On 1 January 2021, the United Kingdom and the European Union entered into a new phase of their relationship. Over four-and-a-half years since the EU referendum, the transition period ended with a broad free trade agreement. This deal was reached on 24 December 2020 and removes the United Kingdom from the European Single Market and Customs Union. While the deal is broadly similar to the previous arrangement, this article will explore the potential impact any changes may have on various UK industries and sectors.
General
While the new trading arrangement between the United Kingdom will remain tariff and quota free, the deal does lead to the introduction of some non-tariff barriers. Most industries are likely to be affected by the border checks, controls and paperwork now required when trading with the European Union. These will likely raise costs and increase the time it takes to receive inputs, while trade of some products may be banned or need special licences, certificates or labelling. Though the United Kingdom is allowing firms a six-month grace period adjust to the new rules, the European Union is requiring the British firms adhere to these arrangements as of 1 January.
Further, to qualify for tariff-free treatment, products must comply with rules of origin arrangements. This means that exported products must be made or substantially changed within the United Kingdom, resulting in disruption for cross-border supply chains. For example, firms with an integrated UK and Ireland supply chain may face the potential of tariffs on EU-produced goods if they are re-exported from Britain at any stage. The impact of these changes is likely to be substantial, but EU rules of origin declarations are not required until 2022, allowing some time for firms to adjust.
Labour market
With the end of the transition period, the freedom of movement and labour between the United Kingdom and the European Union has ended. The new points-based visa system, which was introduced on 1 January 2021, places emphasis on high-paid roles that require a high level of education. This may have a negative effect on industries that already have labour shortages, such as those in the healthcare sector, or little requirement for highly educated workers, such as industries in the construction sector. The new regime also introduced a cost to visa applications, reaching up to £1,400.
Criteria for the UK’s points-based immigration system, through which applicants must attain all mandatory characteristics and 70 points:
Northern Ireland
The rules for Northern Ireland will diverge from the rest of Britain and instead follow those of the European Union to allow for an invisible border with Ireland. This means there is a need for inspections on goods traveling to Northern Ireland from Great Britain, as well as a requirement for compliance with EU standards. To prevent disruption, there will be a three-month grace period for supermarkets, which is extended to six months for certain meat items, in which the rules will not be enforced. Further, negotiators have exchanged the need to apply tariffs for items at risk of entering Ireland with the paperwork. However, this new paperwork will increase the friction and cost of items entering Northern Ireland from Britain.
Fishing
One of the most contentious issues throughout the negotiations was EU access to UK waters for fishing rights. The deal reached will reduce the value of EU fishing rights in UK waters by approximately 25% over a five-year transition period. This will increase the UK’s share from approximately half to two-thirds. From 2026, there will be annual negotiations for EU access to UK waters. An increase in the UK’s share of the catch is likely to support the Marine Fishing industry and related industries. However, should future negotiations turn sour, the European Union may choose to impose punitive tariffs on UK fish exports.
Manufacturing
While the zero-tariff agreement will save manufacturers substantial costs, there a few ways in which manufacturers will be affected by the new relationship. For example, there is no EU-UK mutual conformity assessment. This means that firms will be required to gain certification and carry out testing on both sides of the border, adding to costs. However, some respite may be given through the implementation of a ‘Trusted Trader’ scheme or an ‘Authorised Economic Operator’, although the full details of such a scheme is yet to be announced.
Chemical product manufacturers are likely to faced increased costs from the UK’s departure from the EU’s REACH safety database. According to the Chemical Industries Association, UK firms have invested over £550 million in the scheme and the UK’s divergence is anticipated to cost £1 billion over the next six years. This is similar to the issues that pharmaceutical manufacturers will face, with safety and quality tests needed to be carried out on both sides of the channel. However, facilities have been given mutual recognition, eliminating the need for both EU and UK inspections.
The Motor Vehicle Manufacturing and Motor Vehicle Parts and Accessories Manufacturing industries are also likely to be substantially affected by the new trading arrangement, with the regulatory burden faced by companies in these industries set to increase. Approximately three million vehicles are traded between the United Kingdom and the European Union each year, while the value of parts traded is valued at approximately €14 billion (£12.5 billion). The high degree of cross-border supply chain in the automotive sector may result in some UK-produced cars failing to meet the rules of origin requirements to qualify for zero-tariff treatment. However, UK-produced batteries and electric vehicles will be eligible for a preferential tariff rate, supporting their manufacture.
Electricity Supply
The free trade agreement provides a framework for continued access to the EU electricity market. While future electricity trading through interconnectors, which is included in the Electricity Production industry, is being developed, the trading model in place throughout the transition period will be extended. This is likely to maintain lower costs of electricity supply to UK consumers.
Freight road transport
Companies in the Freight Road Transport industry that provided cross-border services will have their access to the EU market reduced. Under EU membership and during the transition period, UK firms were able to make three further pick-ups and drop-offs within the European Union, before their journey back to the United Kingdom. Under the exit deal, UK hauliers will only be permitted one further pick-up and drop-off in a single EU country or two in different EU countries. This will decrease the efficiency of the industry, which may increase costs and limit profit margins.
Aviation
As expected, UK airlines will no longer be allowed to provide intra-EU flights. Many UK carriers have already set up EU-based subsidiaries, so this is not expected to provide any significant disruption for the industry. Further, with tourism to EU countries being a key source of demand for the Scheduled Passenger Air Transport industry, it is likely to be supported by the decision to allow UK nationals 90-day visa-free travel within the Schengen Area, although consumers will be required to have travel insurance with health cover. While the European Health Insurance Card scheme has ended, the cards will remain valid until they expires and have been replaced by the Global Health Insurance Card, which provides the same benefits. This is expected to support continued demand for EU travel from UK consumers.
Services
The EU-UK trade deal primarily deals with the trade in goods, with services largely ignored. As a result, UK firms will lose their access rights to EU markets and therefore may face some restrictions. A key source of difficulty is the failure of the deal to secure mutual recognition of professional qualifications, which ranges from doctors to architects, but there remains provision for short-term work and secondments.
Financial services face the largest challenge, with UK access to EU markets determined by the bloc through the unilateral determination of ‘equivalence’ based on regulation. As this unilateral decision was not granted, the sector faces a wait due to the 59 areas in which equivalence decisions can be granted. As a result of the lack of a determination, UK financial service firms have lost access to EU markets, with many services now being carried out within the European Union through subsidiaries.
EY estimates that 7,500 jobs and £1.4 trillion in assets have been transferred to the European Union, while on the first day of trading after the end of the transition period, some €6 billion in euro-denominated daily trading had shifted to the continent. However, financial services have been excluded from cross retaliation in case of other parts of the trade deal being breached. Additionally, UK firms have been allowed to continue to provide outsourcing work for EU companies.
Education
EU citizens will no longer be able to access subsidised university placements, with fees set to rise. This may cause the number of EU students choosing to study at UK universities to decline, reducing revenue for the Universities industry. Additionally, EU students will now have to apply and pay for a student visa. The deal, however, included continued access to the Horizon Europe research programme for the United Kingdom, boosting potential research funding for universities. Further, the United Kingdom has terminated its involvement with the Erasmus scheme, choosing to replace it with the Turing scheme, which will allow global university placements instead of focusing solely on the European Union.
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