Brexit: Winners and Losers

When the United Kingdom (U.K.) and European Union (EU) announced their trade agreement on Dec. 24, 2020, officials, business leaders, and private citizens in both areas were relieved. The worst outcome, the U.K. departing the EU without a trade deal, a “no-deal Brexit,” had been avoided. While Brexit likely presents more challenges for the U.K. economy than for the EU’s, both jurisdictions face new administrative burdens and uncertainty due to unresolved issues.

With the announcement of the trade deal, the Pound rose on the U.K. market by approximately 0.47% against the U.S. dollar and 0.46% against the Japanese Yen. However, markets already had taken into account the expected cost of Brexit to the British economy, including, to some extent, the possibility of a no-deal outcome. Therefore, this was less a bullish rally than markets partially rebounding after having expected the worst. It is expected that it will take years for the British markets to overcome Brexit’s adverse economic effects.

The current economic impact of the COVID-19 pandemic and its accompanying restrictions on trade in the U.K. and EU probably outweigh Brexit’s immediate impact. Therefore it may be be difficult to determine the full extent of Brexit's affects on different sectors of the U.K. economy. With that said, there are definitely things we can say about which sectors are likely to be more or less affected by Brexit. The overall upshot is that there are few "winners," from Brexit, and not all them are in the U.K. Meanwhile the "losers" who are economically harmed by Brexit are plentiful.

Few Winners

U.K. and EU Manufacturers of Specialized Machine Parts

New product origin, or content source, requirements for qualifying as U.K. or EU products, will require adjustment by some manufacturers, such as automakers, who currently rely heavily on other regions of the world for parts in their finished products. These businesses are likely to seek alternative European or British sources for such parts so that their products contain the mandatory content-source percentages for treaty benefits. With some companies, such as Nissan and Toyota likely to seek qualified sources for parts currently obtained from Asian countries, local U.K. and EU manufacturers might enjoy new sales opportunities. However, nothing about the rules means that the manufacturers will need to be specifically British, so it is ambiguous if these rules of origin will help the U.K. or EU more.

U.K. Mining Firms

The many international mining companies based in the U.K. have little economic activity with the EU. Extraction industry giants, such as Glencore, PB, and Rio Tinto, have little exposure to Brexit because they conduct their operations far beyond the EU and U.K. and are not subject to EU regulation. 

United States Bankers

Because London-based banks are losing free access to the EU market, they'll have to establish new branches or offices in the EU in order to operate there. Because U.S. banks never had that free access, they already have "passporting rights" and/or operate registered companies that have such offices set up in both the EU and U.K. This situation leaves U.K. financial services firms at a disadvantages until they are able to fully re-establish themselves in EU markets. Therefore U.S. financial firms may be able to draw business and clients away from U.K. firms in the meantime.    

Many Losers

Brexit will complicate U.K.-EU cross-border relationships in every sector with new administrative and regulatory burdens. New requirements, including local licenses, visas, border checkpoints, and personnel relocation, affect all types of businesses, from agriculture to finance. Many sectors of the economy found themselves unprepared for the new regulations and concerned about the costs of compliance.

In addition, the trade agreement seeks to establish a ‘level-playing field” to ensure fair and open competition and to prevent businesses in one area from undercutting businesses in the other. This provision requires that the two jurisdictions have similar rules relating to workers’ rights, social and environmental protection, taxation and government subsidies for business. However, the rules only need to be similar, not identical. Therefore, the U.K is unlikely to reap substantial competitive advantages, but will still suffer from the increased administrative burdens of two rules sets.

Fishing Industry

Despite only making up 0.1% of the U.K. economy, negotiations around the U.K. fishing industry were one of the largest obstacles to reaching a trade deal. On the surface, the trade deal would seem to be a win for the U.K. fishing industry. According to the U.K. government, the agreement will increase the quotas for British fishermen over five years by an amount equal to 25% of the value of the EU catch in U.K. waters, which is estimated to be worth £146 million ($205 million). However, to call this an unalloyed victory ignores two major factors.

The first is that the U.K. fishing industry had expected far greater concessions from the EU. Representatives of the fishing industry say that the deal cannot be considered a success because its relatively modest gains fall so far short of what the pro-Brexit campaign had promised them. The National Federation of Fishermen's Organizations, an industry group for the fishing industry published a letter to Prime Minister Boris Johnson saying that the they consider the trade deal to be a failure as far as fishing is concerned. The second is that the majority of seafood caught in the U.K. is exported to the EU, and the new nontariff barriers that have sprung up in the wake of Brexit make things especially hard for exporters of perishable goods, more on that below.

Food and Agriculture Sector

Regulations and border controls affecting agricultural exports and imports create issues for everyone in the EU and U.K.: farmers, distributors, grocery store chains, restaurants, and consumers. In advance of Brexit, U.K. retailers and consumers stockpiled food resulting in shortages and supply chain problems and prompting warnings about panic-buying.  Because the U.K relies on deliveries of fresh food from or via the EU in the winter, delivery delays immediately created problems. Scottish exporters have complained about delays in transport of fresh seafood at border controls in Scotland and France.  Sainsbury’s supermarkets blamed the new and complex arrangements affecting Ireland for their need to obtain alternative sources of goods. Tesco supermarkets have run into shortages, leaving shelves empty. Supply chain and logistics challenges extend beyond agriculture to all industries.

Manufacturing Sector 

As noted, logistical challenges similar to those facing agriculture are affecting manufacturing. Because modern manufacturing uses complex supply chains that stretch across different nations, even nontariff barriers to goods can significantly complicate manufacturing. Already before the deal was concluded and tariffs were officially avoided, significant companies in automobiles, aerospace and industrial supplies, including Honda, Nissan, BMW, Toyota, and Jaguar Land Rover, had to cut jobs and close plants in the U.K,. Panasonic and Sony planned to move their European headquarters from London to Amsterdam. Almost two years earlier, the Dutch conglomerate, Phillips, closed its only U.K. factory. 

As noted previously, the agreement imposes substantial controls on goods transported between the EU and U.K. It establishes “rules of origin” mandating that goods contain a percentage of locally sourced content, generally more than 50%, in order to qualify for the free-trade and other benefits of the deal. Larger manufacturers with complex products containing parts acquired from other areas of the world likely will need to make sourcing adjustments. While this may potentially benefit some specific local manufacturers down the road, sorting out rules of origin has places enormous administrative burdens on businesses in the EU and U.K., which have not made sufficient preparation and auditing to establish origin of goods. This has emerged as one of the largest impediments to trade post-Brexit.

Financial Services Industry

Financial services companies recognized that Brexit likely would require the relocation of significant operations and personnel from London to EU locations and would mandate local registration and licensing to conduct business in the EU. Major banks, including JPMorgan, Morgan Stanley, Nat West, Goldman Sachs, Bank of America, UBS, and Credit Suisse, moved hundreds of employees and large quantities of assets from the London to other European cities in advance of the December 31, 2020 deadline for a trade deal. Similarly insurers based in London set up EU locations, including Lloyd's of London in Brussels and Aviva in the Republic of Ireland. Approximately £1.2 trillion ($1.6 trillion) in financial sector assets left London between the 2016 Brexit vote and the end of 2020. More than 7,500 financial sector jobs have been relocated from London to European cities.  

Brexit ended U.K. investment houses' “passporting” rights which permitted companies registered in one EU member to operate in the others. As a result of Brexit, in order to conduct EU business, U.K. investment banks will need to obtain EU “equivalence” rulings that recognize regulations in a company’s home country as sufficiently similar to those of the EU. Although European firms will be allowed to continue using London clearinghouses at least until June 2022, the EU has not provided any plan or schedule for issuing equivalence rulings on derivatives- and stock-trading, portfolio management, investment advice, underwriting, and trade-execution. 

Moreover, most core banking business, such as deposit-taking, investment services to retail clients, and other lending services, are not included in the equivalence system. Thus, U.K. banks must establish EU offices to continue these activities with EU clients.  While London will continue to be a major financial center, its status will be diminished, especially if equivalence rulings are not soon forthcoming and clients turn to institutions in other countries, including the U.S., that already have the rights and ability to operate in the EU.  

Pharmaceutical Industry

Pharmaceutical companies are concerned about potential differences in EU and U.K. standards for medicines. In anticipation of diverging rules, U.K. pharmaceutical firms AstraZeneca and GlaxoSmithKline established parallel labs in the EU. For medicine, the imposition of border checks and dispersion of manufacturing are expected to cause delays in distribution. Both the EU and the U.K. reported drug stockpiling in advance of Brexit because of concerns about prompt access to medications.

Transit, Transport, and Freight Industries

Brexit creates legal and logistical challenges for travel and shipping. Both the EU and U.K. have allowed a six-month ‘grace’ period for flights between and within the two areas under present licensing and safety qualifications. But future flights within the EU, across and within member states borders, will be restricted. Generally, only airlines that are majority-controlled by EU, European Economic Area (EEA), and/or Swiss nationals will be allowed to fly between EU airports. However, a special provision allows U.K. airlines that are controlled by a combination of EU and U.K. shareholders, for example, the Madrid-based International Airlines Group that owns British Airways, to continue to operate in the EU. The application of this special rule to majority U.K.-owned airlines EasyJet and Ryanair may require further study of their ownership.

Movement of people and goods, whether by air, water, or Channel Tunnel, will entail time-consuming procedures. Passport requirements will apply to travelers between the EU and U.K., and business personnel, students, and others who stay abroad for a period of time will need visas. Many U.K. freight haulers will not be able to obtain permits to operate on EU roads because the EU has authorized only 2000 permits for 2021 while 10,000 are needed. Permits and border checks could require approximately 250 million pieces of paperwork each year and 50,000 customs agents, six times the present number.