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24 February 2021

The Cost of Sovereignty

With sovereignty top of the agenda for the more hard-line Brexit advocates, most will be pleased with the outcome of Prime Minister Boris Johnson’s deal achieved in December 2020. Yet with talk of border backlogs and reduced fishing rights we ask, what is the cost to our industries?

TRADE OF GOODS
On a positive note, most goods sold to the EU from the UK will not be hit by any tariffs or quotas. However, these direct costs are not the cause for concern coming out the other side of this deal and, in fact, the indirect costs of increasing regulatory burdens are likely to hit UK firms selling into Europe. Restrictions in their most simple form are likely to put a dent in UK export margins across a number of sectors. In manufacturing, many countries import UK-produced vehicles, with 81% of all vehicles produced in the UK exported overseas. Of this figure, the EU is the biggest importer of UK-manufactured cars, with c.56% of exported cars landing on the continent. The limits on tariff-free access to the EU market hinges on the local content of the vehicle being exported so, as a minimum, 55% of the vehicle must be made from parts from either the EU or the UK to avoid this additional cost. This poses issues for British auto manufacturers who are now having to source at least this proportion of parts from regions with higher labour and manufacturing costs. However, electric vehicles (EV) are given some leeway, with EVs and Hybrids allowing up 60% international parts  falling to 55% by 2026)  and the most important and difficult component to source, batteries, allowed to be 70% international (falling to 50% in the same period).

FINANCIAL SERVICES
Unfortunately for perhaps the UK’s greatest export asset, The City of London, the effects of the Brexit deal remain unclear, with a very vague overview on general provisions for financial services. There remains no direction on market access, with yet more extensions from the EU commission as it analyses the UK’s financial regulatory structure. We await this verdict tentatively. That said, the UK and EU both desire strong financial oversight, where cooperation would be essential and, as such, are set to have a Memorandum of Understanding by March.

By no means are the trade of goods and financial services the only affected markets, but it could certainly be argued that the deals made for the industry will have the longest-term economic impact on the United Kingdom. Firstly, there are limitations on how the UK government can support failing firms and banks and, in order to match EU law, the UK cannot save a failing company without a restructuring plan and can only aid a failing bank with the minimum capital needed to wind down the bank’s operations. In addition, the UK must disclose any subsidies they award to companies.

When it comes to settling these disputes between the UK and EU, there may be an arbitration panel to rule on disagreements when one side has not held up its part in the agreement and which can order that side to either resolve the issue or compensate the other side. If one party does not follow the direction of the arbitration panel, the other party can avoid obligations which may include blocking market access or reducing cooperation. It’s certainly clouded with uncertainty.

FISHING RIGHTS
Are there plenty of fish in the sea? When it comes to British waters, it became a symbol of sovereignty. It did not present a large economic impact on the country but remained one of the most contentious sticking points in the eleventh hour of negotiations. In short, the UK fishing sector will take 25% of the current catch of EU fleets in British waters, which will take up to five years to be phased in. However, although the UK will eventually have control of its own waters, the EU could impose tariffs on fish if the UK limits access to British waters from the EU. Fears surrounded regulatory red tape when it came to customs; however, both parties have agreed on a trusted trader programme to avoid those indirect costs in relation to a slowing supply chain.

ENERGY
Although the UK has left the EU and, therefore, its emissions trading system, there is agreement to cooperate in terms of carbon pricing with potential to link the two systems. The deal also ensures the security of energy supply and, since the UK is a net importer of electricity, importing 8% of power from the EU, there are agreements to maintain the interconnectors allowing efficient electricity flows between the regions.

PROFESSIONAL SERVICES
People working in professional services in the UK will now face some barriers to practicing their careers in the EU and will need to have their qualifications recognised by each member state in which they want to work. When it comes to business travel for professionals, managers and specialists will be allowed to stay in the EU for up to three years, and trainees up to one year. without a work permit or economic needs tests.
 
The Cost of Sovereignty
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