With time running out, the EU and UK finally conclude agreement on future relationship

British Prime Minister Boris Johnson signing the UK-EU Trade and Cooperation Agreement as Lord David Frost, UK chief negotiator, and Sir Tim Barrow, UK ambassador to the EU, look on, December 30.
Tuesday, January 5, 2021

With time running out for an agreement on their future relationship that could be approved in time for it to take effect at midnight in Brussels—11 p.m. in London—on December 31, when the UK would leave the EU’s single market and customs union, on Christmas Eve morning, after some late-night, last-minute haggling over fishing quotas, European Commission President Ursula von der Leyen and British Prime Minister Boris Johnson announced the UK and EU had finally concluded an agreement.

In order for the 1246-page UK-EU Trade and Cooperation Agreement to take effect at midnight, Brussels time, on December 31, it would of course have to be approved prior to that moment by the UK parliament, the EU member states and the European Parliament. (The British cabinet approved the agreement in the late evening of December 23, prior to Johnson’s announcement.) The European Parliament had previously said it would not be able to review and vote in time for the agreement, if approved, to take effect at midnight on December 31 unless it were concluded by December 20 at the latest. Since that deadline had been missed, the EU made plans for the states to approve the agreement and apply it provisionally, pending review and approval by the European Parliament in early 2021. After announcing the agreement, the Commission distributed it to the member states and the German EU Council Presidency announced the EU ambassadors would meet on Christmas Day morning to begin their review after being briefed on the agreement by Michel Barnier, the EU’s chief negotiator. On December 28, the ambassadors, instructed by their governments, reconvened and unanimously agreed to the provisional application of the agreement as of January 1, pending the Parliament’s eventual approval. They formally completed the decision in writing the next day. The provisional application applies through February and can be extended if necessary.

The UK, meanwhile, had already made contingency plans to recall the Parliament from its Christmas recess so the House of Commons and House of Lords could consider and approve legislation implementing the agreement so it could, after receiving the Queen’s assent, take effect as of 11 p.m. on December 31. The Parliament was recalled on December 30 and the government introduced the European Union (Future Relationship) Bill with the aim of completing all stages of the legislative process in both Houses that day. The Bill was approved on its Second and Third Readings in the House of Commons by a vote of 521-73. Voting in favor were 359 Conservative MPs and 162 Labour MPs. Voting against were 44 Scottish National Party MPs, 11 Liberal Democrat MPs, 8 Democratic Unionist MPs, three Plaid Cymru MPs, two Social Democratic and Labour Party MPs, two independent MPs, one Green MP, one Labour MP and one Alliance MP. 36 Labour MPs, two Conservative MPs, and two independent MPs, one of whom was Jeremy Corbyn, the former Labour leader, abstained. After the Third Reading, Johnson signed the TCA, which had been flown from Brussels after having been signed that morning by von der Leyen and European Council President Charles Michel. That evening the bill was approved without opposition by the House of Lords on its Third Reading and, later that evening, it received the Queen’s assent and became law.

And so, four and a half years after British voters decided by a 52-48 margin to leave the EU, more than two years after the UK and EU agreed to a 585-page Withdrawal Agreement as well as a non-binding Political Declaration setting out the framework for their future relationship, more than a year after the UK and EU agreed to an amended Withdrawal Agreement containing a revised Protocol on Ireland/Northern Ireland and a modified Political Declaration, and eleven months after the UK left the EU, we now know the broad parameters of its relationship with the EU that began last Friday.

The Trade and Cooperation Agreement provides for trade without tariffs and quotas, as well as a broad economic, social and environmental partnership, a new partnership for citizens’ security, and a common governance framework. Having the relationship described in the Agreement is clearly better, much better, for both the UK and the EU than not having an agreement. Nevertheless, as both Sir Keir Starmer, the Labour Party leader, and Theresa May, the former Conservative leader and prime minister, noted in last week’s debate in the House of Commons, while the TCA provides for trade between the UK and EU without tariffs and quotas, because the UK is no longer a member of the EU’s customs union, there will be new non-tariff barriers – export declarations that have to be filled out, customs checks at the borders, food and animal clearances, regulations pertaining to rules of origin for components of goods, and other forms of red tape, all of which will introduce delays and add to the costs of those trading with the EU. According to a November House of Commons Briefing Paper on UK-EU trade, the UK had a deficit in trade in goods with the EU of £97 billion in 2019. Introducing new non-tariff barriers is hardly the best way to pare down that deficit by increasing British exports to the EU.

As important as its trade in goods with the EU is, the largest sector by far of the British economy involves services, which account for slightly more than 70 percent of GDP. And in contrast to its large deficit with the EU in trade in goods, the UK’s trade in services with the EU produces a surplus—£18 billion in 2019. Financial services alone produced a surplus of more than £20 billion in 2019 while other business services produced a surplus of £14 billion. Given both the relative importance of services in the British economy and the fact that its trade with the EU in services—especially financial and other business services—produces a surplus, one might have thought that, in negotiating the TCA, the UK would have focused on enhancing its trade in services. Yet that didn’t happen; it spent far more time and effort in resisting EU demands in regard to fishing—notwithstanding the fact that fishing accounts for less than 0.5 percent of the UK GDP—than in negotiating provisions that would benefit the largest sector of its economy. Indeed, as Starmer noted in the debate, the TCA not only does little to promote British trade in services with the EU but, because of new regulations pertaining to professional qualifications and short-term business travel, coupled with the end of free movement, those selling services in the EU now face new regulatory obstacles. For example, one obscure provision allows a party to the agreement to determine the institutional and legal form through which a new financial service may be supplied and requires authorization for the supply of the service. A decision in regard to authorization is to be made in a “reasonable” time and authorization can be refused for “prudential” reasons, which of course leaves enormous latitude for administrative discretion.   

Both Starmer and May, who worked in financial services before entering politics, noted that the TCA doesn’t provide an arrangement through which a British provider of a financial service can obtain certification that it satisfies the EU’s criteria for regulatory “equivalence” in regard to provision of the service. The only way British providers of such services can operate in the EU is by satisfying those criteria—meaning they are judged to adhere to EU regulations. Alluding to the provision mentioned above, May noted that under the TCA financial service providers won’t have an automatic right to provide services in the EU and will have to be screened and approved by Brussels and individual member states. She faulted the negotiation for not reaching an agreement in regard to financial services: “In 2018 in Mansion House, I said that we wanted to work to get a financial services deal in the future treaty arrangement and that it would be truly groundbreaking. It would have been, but sadly it has not been achieved. We have a deal in trade which benefits the EU, but not a deal in services that would have benefited the UK.” It’s not surprising, of course, that the EU resisted agreeing to the inclusion of provisions that would benefit British providers of financial services, given the UK’s substantial surplus with the EU in such services. But it is surprising the UK didn’t push harder to get better treatment for its providers of financial services; after all, the EU does very well, and will continue to do very well, in its trade with the UK in goods, including, most notably, motor vehicles, in which the EU  enjoyed a £30 billion surplus in 2019.

Instead, attention was focused in the last days of the negotiation on a segment of the economy— fishing—that, as noted above, accounts for less than one percent of the UK GDP. Indeed, it appeared quite possible early last week that a deal would not be agreed because of the firm opposition of a group of EU member states led by France to the UK’s demands in regard to the fishing issue. In the end, and with the personal interventions of Johnson and von der Leyen, the issue was resolved. But as with services, the terms of the TCA suggest the EU got the better of the deal in regard to fishing. The UK did get, after a longer-than-desired 5½-year “adjustment period,” EU agreement to annual, rather than multi-year, negotiations to allocate shares of the catch in UK waters. But it accepted an increase of only 25 per cent in its share of the annual value of the EU catch in UK waters—€650 million—over the “adjustment period,” far less than the 60 to 80 percent “repatriation” it had insisted upon earlier in the negotiation. It also accepted continued access for EU fishers to British coastal waters within 6-12 nautical miles of the shore rather than their complete exclusion, as it had demanded at earlier stages in the negotiation. And as the Scottish government has noted in its analysis of the fishing agreement, the UK obtained an increase in the quota for UK fishers in only five of the 13 fishing areas around and near Scotland while accepting no increase in two of the areas and reductions in six of the areas, including reductions in the Scottish catch of North Sea cod and haddock. We will no doubt hear much more about this in the run-up to the May 7 election in Scotland, in which the SNP is on track to win a substantial majority in the Parliament and in which, according to a recent poll, almost 70 percent of all Scots now support independence.

There can be no doubt that the UK having left the EU’s single market and customs union with the Trade and Cooperation Agreement concluded, approved, and in effect as of midnight last Thursday is better—much better—than if it had left without such an agreement in effect. Nevertheless, the TCA falls well short of what many had hoped for, both in regard to trade in goods and, especially, in regard to trade in services. It will obviously be very difficult in the days ahead, given the overwhelming impact on the economy of the ongoing Covid pandemic, to discern the extent to which the decision to leave the EU’s single market and customs union will, even with the TCA now in effect, hurt the British economy. But there can be little doubt that having done so will impose some costs in the near and medium term. In its October Economic Survey of the UK, the OECD estimated that leaving the single market and customs union with a comprehensive free trade agreement will result in an overall loss in output over the medium term of about 3.5 percent, two-thirds of which will occur because of rising costs in the trade of goods, including non-tariff barriers, and one-third because of regulatory barriers to trade in services. In November, the UK Office for Budget Responsibility likewise estimated that leaving with a typical free trade agreement will result in a loss in output over the long run of 4 percent. That’s better than leaving without a deal, which would have reduced GDP by an additional 2 percent in the first half of this year and an additional 1.5 per cent over five years. But it’s not better than what the UK had until midnight last Thursday.   

David R. Cameron is a professor of political science and director of the European Union Studies Program at the MacMillan Center.