End of Brexit transition: trade

This paper examines the implications of the end of the Brexit transition period for UK trade with the EU. It is one of a number of Commons Library briefings looking at the consequences of the end of the transition period for a number of policy areas. All these briefings are available on the Commons Library website.

The UK left the EU on 31 January 2020. Since then, the UK has been in a transition period during which most EU rules, including those of the EU single market and customs union, continue to apply in the UK. The UK leaves the transition period on 31 December 2020. In doing so, the UK will leave the EU single market and customs union.

This will mean major changes in the UK’s trade relationship with the EU. Barriers to trade will be higher. Many of these changes will occur even if a deal is reached with the EU. Free trade agreements generally seek to reduce barriers to trade between the parties. Any agreement between the UK and EU will be highly unusual in that it will result in higher trade barriers than before, although a deal would mean lower barriers than no deal.

The EU, as a bloc, is the UK’s largest trading partner: the UK exported £294 billion of goods and services to the EU in 2019 (43% of all UK exports) and imported £374 billion (52%).

Regardless of whether there is a deal with the EU, there will be more checks at the border. HMRC estimates that the number of customs declarations the UK will need to process could increase to 270 million from 55 million now. There will also be regulatory changes.

The Government has taken a number of steps to mitigate problems at the border. These include phasing in border processes over the first six months of 2021, building more infrastructure, such as the Kent lorry parks, and seeking to increase capacity in the customs intermediary sector.

Preparations for the end of the transition period have, however, been hampered by COVID-19. The Public Accounts Committee and others have raised concerns about the risk of disruption at the border. The Government’s own “Reasonable Worst Case Scenario” warns that there could be queues of up to 7,000 trucks in Kent and delays of up to two days.

There are also concerns over how ready businesses will be for the changes coming in at the end of the year. Business groups have called for more information from the Government and pointed out that continuing uncertainty over whether there will be a deal has hampered preparations.

Outside the EU single market, UK service providers will no longer be covered by the harmonised EU standards in certain sectors, and the common EU regulatory and supervisory framework. UK businesses will have to follow the national rules of each EU Member State in which they have a branch or sell a service (the so-called host state rules).

Changes will affect among others, the right of establishment, the recognition of professional qualifications, business travel, financial services, and the transfer of data between the UK and EU. For example, investors setting up a subsidiary in the EU may be required to reside in a country or get a licence to provide a service. Automatic mutual recognition of professional qualifications available to doctors, nurses, engineers, architects and other so-called regulated professions in the EU will fall away. Qualifications will have to be recognised in each EU Member State separately. Financial services providers will lose their “passport”, which allows them to operate in another EU Member State without having to seek new authorisation.

No deal would mean tariffs being imposed on UK exports to the EU and vice versa. While these are relatively low on average, they are high in some sectors such as agriculture. These sectors would see a large impact from the imposition of tariffs.

No deal would also mean businesses might have to certify that their goods meet product standards in the UK and EU separately. No deal might also mean less flexibility and co-operation in applying customs rules.

The difference between the deal being sought by the UK and trading under WTO terms is more limited for services than it is for goods. However, sector organisations have said that in absence of an agreement barriers could be significant for various professional services industries.

Barriers to goods trade resulting from no deal could have further implications for the UK services industry which is part of manufacturing supply chains.

Both the UK and EU can take unilateral decisions on the equivalence of the other party’s financial services regulations independently from trade negotiations. The same is true for decisions on adequacy of data protection laws, which support trade in services. If the EU does not grant this recognition, trade will be more difficult.

A deal is likely to mean no tariffs on UK-EU trade. This would, however, be subject to rules of origin under which products would need to demonstrate that they originated in the UK (or EU) to benefit from zero tariffs. This could mean that some sectors, such as the car industry, might find it difficult to take advantage of zero tariffs.

A deal could contain measures on mutual recognition of conformity assessment in some sectors, removing the need for separate product certification in the UK and EU. A deal might also contain measures on customs facilitation aimed at simplifying customs procedures and smoothing cross-border trade.

A deal on services would offer more clarity and certainty to businesses. It could also secure a continued dialogue and cooperation between regulators and in other ways mitigate the effects of leaving the single market for services. Both sides have offered regulatory cooperation across a wide range of services sectors. Both are seeking to reduce barriers to business establishment in the other, for example by limiting barriers for investment. But the UK has offered more generous terms for business travel and the mutual recognition of professional qualifications. So far, the EU has not accepted the proposals and limited its offer to terms which are in line with its most recent free trade agreements.