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UK, EU strike post-Brexit trade deal days before transition period ends

The U.K. and the European Union reached an agreement on a post-Brexit trade deal, days before Britain leaves the EU customs union and single market.

The deal, which still needs to be approved by the U.K. Parliament and EU governments, ensures tariff-free goods trade between Britain and the bloc from Jan. 1, 2021.

"The clock is no longer ticking," EU Chief Negotiator Michel Barnier told a press conference in Brussels, referring to the language he has used numerous times in recent years to signal that time is short to complete a deal. "Today is a day of relief, but tinged by some sadness, as we compare what came before with what lies ahead."

U.K. Prime Minister Boris Johnson said, "This deal, above all, means certainty — for the aviation industry, the hauliers ... the police, the border forces, and all those that keep us safe. It means certainty for our scientists, who will be able to work together on great collective projects. But above all, it means certainty for business."

Trade talks were stuck over fishing rights, enforcement and the so-called level playing field in recent months, before a compromise was reached.

The EU's fishing rights in U.K. waters will drop by 25% over 5.5 years, compared with an 80% decline over three years that Britain initially sought. On the level playing field, the U.K. and the bloc have agreed to create a mechanism whereby an independent body can rule on whether the standards have diverged significantly enough to confer an advantage for one party, allowing the other to impose tariffs. The EU had initially wanted a common rule book that would mean regulation moved in lockstep.

The U.K. also secured an agreement to allow automakers to develop electric vehicles in the U.K. using parts from outside the EU, improving the environment for the likes of Nissan and Toyota, which have been considering the status of their British factories.

The trade deal is the largest that either side has ever signed. In 2019, 43% of the U.K.'s exports were sold to the EU at a value of £294 billion, while more than half of U.K. imports, worth £374 billion, came from the 27-nation bloc.

Port disruption

The U.K. left the EU on Jan. 31, 2020, following a June 2016 referendum, but a transition agreement ensured that it would be business as usual until the end of this year as both sides negotiate a trade agreement.

Still, there has been considerable disruption at U.K. ports this month as importers tried to stock up on goods before the Dec. 31 deadline, with Honda being forced to halt production for two days starting Dec. 10 at its Swindon plant due to a shortage of car parts.

The situation was exacerbated in recent days as France temporarily closed its border to the U.K. in an attempt to stop the spread of a new, more contagious variant of the coronavirus, before allowing trucks to enter if their drivers had a negative test for COVID-19.

S&P Global Ratings has warned that failure to reach a trade deal with the EU could weaken the U.K.'s economic recovery from the coronavirus crisis and lead to a depreciation in the pound, higher inflation, reduced household spending power and weaker foreign direct investment flows into the U.K. The rating agency projected that U.K. GDP growth in 2021 would be just 4.6% in a no-deal scenario, compared with an expected 6.0% expansion under an agreed-upon trade deal.

Economic impact

Even with a deal, U.K. GDP is expected to be 4% lower over 15 years than it would have been if the country had stayed in the EU, according to the government Office for Budget Responsibility. Even though trade will be free of tariffs, extra paperwork and border checks will increase the cost of trade for the U.K. by £7.5 billion a year, regardless of whether there is a trade deal, according to HMRC, the country's tax office.

As both sides raced to hammer out a deal over the past few weeks, financial services companies continued to prepare for a post-Brexit future, with U.S. bank Morgan Stanley reportedly looking to move €100 billion worth of assets from the U.K. to Frankfurt. Ireland and Germany have attracted the highest number of global financial institutions looking to move business out of the U.K. and maintain access to European markets.

The service sector features in the deal with "good language about equivalence for financial services," Johnson said. "Not as much as we would have liked ... but it is going to allow our dynamic City of London to prosper as never before."

U.K. lawyers will also be able to practice in the EU, he said.

The U.K. is planning to pass the legislation needed to make the agreement law in a special session of Parliament on Dec. 30, according to the Financial Times. While Brussels has said it will not be able to ratify the agreement before the end of the year, it can provisionally apply the deal until members of the European Parliament vote on it in 2021.