• The London Finance Journal

What’s going on with Brexit amidst the pandemic?

For the past 4 years, Brexit has been the most discussed topic and has taken the majority of media attention. The recent coronavirus outbreak at the beginning of this year created turbulent economic conditions, which are unprecedented and certainly have implications for post-Brexit Britain.

In 2016, the British public voted to leave the European Union, and again in the 2019 General Election, the Conservative party whose manifesto was to ‘get Brexit done’ by January 2020 won a landslide majority of 345 out of 533 seats; the party’s biggest in decades, meaning it could now comfortably escape the parliamentary deadlock over Brexit debates. For instance, its controversial points-based Immigration bill, which would revoke the rights to freedom of movement EU citizens currently have and vice versa for UK citizens, was voted through the House of Common in March. Labour argues that the government’s salary threshold of £25,600 neglects a lot of workers in essential services such as NHS and TFL staff. The public’s view towards those considered “unskilled” workers have changed amid the pandemic as their roles are proven extremely critical.

The UK has formally left the EU on January 31st this year and is now in a transition period during which the UK will remain in the customs union and the single market in order to minimise disruptions to businesses and border control. The UK is still being treated as a member state who must abide by EU rules but no longer has voting rights, as it has lost its membership of the European Parliament and European Commission.

Boris Johnson promised during his election campaign to negotiate a trade deal with the EU by December 2020 which is the deadline of the transition period. The pandemic undoubtedly interrupted this original timetable as Brexit is relegated to a secondary concern. The government revealed that 47 officials have been redeployed from Brexit duties to deal with the pandemic. No.10 has until June 30th to ask for an extension, only weeks from now. Despite having to prioritise mitigating the impact of COVID-19, David Frost, the UK negotiator said that Downing Street has no intention to prolong the process further.

Although businesses are already struggling to survive the pandemic-induced recession as the UK experienced the sharpest economic contraction since the 1929 Great Depression, firms may need to prepare for another substantial change come the end of the year. The delay and obstacles caused by the pandemic greatly add to the uncertainty of where the UK is heading in 2021. Negotiations between UK and EU are deferred back after the EU chief negotiator, Michel Barnier, and Boris Johnson tested positive for the coronavirus along with David Frost showing mild symptoms. Both chief negotiators were self-isolating disrupting the process further. The 2nd round of negotiation over the future relationship was initially scheduled to take place in late March in London and had been postponed due to strict social distancing rules in Belgium and the UK.

There have only been 4 rounds of talks so far which are now taking place via videoconferencing. Both sides have expressed their disappointment in the progress made on the most significant issues. The online trade talks appear to have prevented meaningful progress and are less effective as opposed to a physical meeting. “Face to face is important in order to build trust...the body language, the ability to have informal conversations in an informal setting, as in so many other transactions, are important.” says Philip Rycroft, the former permanent secretary at the Department for Exiting the European Union.

The key difficulties preventing a deal being concluded involve fishing rights, the role of the European Court of Justice and the level playing field – a set of common rules which prevent businesses in one country having an advantage over their rivals in another. These matters are ones of political rather than technical and they are yet to be resolved as the Tory promised to return British independence and “take back control”. It is, hence, aiming to strike a deal with very limited EU interference in domestic affairs economically and politically. This matter of sovereignty was already used as a justification for the UK’s refusal to continue being a signatory of the European Convention on Human Rights. After the most recent negotiation, Barnier was displeased that the UK backtracked on pledges it made on the key issues outlined in the jointly agreed Political Declaration (PD), which sets out Johnson’s “oven-ready deal”. While the PD isn’t legally binding, it is an agreement that Westminster has ratified, showing its commitment to abide by and negotiate based on the prearranged settlement.

Seeking an extension would allow Johnson’s government to not rush to an agreement and leave food and medical supply, products essential in a crisis being frictionlessly imported from the UK’s largest trading partner and nearest neighbour. The EU accounted for more than half of all UK imports and 45% of UK exports in 2018. Individually speaking, the US is Britain’s largest trading partner, but holistically, the EU is responsible for the largest share of UK trades. It is therefore rather worthwhile, in practical sense, to request an extension while resources are mainly dedicated to the pandemic.

However, a disadvantage of extending the transition period is primarily political. The Conservative government insists on fully delivering Brexit by the end of 2020 to prevent another year of paying into EU budgets and obeying EU rules with no say in policies.

In the case that the government is unable to arrange an agreement with Brussels by the end of the year, the UK would have to trade under World Trade Organisation (WTO) terms which would subject most of UK exports to tariffs until a free trade agreement (FTA) is settled and implemented. This would require border checks at ports to ensure that imported goods meet regulatory requirements. The process is costly and very time-consuming. WTO rules largely exclude trade in services which makes up 70% of the UK economy in 2018 whereas the most problematic fishing industry accounts for only about 0.12%. This again has to do with the sovereignty crisis. Britain wants to be an independent coastal state and assert control over its waters by exiting the unpopular Common Fisheries Policy. British fishermen have long argued that the quota-based system allows French fishermen too much access into the English Channel and a better model would be zonal attachment where fishing rights depend on where the fishes live.

Some economists are wondering whether the expected contraction in GDP resulted from no-deal Brexit would be masked by the impact of coronavirus. An obvious consequence of a hard Brexit, unrelated to the virus, is that it calls for hard borders, which will cause massive lorry jams at the Ports of Dover and Calais. Moreover, the Irish border, as the only land border between UK and EU, created a complicated circumstance that could trap the UK in the EU or jeopardise the Good Friday Agreement at the extreme ends. Although the delays in restocking empty shelves as a result of heavily measured custom checks would exacerbate the shortages caused by panic-buying, especially with the risk of a second wave of COVID-19.

While No.10 is attempting to plan for all anticipated scenarios, it is struggling to rebuild a 6-week medical stockpile as global supply chains are interrupted. It is estimated that 75% of 7,000 registered medicines and more than 50% of the consumable clinical items the UK uses are imported from or via the EU. Johnson’s government spent £102m in 2019 purchasing additional capacity from ferry companies to alleviate some burden from the Dover-Calais trading route, including a contract with Seaborne Freight which was cancelled after it was found that the company owned no ferries.

Although it is arguable that businesses have had years since the referendum to prepare for exit from the EU, it has been a period of great complications that has taken 3 prime ministers to try and sort out. It is rather difficult if not impossible to predict and prepare for the right outcome. Especially with the unforeseeable pandemic, Johnson has got to decide whether sovereignty is worth sacrificing to alleviate the uncertainty in such an unprecedented and trying time. This decision is so significant that it will likely be the defining element of his political legacy.

By Nhatapa Pattanakul


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