Insights & Advice


Brexit at last

After four years of squabbling, and nine months of last-ditch negotiations, the United Kingdom (UK) and the European Community (EU) have come to a compromise agreement. The deal is much more an economic partnership than a true parting of the ways.

The new economic system covers large areas of bilateral trade, including autos, industrial materials, manufacturing, the pharmaceutical sector, as well as professional services. It also allows the UK freedom to set new standards in areas like the environment and labor laws, as long as any changes do not overstep European standards by too much.

The idea is to maintain a level playing field, but trade tariffs could be imposed unilaterally, if either side believes unfair government subsidies are being granted to companies or that firms are engaged in unfair trade practices.  If that were to occur, then the aggrieved side could demand accelerated arbitration to resolve the issue through a new “rebalancing mechanism.”

The UK also agreed to establish an independent authority to review state-aid, although it will no longer be required to adhere to the EU’s state-aid rules.

Fishing rights in UK waters looked to be a deal breaker in the last few months. It was resolved, at least for now, but neither side got what it wanted. The result is that English vessels will increase their share of fishing rights in British waters from about one half to two-thirds. After this initial agreement, fishing rights will be negotiated on a yearly basis. If, for some reason, the UK should revoke access, the EU has the right to slap tariffs on British fish exports and/or shut the UK out of its energy markets.

As for transportation, UK carriers will still have flying rights into the EU, but they will be prohibited from flying between two points within the EU. Most British airlines expected this, however, and have set up foreign subsidiaries in order to continue their current route schedules within the EU.

UK truckers, on the other hand, did not get off that easy. British haulers will still be allowed to travel across multiple countries in the EU, but they will be limited to a single drop-off, and only one pick-up, when in Europe. The new rules are expected to hurt the British trucking business, since the logistics of one drop-off point and getting a full load back to the UK will be difficult.

General travel will also become more cumbersome. Visas will be required for visits of more than 90 days, and all Europeans will encounter more passport checks. Food and farming businesses will also face some disruptions. The supply chain for food between the EU and UK will most likely undergo some disruptions, and both sides could see prices for certain foods increase, in some cases, substantially.

As for pharmaceuticals, tests and inspections on one side of the English Channel will be considered valid on the other side, but the agreement fell short of mutual recognition of safety and quality tests.  That will be costly, and likely involve duplicative efforts that will mean higher costs and longer delays for patients.

In the case of chemicals, autos, and other manufacturing products, while some tariffs will be averted, the red tape and regulations that will be necessary to export and import products will increase considerably. Manufactured products, for example, will need to be certified twice to meet both UK and EU standards.

Professional qualifications also took a body blow since the agreement failed to allow for the continued practice of Pan-European mutual recognition of professional qualifications. From medical doctors to accountants, and every profession in between, professionals will be required to have their qualifications recognized in each EU member country. Financial services were not part of the Brexit deal. Negotiations require a separate process and are ongoing but leave the City of London in limbo. The hope from the British side is that the EU will unilaterally grant equivalence to its regulated companies. The alternative would require British firms to ask for permission to do business in each member state within the EU.

From a terrorism and organized crime aspect, the UK police and intelligence agencies will still be able to work with their European counterparts, but the British will be cut off from the EU’s crime databases that operate on a real-time basis. The new arrangement, while not ideal, still allows both sides to at least check air passenger information, DNA, criminal records, vehicle registrations, and fingerprints.  In this case, it appears the only side to win in the defense and security arena are the bad guys.

Overall, there is not much gain for either side, in my opinion, from the economic separation of Great Britain from the European Union. Both sides lose quite a bit. It remains to be seen what gains, if any, will result from this divorce. But then again, nationalism is really not about economic gain is it?

Posted in BMM Articles, Events, General Interest, Global, Market & Economic Overview, The Retired InvestorTagged , , , , , ,