48-30-28 Hike!

Reports that Stanley Johnson, the father of British Prime Minister Boris Johnson, is seeking to keep a foot in Europe by

taking up French citizenship made headlines just as his son led Britain’s split Thursday [12/31] from the EU. Britain left 

the European bloc’s vast single market for people, goods and services at 11 p.m. London time on New Year’s Eve.

Associated Press, January 2nd.

As the United States has been obsessed with the 2020 election (extended to January 5th with the Georgia runoff), Europe has been obsessed with the final implementation of Brexit. And while everyone is obsessed with taming the novel coronavirus, the impacts of both of the above political events alone are particularly significant. Each will have deep consequences for the going-forward economies of each party, and for global trade in general, as the world sputters and struggles to find a medical and economic path in the quivering pandemic recovery efforts. No one can be completely sure what Brexit – officially implemented on January 1st – will mean for the participants (European Union Europe and the UK), but at least for the near term, the prognosis will be further economic contraction for both.

While the genesis of the European Union was born in a series of negotiations and accords that began after WWII, seriously amplified in 1973 (when the Community of Europe reached critical mass; the European Customs Union began), it was the Maastricht Treaty, negotiated almost 30 years ago and signed in February of 1992 that formalized this new economic and political aggregation. Effectively, by aggregating most of Europe into a greater but ultimately single market, that combined force would balance the disproportionate economic power wielded by the United States and later, China. The notion of a single market was implemented 28 years ago, with most (but not all) EU members adopting the euro as their only currency.

Strange that the notion of a single “Common” market, no customs or trade restrictions within the EU, actually emanated with UK PM Margaret Thatcher, demanding European reform. She was trying to find a path for massive foreign investment in the region. A big enough combined market would be attractive to outside money (then mostly US and Japanese), particularly needed by a post-industrial UK. That it was the UK, through Brexit, that would undo this combination is thus somewhat ironic.

Parallel with the growth of this massive common market was the elimination of visas and controlled border checkpoints for travelers within the EU, indeed even allowing workers from signatory European nations to move freely within the union to live and work. This was born in the 1985 Schengen Treaty, supplemented by the Schengen Convention in 1990 and absorbed into EU law in 1999. It was also an increasing thorn in the side of many UK residents who saw foreigners (read: Eastern European immigrants) coming in to take UK jobs at lower rates of pay.

Likewise, even as the UK maintained its own currency (but accepted euros), it also surrendered almost all of its trade regulation to the EU Parliament and its regulatory bodies. This also riled many UK businesses and citizens. But those open borders within the EU also exploded the economic and trade traffic for the participating nations, generating foreign investment and huge trading advantages across the EU. For many American corporations, the UK became a comfortable gateway to the rest of Europe.

It was this submission to trade and other regulations from the EU, seen by many as an infringement on the basic sovereignty of the UK, and this unregulated movement of workers into the UK that fueled a growing resentment, that led to the narrowly passed Brexit referendum in 2016. With stronger support from England (resisted in parts of the UK, particularly Northern Ireland and Scotland), a move to withdraw the UK from the UK was based on increasing friction between conservative factions in the UK who wanted more self-determination in trade matters plus the ability to stem the tide of outside workers entering the UK without any legal way to control that migration. Those who opposed Brexit pointed to the massive economic benefits to the UK and the likelihood of economic contraction should a split be implemented.

Over the decades, virtually all trade and border regulations and policies were determined at the EU level. Member states no longer had to make those laws locally, since the EU was a one-stop-shop that governed what was now a single market. Customs and border barriers between member states came down, and personal and commercial traffic moved unhindered within the EU. Nowhere was this more evident that the 310-mile border (with at least 275 crossing points) between the only contiguous land mass between the UK and any other EU nation: UK’s Northern Ireland and a very separate EU state, Ireland. This open border was a huge sticking point in the negotiations between the EU and UK on what post-Brexit would look like. It was tumultuous, but at least for now, Northern Ireland will pretty much be a lingering vestige of that common market.

So now what? We cannot be certain, and the UK-EU post-Brexit operating agreement was only approved in late December. Undoubtedly, there will be unforeseen consequences and unexpected bumps in the road. Replacement legislation is rolling in the UK, but the UK is now free (though not completely) to pursue trade agreements with the rest of the world, but now it must rely on its individual bargaining power. China and Russia are clearly happy about anything that unravels the Western world at any level, and indeed, many in the UK thought their withdrawal would have had a bigger impact on Europe.

The January 1st BBC.com explains: “Some Brexiteers had hoped that the edifice [the EU itself] would collapse once the UK left. But it has proven more robust than that. Indeed, Brexit has proven a catalyst of the EU to sign trade and investment deals far more quickly, including even with China.

“So now the UK finds itself outside of the machine it created as its strategic competitor. The trade negotiation wasn't primarily about trade. Great Britain has declared regulatory independence, or to be more specific, has declared as much regulatory independence as is compatible with a zero-tariff trade deal.

“The EU retains levers and switches to turn off some of these tariff advantages should the UK use the deal to turn into an offshore tariff free assembly hub for US and Asian manufacturing to be traded into the single market. Unlike with Nissan four decades ago, the European Court of Justice will no longer be there… The [UK] PM wants regulatory competition, but his own deal contains disincentives, if not actual restrictions, on competing ‘unfairly’ or too much.

“So the strategy matters. Britain is free, but to do what exactly? To level up? Well the regions that need levelling up are the ones that are actually most dependent on exports to Europe. Exports to Europe will be spared tariffs, thanks to the deal, but there will be literally millions of non-tariff barriers, that the economists calculate matter more, from health checks, customs formalities, origin paperwork, assessments of standards etc.

“Even to qualify for tariff-free treatment means, according to new government guidance on ‘rules of origin,’ analysis of how complicated is the process of grating cheese, of the shelling of nuts, and formalities on where the eyes of a doll come from. Most apply legally from tonight [1/1], having been absent for decades.

“The sweet spot for UK will now be to deploy regulatory freedom in sectors that are truly global, where we are not already overly dependent on EU markets… Certain sub-sectors within technology, finance and pharmaceuticals, for example. In each of these sectors the UK is likely to have to offer more friendly regulation to the multinational private sector, than the EU.” 

There are also interim rules covering UK workers in the EU and vice versa. But one way or another, the level of uncertainty, a lingering anti-UK animosity within the EU, and those many elements that simply have fallen between the cracks will undoubtedly confuse matters significantly and make a whole lot of lawyers very rich. Many multinationals, particularly in the finance sector, have already moved their main European corporate headquarters out of the UK. There will be many more surprises to come. But will the UK ultimately benefit from this decision? Time will tell. But there are a number of Brits, like UK PM Boris Johnson’s dad, who are not happy about Brexit.

I’m Peter Dekom, and in the middle of political upheaval in the United States and a horrific global pandemic, it is easy to miss one of the most significant economic and political reconfigurations in history.