Britain’s trade options are not what Johnson promised

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Brexit deal or no deal?

Remember when Boris Johnson won the election and brought back that ‘oven ready deal’ with the EU? After 3 years of tiresome back-and-forth between Brussels and London with a pile of draft agreements rejected by the House of Commons, Johnson finally had the required majority to whip the treaty through the approval process. January 31st, 2020, Boris Johnson and his fans finally celebrated what they wanted to achieve since 2016. Leave the European Union!

With his upbeat ‘can do’ mentality and hyped for his self-proclaimed skills as a gifted dealmaker, it would only be ‘a matter of time to work out a trade deal with our friends in Brussels’ [sic] and ‘now that trade deals are up for grabs and we are no longer bound by the bureaucracy of Brussels, the future for Great Britain is brighter than it has been in many years’ [sic].

Confusion started to kick in when Boris Johnson said only few days after the ‘we made BREXIT happen’ party ‘We want a free trade agreement, similar to the Canada deal’ which refers to Comprehensive Economic and Trade Agreement, or CETA for short. CETA does not provide free trade in the way the United Kingdom enjoys it until the end of 2020. It does remove and reduce tariffs on goods, but not all. It also does not lift quotas; it only increases quotas.

What CETA does not provide is arrangements for services and especially not for financial services and travel, which form the majority of the services provided by the United Kingdom to member states of the European Union. In fact, these services form significant contributions to the entire trading balance of the UK. Especially the financial services between the UK and the EU will be impacted by BREXIT one way or the other, and a ‘CETA like deal’ will not improve that.

What makes the financial services so special? Within the European Union there is so-called passporting for financial services including capital which allows the financial institutions to conduct their business throughout the European Union without the need for local branches, licenses, and all the resources and costs that come with that. In short, a licensed bank in Spain can for example conduct business in Germany without the need for a local branch and license.

Given that London is seen as the financial capital of Europe and the European Union, one would expect that an optimal agreement for the financial industry would be a top priority for Johnson. A ‘CETA like deal’ definitely does not offer that! And with services being no less than 42% of the entire export volume, preferring such a deal for the future makes as much sense as stating that the UK pays 330 million per week to the EU without mentioning the 12 billion weekly tariffs free trade which would accumulate to almost 1 billion in tariffs and customs costs per week…

Even if Boris Johnson would be able to negotiate a trade agreement which includes services in the few remaining days after he already stated that he will not pursue further negotiations with the European Union, there will be no passporting for the British financial industry and their business with the EU. At best they will be able to obtain equivalence status which eliminates some hurdles but not all. With an appropriate agreement, financial services can continue to operate under supervisory law. Before we declare potential victory, the European Union made crystal clear that the supervisory law will be that of the European Union after which Boris Johnson issued a statement that ‘the financial industry will have to find new solutions and markets after 2020’ [sic].

The British travel industry was already looking for support from their government in reaching a deal with the European Union before the COVID pandemic crushed their markets. Even when the UK opted out of the Schengen Agreement and Amsterdam Treatment, tourists and business travelers dearly enjoyed the ease of travel from and to the European Union. All hopes were crushed when Boris Johnson stated ‘the travel industry will need to prepare for a different business environment and might have to look at alternative destinations, and I am sure that they will do so with the good old British can do spirit’ [sic].

Britain also needs a comprehensive trade agreement for its goods and based on the trade balance one will quickly come to the conclusion that a ‘CETA like deal’ does not even remotely cover the requirements to keep economical developments at par level. The UK depends on imports from the EU in almost all areas of its economy and having both tariffs and full customs procedures in place will drive up prices and resources as of January 1st, 2021. But it isn’t just the goods where the British economy will suffer under a ‘Canada deal’ or even less than that.

The United Kingdom imports enormous amounts of parts to produce the goods it consumes and exports. A very clear example is the car industry. McLaren is still a British brand, but it is not producing the volumes that would require a trade agreement. At first sight, Auston Martin appears to be the other British brand but not for WTO trade rules. Besides the AMG engines and parts coming straight from Daimler, enough other parts are imported to exceed the international ‘Made in the United Kingdom’ limits. The same applies for all other cars manufactured in the UK. Parts imported from Turkey, Japan and the European Union make those cars, more than half of which are exported to the European Union, not made in the United Kingdom.

Unless there is a very comprehensive trade agreement, or even just a trade agreement for the car industry, this means that the British car manufacturers will face the default 10% WTO tariffs and even up- and downstream for their exports to the European Union. The response from the car manufacturing industry is already communicated loud and clear: unsustainable! Toyota and Nissan have equivalent plants within the European Union from which they can serve the market without these tariffs.

And the other brands? They are in Indian, French or German hands with more than enough production capacity at home for the current and expected volumes in the coming years. Gone are the benefits of a free market in combination with low corporate taxes in the United Kingdom. Preparations for downsizing from serving the European markets to serving the British markets have already been announced, and those changes will also impact the British automotive suppliers.

With a ‘Canada Deal’ or an ‘Australia Deal’, the financial industry, the travel industry and the car industry will suffer significant deflation of their market share within the European Union, and at much higher costs. A real trade deal could have decreased those impacts but not completely. It is unlikely that a typical ‘in the nick of time Johnson deal’, when there will be any deal at all, will cover these areas. They are however a significant chunk of the British trading balance and exports.

The highly appraised (mainly by himself and his followers) and often cited ‘upbeat can do’ spirit of Boris Johnson has little to no value when these words are not followed by real and constructive actions. So far, there has not been much more than words, and in many cases these words were contradicted by himself not much later. Trade deals up for grabs? British businesses are anxiously awaiting them…! The ‘Canada Deal’ is last week, now it’s ‘Australian Deal’ which basically means WTO.

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