Author: Maciej Danielewicz

Editor-in-chief of Obserwator Finansowy

The United Kingdom’s Great Leap Forward

“After Brexit, the United Kingdom is building trade links and developing its own competences in many modern sectors of the economy. This can be seen on the example of biotechnology and pharmacy – the United Kingdom has efficiently implemented its own coronavirus vaccine and is now one of the leaders in terms of vaccination,” says Dr Przemysław Biskup from the Polish Institute of International Affairs (PISM).
The United Kingdom’s Great Leap Forward

Przemysław Biskup (©PISM)

Obserwator Finansowy: The agreement on the final “divorce settlement” between the United Kingdom and the European Union was signed on 24 December 2020, that is, on Christmas Eve. This “Christmas Eve” agreement bears the name of the “Trade and Cooperation Agreement”, which emphasizes the positive dimension of the provisions ultimately agreed upon by the two parties after months of painful negotiations. However, it is known that in the future this partnership will no longer be based on a common market and a common customs union. Instead, we will have a relationship between entirely separate political and economic entities. As a result of the agreement, Brexit was finally completed. A new era of cooperation has begun. To what extent have the two parties been able to overcome their differences, and to what extent was this apparent compromise forced by the deadlines set out in the previous agreements?

Przemysław Biskup (Polish Institute of International Affairs): The fate of the agreement hung in the balance until the final days of last year. The talks lasted until 24 December, almost to the end of the transition period (which expired on 31 December). The agreement still hasn’t been ratified, and the situation currently looks less optimistic than it did in the first days of the year. The period of provisional application was supposed to formally last until 28 February, but was extended until the end of April due to ongoing works at the European Parliament. In light of the disputes concerning the implementation of this agreement which have arisen in the meantime, some MEPs are threatening to reject it during the ratification vote. This is not a particularly comfortable situation.

So, was this agreement indeed forced by the circumstances?

We should state that on the one hand, the agreement largely resembles a “protocol of differences”, and the other hand, a compromise based on the lowest common denominator. As a result, many issues were either set aside completely or only partially regulated. This is particularly striking, for example, in the area of foreign policy, security and defence, where the United Kingdom decided that the European proposals were not sufficiently attractive and at a certain point simply blocked further talks. This entire chapter was removed from the agreement. Moreover, many issues weren’t included in the negotiations at all. This was the case, for example, when it comes to trade in services.

And what is the shape of the deal that was negotiated and ultimately signed?

The agreement has a relatively open legal structure and provides for numerous revisions, carried out once every 5 years. If we were to extrapolate onto the new “Trade and Cooperation Agreement” our experiences from the application of the previous treaty between the EU and the UK – that is, the Withdrawal Agreement – then it is clear that a large portion of the provisions will only acquire any real meaning in the course of their practical application on the forum of the respective executive bodies. In the case of the Withdrawal Agreement, the main executive body was known as the Joint Committee. In the case of the new agreement, this main body is called the Partnership Council. Both bodies are complemented by a number of more specialized bodies. The new agreement also provides for the settlement of disputes through an arbitration tribunal. But the agreement signed on 24 December leaves many issues open or semi-open. A lot of issues were left out and are to be resolved in separate agreements.

Does the agreement treat the partnership between the EU and the UK in any a special way, or is this simply a standard agreement between large economic entities?

In the part related to trade, the new agreement represents the lowest level of advancement of economic agreements from the point of view of the EU system. Meanwhile, the part concerning the mutual partnership is very advanced. This shows the dual and unique nature of this treaty. The agreement is also very susceptible to future modifications. Moreover, it is also envisaged as a framework agreement, which means that its basic legal instruments will be automatically extended onto all subsequent treaties and agreements concluded between the EU and the UK in the future, unless they explicitly state otherwise. The new agreement sets out a relatively high level of sanctions for violations. But it could be said that the treaty does not provide for the application of sanctions on a discretionary basis – this issue is to be decided by an arbitration tribunal. The new agreement establishes what is in principle a duty-free zone, but with the caveat that this only applies to goods produced within the territories of the two parties (that is, goods produced in the UK and in the EU). This structure of the legal regulations puts emphasis on provisions determining the rules of origin and creates potential barriers to trade in products with a significant share of components originating from outside the UK or the EU.

Which side stands to lose more as a result of such provisions?

This is certainly an important issue for the UK in relation to the automotive industry. In fact, it is so important that, for example, Nissan announced the construction of a separate electric vehicle battery factory in the UK, because their continued imports from Japan would put into question the economic viability of selling British-produced cars in the EU.

If we look at the agreement in the global context, then this agreement provides for the liberalization of trade in goods, but looking at the problem from the perspective of the previous rules of trade resulting from the United Kingdom’s membership in the EU, it is certainly a regression. For example, the customs documentation became significantly more complex since the duty-free trade does not include VAT deductions. Additionally, it is necessary to document the origin of the goods, as well as their safety and compliance with the importer’s market standards prior to their introduction on the market. Meanwhile, the recognition of certificates issued by entities from the exporter’s market no longer applies. These are – and will continue to be – profound barriers for smaller companies. At present, they are already fully affecting the British exporters, while the European exporters are still impacted to a much lesser extent due to the British unilateral moratorium before the introduction of full controls on 1 October this year. In other words, EU-based businesses are now enjoying a vacation from the “control measures”, but it is only a matter of time when they will face the same problems as British companies. This issue partly explains the difference in the scale of the decline in British exports to the EU and European exports to the UK in January of this year (a 40 per cent reduction versus a 30 per cent reduction, respectively).

The agreement signed on 24 December generally ignores the area of services. This is typical for free trade agreements, but is, nonetheless, highly unfavourable compared with the United Kingdom’s previous participation in the Common Market. The European Union took care to regulate trade in goods, where it enjoyed a surplus in trade with the UK, while simultaneously limiting the flow of services, where the EU recorded a deficit. The new agreement makes an exception for transport services (especially land and air transport). The agreement provides some facilities for airlines, but all airlines will ultimately have to be European owned in order to take advantage of the open skies in the EU. A significant number of airlines in the EU previously had a mixed status (e.g. registration in the EU, but British ownership). Now these companies – including Ryanair, Wizz Air, and Iberia – must fully relocate to either the EU or the UK. British airlines will have limited ability to operate on the European market. For example, Ryanair has already announced that it would limit the voting rights of British shareholders in order to remain classified as majority-owned by investors from EU countries. This is supposed to enable this carrier to retain full cabotage rights within the EU.

And what about road transport? Polish carriers had a large share in this market, it was even seen as a Polish specialty.

In the field of road transport, so-called partial cabotage was introduced. In the period before the pandemic every fifth delivery truck headed to the United Kingdom was coming back empty (which was natural in light of the European Union’s export surplus reaching EUR 80-90 billion per year). Previously, in order to reduce the costs, these vehicles performed transportation operations within the territory of the United Kingdom. At present this possibility is retained – but has been limited to just two journeys carried out on the other side of the border. Ultimately, this will likely lead to a reduction of the role played by European carriers in the territory of the United Kingdom. Before Brexit, the British market was dominated by Europeans, therefore it is to be expected that Polish companies will be affected in this regard.

And what about the obstacles in terms of what is being transported – are there any groups of goods that are particularly vulnerable?

All exported goods are now subject to documentation requirements concerning a much wider range of their properties, but agricultural and food products are particularly affected by these regulations. Firstly, they are subjected to significantly more frequent physical inspections (fresh food is controlled in up to approximately 100 per cent of cases). Additionally, sanitary or phytosanitary documents are also required for these products, which creates significant grounds for potential problems at the borders. The EU has been implementing these controls on a full scale since 1 January this year, which has led, for example, to confiscation of sandwiches and drinks that were purchased by drivers for their personal consumption and that lacked such documentation. Meanwhile, the current British approach is much more pragmatic. The authorities of the United Kingdom want to maintain the smooth flow of goods and operate on the basis of the assumption that if certain goods were previously imported into the United Kingdom by so-called trusted suppliers (e.g. supermarkets), then their credibility most likely hasn’t changed overnight just because the United Kingdom withdrew from the EU. Additionally, the British authorities are focusing on controls carried out within the country (e.g. in warehouses and distribution centres) and not at the borders. The responsibility borne by the aforementioned trusted suppliers is quite extensive in this respect.

These issues are particularly visible with regard to the maritime border between Great Britain and Northern Ireland, which is supposed to help in eliminating a land border on the island of Ireland. This concerns the application of EU rules in relation to Northern Ireland for the purpose of protecting the integrity of the EU market. While the principle itself is not challenged by the British government and is included in the so-called “Irish protocol” to the Withdrawal Agreement, its application in relation to goods clearly intended for consumption in Northern Ireland itself has caused strong controversy and disputes. It turned out, for example, that – in accordance with the European Union’s interpretation of these regulations – it will not be possible to import used construction and agricultural machinery, or plant seedlings aimed for distribution in local gardening supply stores, from Great Britain to Northern Ireland, because they contain soil from the United Kingdom, or that it will not be possible to send individual postal parcels from Great Britain to Northern Ireland without a customs declaration. This has generated opposition among the unionist community and led the unionist political parties to initiate a procedure aimed at the termination of the “Irish Protocol” by the UK. In response, the British government has unilaterally suspended the application of some of these border procedures in Northern Ireland until 1 October. The European Commission protested against this move and announced the filing of a lawsuit at the Court of Justice of the European Union.

The United Kingdom currently claims that the border controls required by the EU violate the provisions of the Good Friday Agreement and constitute a threat to the Irish peace process. In the meantime, on 29 January this year there was an incident in the course of which the European Commission temporarily shut down the land border on the island of Ireland in order to block the possible exports of vaccines to the UK in connection with the legal dispute between the EC and the AstraZeneca group. Although the blockade only lasted a few hours, the EU introduced it without the consultations required by the treaty, which triggered a lot of negative emotions on the part of the unionist community. The issue of border controls on the island of Ireland is likely to remain a source of problems in the coming months.

Are these difficulties affecting the availability of goods – and especially food products – in the United Kingdom or leading to price increases in the shops?

The costs of trading have certainly increased to some extent. We can see that this has affected prices in certain supermarket chains. Even the German chains, such as Lidl, are now planning to source more goods within the United Kingdom, as importing them from the territory of the EU is not economically viable at the current cost levels.

There are plans to shift the supply chains in the food market: for example, the oranges on the British market do not have to be imported from Spain, and chicken does not have to be imported from Poland. 

But there are also new challenges for both parties. Here we can clearly see that a free trade agreement is not the same as the EU common market. On the one hand, there are fewer advantages in trade with the EU, but on the other hand, the United Kingdom will be able to open up its market to other countries if that proves to be more favourable. The EU customs union has a protectionist effect on imports from third countries, but starting from 1 January 2021, the British no longer have to follow such restrictions. There are already plans to divert the supply chains in the food market: for example, the oranges on the British market do not have to be imported from Spain and can be purchased from South America instead. Meanwhile, chicken does not have to be imported from Poland (and we should recall that one-third of Polish chicken exports are headed to the United Kingdom) and may be sourced, for example, from Brazil. Of course, the same processes will also affect British exporters. However, we should keep in mind that the EU previously enjoyed an export surplus in this regard.

So, the British are now entering a – somewhat fascinating – period when they can search for better import and export markets?

Yes, I’m certain there will be a restructuring of the British market in terms of supplies from abroad. For example, the British food market is one of the largest markets of this kind in the world. It is a very wealthy market, with affluent consumers, and the British have very limited domestic food production (only accounting for approximately one-third of the total consumption).

Let’s keep in mind that the full trade procedures provided for in the agreement are still to be implemented in the coming months, with the deadline on 1 October. This will generate an additional impulse to assess the effectiveness of the supply chains. British entrepreneurs will have to rethink the existing trade links in terms of cost effectiveness. For example, it is known that European food products are not competitive in terms of prices compared with what is offered across the world. When the barriers associated with the EU customs union are removed, and, additionally, new technical barriers are introduced starting from 1 October, this will provide a strong impetus for changes in the supply chains. This scope is likely to be limited by both sides’ approach to the procedures, but the initial experience is not encouraging. Sooner or later the conduct of both parties will be based on the principle of reciprocity, which – if the current trend is continued – will lead to a collision on both sides.

For example, before Christmas France introduced entry barriers formally related to the pandemic. However, they were not limited to the movement of people, but were also extended to the flow of goods. In this case it is worth noting that 85 per cent of physical deliveries of goods pass through the Dover-Calais route. Is this sustainable? I think there may be some diversification in the future, for example, towards the other ports. Dover-Calais will lose, while Ostend, Amsterdam, Rotterdam, and Zeebrugge will gain. It would also be worth exploring the viability of direct maritime connections from Poland. Although the Dover-Calais port facilities themselves are indeed well prepared, even with solutions based on artificial intelligence, the bureaucratic barriers could reduce the efficiency of its operations. In the medium-term a serious barrier could lie in the limited availability of customs agents, especially on the British side. This was one of the reasons why transport fees have recently increased by up to 10 times. As a result, exports of certain goods on both sides of the new border may no longer be economically viable.

What groups of goods will be most affected by the expected or already occurring changes in supply chains?

This will certainly apply to food products but will not be limited to this group. The pandemic has changed a lot here. From the viewpoint of the United Kingdom, the pandemic is accelerating the digitization of the economy by at least a decade. It is showing the importance of greater self-sufficiency, for example, in the area of pharmaceuticals, and it is forcing a higher level of public spending. At the same time, both the EU and the UK are supposed to undergo a massive green transformation, with the United Kingdom already seen as a global leader in this regard. For example, a major climate conference will be held in Glasgow this year. The effect is that both in the EU and in the UK, there are strong expectations that if we are already spending large amounts of money, then we should spend it on digitization, electromobility, and green energy. In the case of the UK, this has been translated into a programme for the reindustrialization and regeneration of previously neglected regions. This programme in itself should already generate significant changes in the supply chains.

The Trade and Cooperation Agreement reflects the new British strategy for the development of a European electric vehicle production hub in cooperation with Japanese corporations.

One example of this was the fierce competition for electric vehicles. While before the pandemic the United Kingdom was in some ways like a larger version of Poland – that is, it was home to numerous car factories belonging to European companies – it now seeks to rebuild its own automotive industry. The British want to focus on developing their own potential in the field of electromobility. Additionally, they have the ambition to become a major exporter of cars, even though at present they are importing approximately 1 million cars per year from Germany alone. The Trade and Cooperation Agreement reflects the new British strategy for the development of a European electric vehicle production hub in cooperation with Japanese corporations on the basis of the UK-Japan free trade agreement. The agreement with the Japanese also includes provisions concerning the flow of data and digital services.

And what export markets are the British looking for?

The British have already managed to renew almost all of the trade agreements inherited from the EU. The most important of these was the aforementioned agreement with Japan. Now they will start negotiating new agreements geared towards the new challenges ahead. The main objective of the agreement with the EU was to maintain the current trade for as long as possible, but without sacrificing the freedom to conclude new agreements with third countries. The British believe that the potential for growth ultimately lies elsewhere – mainly in South and East Asia. Therefore, from the point of view of the UK, the agreement with the EU rests on the assumption that if the mutual relations cease to be profitable compared to relations with third parties (e.g. Japan), then it will be worth accepting growing trade barriers in relations between the EU and the UK without having to renegotiate the entire agreement with the EU. If it proves beneficial for the UK, then it will broadly open up its market to some country, such as Australia. At the same time, it could also join entire groups of countries within the framework of free trade agreements. Previously such independent actions were impossible within the bounds of the EU Common Market.

So, the United Kingdom assumes that it could benefit from this approach?

Twenty years ago the United Kingdom still exported nearly 60 per cent of the goods it produced to the European Union. Today, this share is approximately 43 per cent. Exports to the EU have been steadily declining in recent years. The British strategy is as follows: while we have access to the EU market, we will not give it up, but future growth is located elsewhere. For example, on 1 February this year the United Kingdom officially applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

And what about the financial services sector located in the City of London? European companies have started organizing their stock exchange debuts in Amsterdam instead of London. Meanwhile, big banking groups are searching for headquarters on the European continent and are moving away from the United Kingdom. This can’t be seen as a beneficial development. 

There is currently a heated debate going on in the United Kingdom, which is stimulated by the Bank of England – it concerns the extent to which it would be worth sacrificing the free operation of the financial market and freedom in shaping regulatory policy in return for access to the European market. The belief is that regulatory freedom is more important than access to the EU market. The dominant view is that the United Kingdom is such a large financial market that EU customers will operate there anyway. As for stock trading in Amsterdam, the reality is that trade of this sort provides relatively low earnings to the City. On the other hand, the British are highly interested in the continued servicing of the European business and government bond market. Of course, the EU wants to change that. But the real question here concerns the behaviour of individual EU governments. This issue is interpreted differently by countries with large financial centres competing for the individual parts of the financial market, and differently by countries that simply want to issue their debt as efficiently as possible. However, issuers usually go to the market that is the deepest and the most effective. At present, this logic this still points to London, and is likely to continue to do so for a long time to come. As a result, in this case there is already some tension within the EU between countries such as France, Germany, the Netherlands, Ireland and Luxembourg, on the one hand, and the majority of the remaining countries, on the other hand.

The whole world is currently dealing with the pandemic, and in this area the British also want to reap the benefits related to their “divorce” from the EU. They started vaccinating their residents before the EU member states and have already immunized many more people. On top of that, they are using their own vaccine!

This shows a partial reversal of roles. Since 2016, in the course of Brexit negotiations, we have got used to the image of a divided and ineffective United Kingdom juxtaposed against a unified and efficient EU. However, when it comes to vaccines, the exact opposite is the case. In March 2020, the British decided to leave the European Medicines Agency, the European Centre for Disease Prevention and Control, and the joint vaccine purchase programme implemented by the European Commission. In spring 2020, they independently negotiated contracts with all the potential Western suppliers of vaccines for a total number of approximately 340 million doses (with the UK population standing at 67 million people), they signed contracts for the construction of production lines for two of these vaccines in their own territory, and by the end of December 2020 they had already officially registered two vaccines. The swift development of a vaccine by Oxford University and its subsequent preparation for mass production by the company AstraZeneca also wouldn’t have been possible without the Brexit-related industrial strategy promoting biotechnology and pharmacy, which has been developed since 2016. Other areas represented in the strategy – such as electromobility, artificial intelligence, or fin-tech – also reflect the very strong potential of the British economy in areas of research and innovation. It’s also worth noting that the British are the global leaders in the area of identifying and modifying the human genome (they perform half of all genome sequencing in the world).

The Brexit-related industrial strategy promotes biotechnology and pharmacy, electromobility, artificial intelligence, or fin-tech – this reflects the very strong potential of the British economy in areas of research and innovation.

 Will the UK take full advantage of its potential in these areas, as has been the case with regard to the supplies of AstraZeneca vaccines to the EU?

In this case, the European Union has unnecessarily elevated a private law dispute with a corporation to the level of inter-state relations in the area of foreign policy. Recently the President of the European Council wrongly accused the British government of introducing a ban on the exports of vaccines and was subsequently forced to retract his statement. Unfortunately, this is not a good sign for future bilateral relations.

So, generally speaking, there is no reason for the United Kingdom to mourn its “divorce” from the EU? It seems that it has no time for that, as it is busy searching for better opportunities for development.

The United Kingdom is pragmatic – many of the changes in relations with the EU will be costly, but the current British government was chosen by pro-Brexit voters, it represents these voters, and they are prepared for the necessary sacrifices. Meanwhile, the issue of vaccines has proven that – in the words of Ursula von der Leyen – sometimes riding an agile speedboat can be more advantageous than being onboard of a super tanker.

– interview by Maciej Danielewicz

 

Przemysław Biskup is an analyst of the Polish Institute of International Affairs (Polski Instytut Spraw Międzynarodowych – PISM). He conducts research in the field of foreign, European, and internal policy of the United Kingdom and Ireland. His scientific interests include Brexit and transatlantic relations. He holds a PhD in political science (University of Warsaw, 2006) and a master’s degree in law (University of Warsaw, 2001). He received a scholarship from the Marie Curie programme at the University of Sussex. He is the author of dozens of scientific publications, a research fellow at the Warsaw School of Economics, and a visiting professor at Sciences Po Lyon (2016, 2018).

Przemysław Biskup (©PISM)

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