UK: A free-trade agreement isn't frictionless – ING

James Smith, developed markets economist at ING, suggests that even if a trade deal can be agreed during 2020, the UK economy still could face some fairly large changes at the start of 2021.

Key Quotes

“Despite the name, a free-trade agreement (FTA) does not mean frictionless trade. It will involve plenty of costs and bureaucracy – and one particular headache for firms could be so-called rules of origin.”

“To qualify for zero-tariffs, UK firms selling goods to Europe will likely have to prove that their products are sufficiently British-made. For goods that have come through a complex supply chain, documenting the origin of a product’s value is not always easy – and often it is simpler and cheaper to pay the tariff than it is to try and document origin.”

“Don’t forget too that a free-trade agreement covering goods will do very little for services – which account for 80% of UK output. An FTA-style agreement will most likely see an end to financial passporting, as well as automatic rights on data-sharing, among other things.”

“What is not clear at this stage is how far both sides would be willing - or legally able - to go to cushion the blow.”

“We may well see a series of unilateral actions taken to keep services trade moving – at the very least covering things like aviation. Both sides are also reportedly aiming to reach agreement on financial equivalence and data-adequacy agreements by the end of this year. It is possible that other 'patches' emerge to help prolong certain access rights for UK services.”