With Brexit done, reality dawns that frictionless UK-EU trade is no more

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Good afternoon. The Brexit Briefing is back after taking a couple of weeks to get over the drama of the eleventh-hour trade and co-operation agreement (TCA) that Boris Johnson finally agreed last Christmas Eve.

Skinny though it is, the deal was a relief when set against the potential fallout from a no-deal exit, but as the new year dawns business is digesting the full reality of what Mr Johnson has done in the name of “prospering mightily” outside the EU single market.

Over the next few months Brexit Briefing will do its best to unpack what this actually means for industry and business in important sectors, a process that will be necessarily anecdotal until we start to get data on what is happening. Even then it will be masked by other factors, notably Covid-19.

The truth is that no one knows exactly how this will pan out because no government has ever done this kind of reverse co-operation trade agreement before — applying the brakes to the EU’s integrationary juggernaut overnight.

The first thing that is emerging is the extent to which some parts of industry have failed to fully appreciate what the deal means for future UK-EU relations and their cross-border supply chains

It was interesting this week, for example, to see the food and drink industry lobbies on both sides of the Channel protesting about the impact the “rules of origin” clauses in the TCA will have on their existing distribution networks.

The Food and Drink Federation, backed by some EU counterparts, warned that UK distribution hubs would struggle to function because goods imported tariff-free into the UK from Europe were then facing full EU tariffs when they were spun back out into EU member states. 

The trade groups initially said they believed this was an “unintended consequence” of the deal and were lobbying for a derogation (which trade experts say is technically possible) but EU officials were very clear — and I paraphrase — that this is just the deal, so deal with it. 

It took the UK government 24 hours to give a response but when it finally came the Cabinet Office gave no sign that the UK government intended to fight the industry’s corner. It just said that businesses could use “transit” procedures to get goods through the UK without falling foul of the rules of origin issue.

But as the Food and Drink Federation said, this is “unworkable” based on current models, since hubs don’t just shunt goods onwards, they break them up, repackage them for onward distribution — and that won’t work now. Clothing retailers will also be hard-hit by this. 

In short, change is coming, and perhaps more change than some had previously understood, and there is no sign of the EU looking to help. 

“You can’t expect the UK to remain the food import hub for the EU. It’s not sustainable, and makes no sense in the mid-to-longer run,” said a senior EU official, explaining thinking in Brussels, and drawing the parallel with financial services where Brussels also sees little point in moving to preserve the UK as a “hub”, even if that drives up costs for some businesses.

The prevailing view in Brussels seems to be that given that dual regimes will emerge over time — for financial services and indeed phytosanitary (SPS) regulations — it makes no sense to have the UK as an EU hub for very much. This penny is now starting to drop.

On a micro level, this means that some businesses will simply stop trading with the EU because it becomes too expensive — or move to split their supply chains to avoid having to do cross-Channel trade, shrinking their UK footprint in the process.

So, for example, a company such as Aston Chemicals in Aylesbury, which has imported chemicals for the cosmetics industry for 30 years and distributed to the EU from the UK, sent its last load across the Channel on December 18. 

It will now serve its EU customers directly from Poland to avoid duplicating paperwork for compliance with the EU’s Reach chemical safety regulations, border delays, and tariffs risk from rules of origin requirements. Its UK warehouse staffing has shrunk by one-third as a result of the changes.

It is a similar story for Premium Plus UK — a dental medical devices maker — that is now also hubbing in Poland because EU medical devices rules make it prohibitively expensive to import from China and then hub from the UK. This is because it would turn their EU customers into importers, with all the regulatory burden that entails for medical devices. 

For others, like The Curiosity Box that makes children’s science kits, it’s more of a wait-and-see game, working out if it is worth the cost of obtaining both EU “CE” and “UKCA” safety certifications. The company estimates that the UK decision to create a dual regime will cost the company £20,000 it doesn’t have. 

There will be many of these stories, particularly for small businesses. Some will stop trading with Europe altogether, others — such as Hampstead Tea, Chiltern Distribution or Produmax aerospace parts — will look to adapt. The FT will track their progress as they do so. 

There will be some local “winners” from this transition process as UK businesses pick up work previously done by EU competitors, but economists are pretty clear that in aggregate the effects from erecting such barriers with the advanced economies on our doorstep will be negative.

John Springford, deputy director and former chief economist of the Centre for European Reform, said that it was inevitable that barriers to trade created by leaving the EU would act as a drag on the forces of “specialisation and exchange” that had been driven by the creation of the EU single market.

As he explains: “The UK provides advertising to big business in Germany and big business provides the UK with cars — it is that process that we’re weakening, which ultimately means that UK wages are likely to grow less strongly over time.”

In short, the laws of economic gravity point to the “very, very high” likelihood that the UK will end up poorer than peer economies in Europe a decade from now. 

The extent to which anyone will notice in the short term (no one lives the counterfactual, after all) and how that cuts into UK politics is a separate question.

Brexit in numbers

Column chart of NI external purchases* & imports by source, 2018 (£bn) showing The Northern Ireland economy is reliant on movement of goods across the Irish Sea

Just one quick number to consider this week as haulage and logistics companies try to adjust to the new trading arrangements — trade with Ireland is throwing up some of the most immediate teething problems. 

One of the main issues, Irish hauliers say, is preserving the circular nature of the trade flow. This means that trucks that drop off Irish produce on the UK mainland need to be able to reload in Great Britain and return to Ireland so they can repeat the process. 

If one side breaks down, the flow starts to get blocked, with knock-on consequences for both sides. The same principle applies across the short straits. 

In Ireland the system is already starting to grind. For example, Seamus Leheny, Belfast-based policy manager of Logistics UK, told MPs on the Northern Ireland affairs committee this week that one haulier had sent 285 trucks to GB since January 1, but got only 100 lorries back into Northern Ireland.

There are several factors at play: one is because of stockpiling (less need to send goods), another is delays caused by GB suppliers not having correct paperwork (so hauliers can’t lift the loads or they’ll get stopped) and some of it is deeper legal and process issues.

Chief among these, hauliers say, is the fact that no one seems to have found a legal formula to enable them to pick up multiple loads of agricultural goods one after the other. The rules around signing off EU export health certificates make this staple of GB-Irish supply chains very problematic — a fix is being sought.

Thus far there have been very few queues, but talking to industry it is clear there are still many concerns about what happens when the pre-Christmas stockpiles expire and the full force of EU-UK trade has to absorb frictions designed for “rest of world” trade.

Industry was also warned today that the French authorities will start to impose much stricter enforcement from next week, having been lenient thus far. When they do, just as with Ireland, it will be all about the impact on the circular flow.

Thanks for reading and please keep your feedback coming to brexitbrief@ft.com.

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