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Brexit : What You Need to Know About the U.K.'s Prospective Deal With the EU

11/19/2020 | 05:35pm EST

By Stephen Fidler

Brexit is shorthand for Britain's exit from the European Union, which took place on Jan. 31 following a referendum in June 2016. The EU is left with 27 countries and a combined population of almost 450 million people that share a set of rules and laws covering the economy, trade and legal and security cooperation. The bloc grew out of a grouping of six countries that sought economic cooperation in the years after World War II. Britain joined the bloc in 1973, along with Ireland and Denmark.

Has the U.K. left the European Union?

The U.K. has left legally and politically, but is in a transition period when economic, trade and security relations remain unchanged. Negotiations are under way to determine U.K.-EU relations after Jan. 1, 2021 that will cover trade now worth some $800 billion a year.

The 2016 referendum plunged British politics into a period of turmoil that cost the jobs of two Conservative prime ministers, David Cameron, who called the referendum, and Theresa May, who failed to get parliamentary backing for the withdrawal agreement she negotiated with the EU.

Boris Johnson, who took over from Mrs. May in July 2019 after becoming leader of the Conservative Party, renegotiated the withdrawal agreement. This covered issues related to the divorce, including the settling of financial commitments with the EU, the status of EU and U.K. citizens in each other's territories and an arrangement to stop a hard border reappearing on the island of Ireland.

After winning a general election in December, Mr. Johnson secured the support of Parliament for his agreement and the U.K. left the EU on Jan. 31 -- 10 months later than planned after three delays.

The agreement mandated a transition period during which economic relations would remain unchanged and the U.K. would continue to participate in EU databases and other arrangements designed to tackle crime and terrorism. The transition could have continued until the end of 2022, but Mr. Johnson insisted that it conclude at the end of this year, establishing an ambitious timetable for complex negotiations over their future relationship.

What are the U.K. and EU negotiating?

Many aspects of their future relationship are up for negotiation because the current legal basis of their relations will fall away. The talks cover, among other things, a free-trade deal and agreements on sharing information in security databases, on police and judicial cooperation, on making it easier for people to travel with or without their pets, on transport and on fisheries.

A deal would provide a strong basis for future cooperation, including on security, avoid the need for tariffs, limit new bureaucratic obstacles to trade and provide a framework for fishing, which while insignificant economically is politically important in the U.K. and some EU countries.

The main disagreements in the talks relate to procedures to resolve disputes between the two sides, the extent to which the U.K. should follow EU standards related to labor, environmental issues such as industrial pollution and government support for the private sector as well as fisheries.

The U.K. is seeking freedom to diverge from EU standards and ignore the EU courts. The EU worries that if the U.K. is free to undercut EU standards, particularly if there is a weak mechanism to resolve disputes, British companies would have unfair advantages over EU firms while having privileged access to its market.

The EU's most immediate goal has been to limit the ability of the U.K. to emerge as a major competitor on its doorstep. That is why it has insisted that a free-trade deal with a close neighbor like the U.K. must include some coordination of economic standards that its other free-trade deals with the likes of Canada and Japan lack.

The EU has a longer-term concern too: that if Britain thrives outside the bloc because of an advantageous deal with the EU, it could encourage other EU members to leave.

What are they not negotiating?

Some elements of their economic relationship aren't being negotiated, largely because the U.K. wants out of the EU's single market, the bloc's zone of harmonized economic regulation, as well as its customs union, which mandates tariff-free trade inside the EU and a common set of tariffs on imports from countries outside the bloc. Continued membership of both would mean the U.K. would have to keep to EU rules and agreements over which it had no say. On its side, the EU wants to make sure the U.K. can't "cherry pick" the parts of the relationship it likes and discard those it doesn't.

This means the trade deal under negotiation won't aim to ensure there will be no new obstacles to trade flows that are now almost friction-free. Instead, the negotiations will decide how many new obstacles -- border checks, customs declarations and even tariffs -- there will be. The U.K. decision to leave the single market also ruled out a basis for negotiations over a range of important economic issues, such as financial services and data sharing, which will be decided on the basis of unilateral decisions by each side.

It also means that professional qualification won't be automatically recognized. The U.K. will lose access to some security arrangements with the EU, including full membership of Europol, the agency coordinating the work of police forces across Europe. Mr. Johnson also ruled out any agreement over external security and defense in the accord.

Is a no-deal exit possible?

Yes. That would mean that, after more than four decades of tariff-free trade, each side would impose customs duties on many goods from the other side and impose significant bureaucratic hurdles on two-way trade.

The auto industry, with pan-European supply chains, would be among the hardest hit with tariffs on car parts as well as a 10% levy on finished cars. The two sides would impose high tariffs on many agricultural products. A host of other arrangements would fall away, such as those allowing British truck drivers to drive on the continent, and sharing of information on criminals and terrorists registered in EU security databases would stop.

It wouldn't be quite the same as the no-deal exit that people were talking about at the end of 2019, when the concern was the U.K. would leave without a withdrawal agreement. As well as triggering new tariffs and ending security and other arrangements, that no-deal exit would also have led to a dispute over the U.K.'s financial settlement with the EU, questions about citizens' rights in each other's territories, and the likely emergence of a hard border in Ireland. That withdrawal agreement also enabled the transition period through 2020.

There is a footnote to the withdrawal agreement. Mr. Johnson has introduced legislation with clauses that would give the government the ability to renege on part of that agreement relating to Northern Ireland. It justified those clauses by saying that if there isn't a trade deal the EU could in effect force the rest of the U.K. to restrict trade with the British province of Northern Ireland. The EU has demanded the offending clauses be withdrawn from the legislation, which is still under debate in Parliament.

Failure to strike a deal would be regarded as an economic and strategic setback among allies that would risk contaminating EU-U.K. relations for years.

How will Brexit affect financial services?

The British decision to leave the single market means that after the transition period British firms will lose automatic access to EU markets. So-called passporting allowed firms that were regulated by U.K. authorities to trade in other EU markets as if they were regulated locally (and vice versa.) There has been no significant negotiation over financial services during the transition. This means that passporting will be replaced by so-called equivalence, under which each side unilaterally permits companies from the other to conduct certain financial activities in its territory. These activities exclude core businesses like lending or deposit-taking.

Another drawback is that each side can unilaterally rescind recognition at short notice, an arrangement that many companies don't see as a reliable basis for their business models. So far, the U.K. has made some equivalence rulings, for example recognizing EU derivatives exchanges. The EU so far has only allowed access to U.K. clearing houses until June 2022.

Many financial activities in the City of London, such as foreign-exchange trading, don't depend on European regulation. Nonetheless, firms have already shifted assets and personnel to the continent and over time EU regulators are likely to push firms to relocate more capital and expertise into the EU. Whether this will be enough to damage the economies of scale that have made London a world-wide center of financial services is unclear.

What do British people think about Brexit now?

It depends on the question you ask. For most of the period since June 2016, a small majority of Britons have said they would vote to stay in the EU in a second referendum. Confusingly, a larger majority of Britons -- on the whole -- say in hindsight it was a mistake to leave the bloc. The latest poll on Nov. 12 by YouGov showed that 51% of people think it was a wrong decision and 38% a right one, the largest gap since 2016.

Of course, the direct economic effects of Brexit have yet to happen, as the country remains inside the EU's economic orbit until the end of the year, so few people have noticed any difference.

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