The U.K. officially quit the EU at the end of January, and during the transition period, officials will need to hammer out a trade deal by the end of 2020.
The United Kingdom formally left the European Union on January 31. The country is in temporary limbo, and key Brexit issues are, at long last, coming into focus. A trade deal must be concluded with the EU in less than 11 months in order to avoid a hard landing.
Intricately linked economies
The outlook for the British economy depends on the terms of a future trade relationship governing goods and services. The economies of Britain and the EU are tightly integrated, having been part of the same trade policy regime for almost 50 years. The U.K. needs to get its EU relationship sorted out before it can sign any trade deal with the United States, Japan, or anyone else. This is crucial because those trade partners will need to know what kind of commitments Britain will make with the EU, its largest trade partner.
Despite the language contained in the supporting documents to the Withdrawal Agreement, Prime Minister Boris Johnson's government has started to set out a negotiating position that will likely impose some considerable economic distance between the EU and the U.K. Johnson has doubled down on a vision for a "Canada-plus," free trade deal, which will be similar to the EU–Canada trade pact. Such a deal is remarkably unambitious. The U.K.'s fallback position is a trade deal with the EU that will be based on WTO rules — a deal that, according to the government's own analysis, would cost about 5% of GDP over a lengthy transition period.
It is inevitable that the costs of changing existing relationships will be evident before the benefits of the new regime become clear. Still, the government's current position is pretty much the extreme, hard Brexit.
Of course, the negotiations are just beginning, and there's every reason to expect the final outcome will be some distance from the U.K.'s initial demands. The shift in tone, however, is quite striking.