The next round of trade talks between the UK and the EU is set to resume in London. What are the main sticking points, and what will the outcome mean?
Markets have been preoccupied this year with COVID-19 and tensions between the US and China. But the potentially forgotten topic of Brexit – or rather, the future relationship between the EU and the UK, is still a cause of uncertainty. Negotiations have been taking place all year, and with the next round of talks about to start, time is running out.
What’s happening next week?
Teams from the UK and the European Union will resume discussions surrounding their future trading relationship.
The UK left the European Union at the start of this year, but the impact has been relatively small because key parts of the relationship (like membership of the customs union and the single market) are in place until the end of this year. After that, the UK and the EU will either trade under a new agreement or without one, under World Trade Organisation rules (which are the default rules if countries haven’t agreed their own deals).
Where are we in the timeline?
There have been several rounds of talks already, but the deal hasn’t been agreed yet. Negotiators are trying to wrap up the core parts of the agreement in time for a summit of EU leaders that starts in the middle of October.
The talks that begin on Monday are especially important because the deadline for reaching a deal is getting closer. News reports suggest that a breakthrough may not take place until September – if at all. Future talks between the UK and the EU will continue in 2021 on various topics beyond trade, such as transport and services.
What are the main sticking points?
Leaders have been at loggerheads over two important topics. First, the so-called ‘level playing field’ rules – which stop countries in the EU from supporting their own industries unfairly (such as with subsidies). The UK wants to be bound by as few EU rules as possible in the future, while trading with Europe freely. The EU, on the other hand, wants the UK to agree to similar rules.
The second area is fisheries. The negotiations surround quotas of fish that can be caught, by whom, where fish can be sold, as well as how regularly any agreement will have to be re-negotiated.
How likely is a deal?
The tone from both sides has become more optimistic in recent weeks. The biggest problem in the past few months has been the ‘level playing field’ issue, but recent news reports have suggested that the two sides might reach a compromise.
Capital Economics believes a deal is the most likely outcome: “While the chances of the both sides failing to reach agreement by year-end are significant, we think the most likely scenario is some sort of fudge or compromise which results in the bare bones of a deal by 31st December”.
What does this mean for me?
If the two sides fail to reach a deal, there will be more disruption to businesses and people on both sides. At least in the short-term, UK businesses will have extra work to do if they want to sell to European buyers, and vice versa. This extra disruption will make life harder for businesses that are already struggling due to COVID-19, and could cause economic damage that reduces the value of investments in the short-term.
A deal, on the other hand, would allow smoother trade between the UK and the EU, leading to less disruption.
However, it’s important to remember that there several issues that will affect markets in the coming months alongside UK/EU trade. COVID-19 is the major one, as well as its knock-on effects, such as high levels of government borrowing, lockdown measures, and changes in people’s behaviour. Plus, tensions between China and the US also affect markets in lots of ways.
For example, the issue of wealth taxation in the UK is now under the microscope – but that discussion has been prompted by government borrowing to fight coronavirus, rather than trade talks.
So, while the upcoming negotiations will certainly have an impact on investors, it’s important to keep a long-term view.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place