‘Free trade deal with India is not on UK’s priority list post-Brexit’5 min read . Updated: 04 Jan 2021, 08:50 AM IST
- The EU is a global regulator and it is hard for any country to fully escape it. It is even harder for neighbours of the EU, says David Henig, Director, UK Trade Policy Project, European Centre for International Political Economy
The UK formally left the single market and customs union of the EU on 1 January after the two sides agreed upon a post-Brexit deal on 24 December, seven days before the deadline. According to the Brexit trade and security deal, UK nationals will no longer have unrestricted freedom to work, study, start a business or live in the EU, and vice versa, though both sides will have tariff-free and quota-free access to each other’s markets. Brexit will creater both opportunities and challenges for India. It will open the window to negotiate a free trade agreement, but many Indian companies that had their base in the UK for EU operations may face significant trade barriers. In an interview, David Henig, director of the UK Trade Policy Project at the European Centre for International Political Economy, demystifies the implications of a post-Brexit deal for the UK and India. Edited excerpts:
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Like any other trade deal, the UK-EU post-Brexit deal creates winners and losers on both sides. Which sectors or sections of society will it help or harm on either side?
In terms of the economics, all parts of the UK economy will face extra barriers to EU trade in the future. The initial projection is that the UK’s superior competitiveness in services will mean this sector is better prepared for these barriers than manufacturing, but we have to see how this will develop after January. Politically, the Conservative Party and Prime Minister Boris Johnson have done well out of this deal to seem united compared to the opposition Labour Party. For the EU, the member states most exposed to economic losses are Ireland, Belgium and the Netherlands, those closest to the UK. It seems the EU obtained more of what it wanted, in terms of protecting its markets from unfair competition, than the UK, though both are happy.
How will the deal impact London as a global financial centre?
There is considerable debate about the impact of Brexit on the city of London. As a global financial centre, I believe that London should be able to adjust to greater barriers to EU services, with the use of subsidiaries and creative structures. However, there are threats. Some US banks believe they could now serve the EU as well those from the US, as the UK-EU regulators will try to ensure activity inside the bloc is properly resourced, and EU regulations do disadvantage third countries. Financial services equivalence, according to EU rules, cannot be taken for granted. It may, therefore, take us a year or more to fully understand the impact.
Has Britain secured complete regulatory independence from the EU through the deal? What is the UK likely to do with its regained sovereignty?
The EU is a global regulator and it is hard for any country to fully escape this. It is even harder for neighbours of the EU, as the EU tends to use access to the market as a lever for regulatory alignment. This will be assisted by clauses in the UK-EU agreement, which could penalize divergence. The UK has no specific aspirations for regained sovereignty in terms of regulatory changes, but we can expect to see some divergence.
Scotland and Northern Ireland, which are parts of the UK, were opposed to Brexit. While the UK has avoided a hard land border between Northern Ireland and Ireland, how will these issues unfold?
Northern Ireland will continue to follow many EU rules particularly in goods, and the chances have increased that at some stage in the coming years it will leave the UK and unite with the Republic of Ireland. There is a Scottish election in 2021 and pro-independence parties are likely to win an overall majority of votes. It is not clear whether there will be another referendum in the near future, but recent polls have suggested if there is, the result is likely to be a narrow vote to leave the UK. Thus the UK faces serious threats to its status.
How will the trade deal impact Indian manufacturers based in the UK? Will the zero-tariff deal mean there will be no hurdles for them to access the EU market or will non-tariff barriers and customs regulations change ground reality?
There will be considerable barriers to UK manufacturers, such as JLR (Jaguar Land Rover owned by the Tatas), from 1 January compared to the current position. These include reaching rules of origin thresholds for zero tariffs, ensuring the correct regulatory approvals for the final products, and potential delays at borders. The competitiveness of the UK compared to the EU for manufacturing may well be reduced and in typically low-margin businesses, such as volume car manufacturing, this could be significant.
The deal is expected to create major disruptions in the services sector. Does that open opportunities for Indian companies or increase the risk?
The services sector is diverse and beyond saying barriers will rise, (but) it is hard to say exactly what the impact will be. Issues will include the difficulties of UK citizens working in the EU, and vice versa, recognition of professional qualifications, and strict reservations of member states on provision of services by non-EU member states.
To the extent the UK is now outside the EU, there may be scope for Indian services companies to compete with those from the UK in the EU, but I would expect the UK services sector to remain strong.
India and UK both have hinted that they will explore a free trade agreement. Is India in UK’s priority list for a trade deal?
A free trade agreement with India is not the UK’s immediate priority. USA, Australia, New Zealand and accession to the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) are highest, and there are also replacement deals to be negotiated with Canada, South Korea, and Mexico.
However, the UK is keen to complete as many trade agreements as possible, with the content less important than the headline numbers. Tariff reduction is the most important so far, but traditional UK interests for financial services and Scotch Whisky are also prominent.
How will the UK and EU address concerns of other World Trade Organization (WTO) members about tariff rate quotas (TRQs)?
The issue of the UK’s WTO quotas is still unresolved, but this process may be helped by a UK-EU deal, meaning quotas will not be used for this trade. The expectation has always been that the UK would have to increase the size of quotas, perhaps not significantly, but this may happen ahead of trade deals with Australia and New Zealand.