from any form of Brexit likely will have at least a short-term negative economic impact on the UK. A no-deal Brexit represents the most disruptive and unpredictable scenario, and many businesses in the UK are taking steps to mitigate potential economic losses.

Northern Ireland

Many observers have expressed concerns that Brexit could destabilize the Northern Ireland peace process and lead to a hard border with physical infrastructure and customs checks between Northern Ireland and the Republic of Ireland. Although conditions have improved considerably since the 1998 peace accord (known as the Good Friday Agreement or the Belfast Agreement), concerns about the fragility of peace and security in Northern Ireland remain. A Brexit that results in a hard border likely would have negative economic effects for Northern Ireland and constitute a pressure point in the continuing implementation of the peace agreement.

U.S.-UK Relations and Congressional Interest

President Trump and Administration officials have expressed support for Brexit. Members of Congress hold mixed views. The UK likely will remain a leading U.S. partner in addressing many foreign policy and security challenges, but Brexit has fueled a debate about whether the UK’s global role and influence is likely to be enhanced or diminished. In 2018, the Administration notified Congress of its intention to negotiate a bilateral FTA with the UK after Brexit. Congress likely would need to pass implementing legislation before the potential FTA could enter into force. Many in Congress also are concerned about Brexit’s possible implications for Northern Ireland’s peace process and economy.

To read original article, click here

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Figure 1: UK merchandise export shares (2018)

As of 2018,  UK merchandise exports were valued at approximately USD $450 billion. The EU is the UK’s most significant trading partner and accounts for approximately half of UK’s merchandise exports., exports to the EU accounted for approximately half of this figure. Our calculations indicate that a loss of preferences in the EU market consequent to a no-deal Brexit will result in UK export losses of at least USD$16 billion  (representing a loss of approximately 7 percent of overall UK exports to the EU). This is a conservative estimate that only takes into account the increase in tariffs from zero to current EU MFN levels. In reality, the losses would be much greater because of non-tariff measures, border controls and  disruption of existing UK-EU production networks.

Some sectors would be affected substantially more than others (Figure 5). The UK exports to the EU could face significantly higher tariffs in several sectors not only agricultural (animal and vegetable products) but also manufacturing sectors (processed food products, apparel, leather products, and motor vehicles). In numbers, most of the losses would be concentrated in motor vehicles (5 billion USD), animal products (2 billion USD) and apparel and textiles (encompassing about 2 billion USD). These figures represent the minimum export losses for the UK in the EU market.

Figure 2: UK Export Losses in EU markets

For the UK’s remaining export markets, a substantial share was exported to countries which do not give preferential access to the EU (e.g. China and USA) and therefore are not affected by the potential loss of preferential market access due to Brexit. Of relevance in the Brexit context are about 17 percent of the UK exports which are to countries that currently grant preferences to the EU. With this in consideration, these exports are among the most at risk for the UK in  a no-deal Brexit scenario. While the UK has already secured the continuation of preferential market access conditions in several countries through roll-over trade deals, there remain almost 10 percent of exports for which the UK risks facing higher tariffs due to roll-over trade deals that are not yet signed (Figure 1). The tariffs imposed on UK exports in these markets could jump from a current average of about 0.5 percent to about 3.5 percent. The effect of a no-deal Brexit on UK exports can be estimated by using import demand elasticities. These elasticities can be used to measure the amount of trade loss from a change in tariffs (from preferential to MFN). The results below are based on an analysis made in a partial equilibrium setting at the HS6 digit level of detail.   

Figure 3: Potential losses because of not yet agreed roll-over deals

Among the countries which currently grant preferences to the EU but for which the UK has not yet reached an agreement to grant continued preferential market access, Turkey, South Africa, Canada,  Mexico, Japan, Egypt and Morocco are the markets where the UK is expected to have larger export losses (Figure 2). In particular, the UK is expected to lose about USD$500 million  of exports in the Turkey market, about 5 percent of its exports to Turkey. In South Africa, the UK is expected to lose about USD$240 million, equivalent to about 9 percent of its exports to South Africa.

Figure 4: Losses avoided because of signed continuity agreements

The losses detailed in Figure 2 could be avoided if the parties agree on rolling over reciprocal market access conditions. Indeed, the UK has already agreed with several other countries to continue preferential schemes, and therefore has already avoided some substantial losses. In one example, the recently concluded agreement with the Republic of Korea avoided export losses in the sum of USD$800 million (Figure 3).

Due to the varying  MFN tariffs and export compositions, the consequences of Brexit would differ not only across trading partners as shown above but also across products (Figure 4). In relation to exports to countries with which the UK has not yet secured the continuation of preferential access, the UK could face substantially higher MFN tariffs, especially on agricultural products. For example, processed food products could face an average increase in tariffs of about 17 percent. Similarly, apparel, textiles and motor vehicles would also face substantially higher tariffs. In value, most of the losses would be concentrated in motor vehicles (about USD$750 million) and in chemicals (USD$200 million).

Figure 5: Potential losses in countries with roll-over trade deals not yet in place

Overall it is clear that while the UK has managed to secure preferential access to some important countries, there are still several important markets where agreements would not be likely be concluded in case of a sudden no-deal Brexit. In these markets, the tariffs  faced would be substantially higher, especially for agricultural exports. Still the largest losses for UK exports in term of values are likely to happen in the manufacturing sectors. Processed food products, chemicals, leather products, motor vehicles, textiles and apparel would experience the highest losses. Trade in these sectors is very competitive and increases in tariffs would result in substantial export losses.

Finally, besides the existing EU agreements, trade agreements that the EU is currently negotiating with other countries should be also of concern for UK exporters. In particular, the EU is currently concluding trade agreements with important partners such as Vietnam and MERCOSUR countries (Argentina, Brazil, Paraguay and Uruguay). When these agreements are implemented, if not matched by equivalent agreements with the UK, they would likely erode competitiveness of UK firms in these markets vis-à-vis EU competitors.

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