Daily Archives: December 22, 2023

London financiers have largely lost access to EU markets, but the UK says its recognition of Swiss banking and asset management rules is 'ground-breaking'

UK-based financial firms will be able to serve Swiss clients using domestic rules, under an agreement signed by British finance minister Jeremy Hunt today (21 December).

The mutual recognition deal, under which both countries agree to accept each others regulations for sectors like banking, investment and asset management, comes after financiers in the City of London lost significant access to the much bigger EU market next door.

The Berne Financial Services Agreement is a global first, Hunt said in a statement, describing it as a "blueprint" for deals with other trade partners.

The ground-breaking agreement gives British insurers a unique right to serve Swiss clients without a base in the country, and is only possible" due to the new legal situation post-Brexit, the statement added.

The UK's finance and insurance trade with Switzerland grew by 53% since 2016, reaching 3.28 billion in 2022, the UK Treasury said.

Brexit also meant that UK-based banks and brokers could no longer trade freely across the EU bloc, however, and Brussels has been reluctant to open up its market by deeming British laws equivalent to its own.

UK-based banks moved 900 bn in assets to places such as Dublin, Paris, Frankfurt and Amsterdam, one 2021 study by London-based think tank New Financial found, after regulators such as the European Central Bank called for operations to shift to locations within the bloc.

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EU Policy. UK hails financial access deal with Switzerland after Brexit losses - Euronews

Inflation has become a concern for policymakers worldwide. Its potential causes include geopolitical tensions, supply chain disruptions, expansionary monetary and fiscal policies, and rising commodity prices (Ilzetzki 2022). This has also been an issue in the UK, which has experienced higher inflation than other G-7 economies, and raised the question of whether and how Brexit has contributed to rising prices.

There are different channels through which Brexit can affect price levels. One source is the pound devaluation, as Breinlich et al. (2022) find. Our research highlights an alternative source: the trade policy uncertainty (TPU) associated with Brexit. Specifically, we find that uncertainty about the future trading conditions with the EU increased the UK's import prices from the EU-27, with the leave referendum raising those prices by as much as 10%.

The opportunity to vote for Brexit in the 2016 referendum increased uncertainty about the future trade conditions between the EU and the UK. In 2013, the UK Prime Minister David Cameron raised the possibility of a referendum on the EU and announced he would follow through after the Conservative election victory in May 2015. As the June 2016 referendum approached, 83% of UK Chief Financial Officers (CFOs) reported high uncertainty, as did CFOs in Ireland (55%), the Netherlands (69%), and Germany (93%) (Deloitte 2016). UK CFOs ranked the Brexit referendum as the number one risk to their business over the next 12 months in 2016Q1. Similarly, two-fifths of CFOs in Europe ranked geopolitical risks as the first or second most important risk factor.

With the UK's membership status in danger, firms in other EU countries had to make investment decisions without knowing whether they would continue to have duty-free market access. Export investments include setting up distribution networks, acquiring consumers, matching quality to foreign tastes and product standards to regulations, as well as learning customs procedures. These investments in export capital cannot be easily recovered when market conditions worsen, for example if tariffs or other trade barriers increase.

Since at least May 2015, an EU firm had to consider the possibility that the UK would vote for Brexit, and a new agreement had to be renegotiated. If no deal could be reached, import tariffs on EU goods could increase by as much as 15 percentage points on some products, enough to significantly reduce expected future sales to UK customers. In Graziano et al. (2021), we use the difference between duty-free rates on EU trade and the Most Favoured Nation tariffs (MFN) to measure tariff risk from Brexit. We find that increases in the probability of Brexit reduce EU-UK trade in goods, particularly in industries with higher potential MFN tariff rates, such as motor vehicles.

There is a substantial amount of evidence showing that trade agreements increase trade by reducing trade policy uncertainty (Handley and Limo 2022). Brexit provides evidence of the same phenomenon in reverse: trade reduction due to a disagreement. However, much less is known about the price effects of trade policy uncertainty, and this is the focus of Graziano et al. (2023).

We first examine how the Brexit probability before the referendum is correlated with the growth in the UK import price index of goods imported from the EU versus its total imports. We use prediction markets on the referendum outcome to capture the likelihood of Brexit. To measure relative prices, we construct monthly import price indices from each EU exporter to the UK for each of the 1200 industry groups (e.g. babies' garments and clothing accessories from France), capturing 12-month changes. We plot its average relative to the UK aggregate import price index from the Office for National Statistics (ONS), which captures 12-month price changes in imports from all countries. As shown in Figure 1, the relative price of EU imports comoves closely with the Brexit probability measure.

Figure 1 Relative EU import price change and Brexit probability

EU firms would have expected UK tariffs to be higher on some goods after Brexit. In Figure 2, we show the sector-specific Most Favoured Nation tariff distribution imposed on different products by the EUthe reference we use for likely future UK tariffs. The threat of facing higher protection was heterogeneous between and within sectors. For instance, in Vehicles, Aircraft, Vessels, the increase would be 9% for motor vehicles but only 2% for trailers. In contrast, no products in "Pulp, Paper & Articles" would face a Most Favoured Nation tariff threat.

Figure 2 Sector-specific distribution of potential Most Favoured Nation (MFN) tariff rates

The theory predicts a stronger relationship between import price changes and the Brexit referendum probability for those products with higher Most Favoured Nation tariff risk. This is what we find in Figure 3: the relative price change of high to low-risk goods comoves with the Brexit probability.

Figure 3 Relative price and quantity changes and Brexit probability

Figure 3 also shows a negative relationship between relative import quantities in high to low-risk goods and the Brexit probability. The increase in price and decrease in quantities implies a supply rather than a demand shock, ruling out alternative channels such as stockpiling high-risk goods.

The descriptive evidence above is consistent with a trade policy uncertainty channel for increasing UK import prices. Yet, it does not rule out certain alternatives or allow for easy quantification. Therefore, we derive and estimate the impact of pre-referendum trade policy uncertainty on import prices by exploiting the different Most Favoured Nation tariffs these goods could face and the changes in the probability of Brexit over time. In effect, the estimation answers if import prices of specific items, e.g. baby garments from France, were systematically higher in months when the Brexit outcome was more likely when compared to price changes of hats and other headgear from France, which would face lower tariffs.

We find that trade policy uncertainty increased import price indices. A one standard deviation increase in the pre-referendum probability of Brexit increased import prices by 2% at the average Most Favoured Nation tariff. This effect is due to increases in prices of products continuously traded throughout the year and a decrease in the available varieties.

Using the model and our estimates, we quantify the impact of the referendum outcome on UK import prices. Figure 4 plots the average price impact under alternative Brexit tariff threats. Our preferred estimate implies that the increase in probability after the referendum increased UK import price indices for EU goods by around 11%.

Figure 4 Predicted post-referendum price impacts across tariff risk factors

About 7% of total UK expenditure was on EU imports in our sample. Therefore, an 11% increase in the price of EU imports significantly impacts UK consumers and firms. Our calculations indicate that the prices for UK households and consumers increased by 0.6% due to higher trade policy uncertainty generated by the Brexit referendum outcome. This trade policy uncertainty remained in place and likely grew at least until an agreement was reached years later.

The Trade and Cooperation Agreement reduced some of the trade policy uncertainty present in 2015-2020, but has not eliminated it. For example, changes to rules of origin have meant some EU firms face Most Favoured Nation tariff rates. Likewise, the status of the sea border in Northern Ireland and the potential for renegotiation of the Trade and Cooperation Agreement remain a source of uncertainty. Brexit provides a clear example of how reductions in the credibility of trade agreements can exacerbate price pressure on consumers even in the absence of applied policy changes.

Ahir, H, N Bloom and D Furceri (2022), The world uncertainty index", NBER Working Paper 29763.

Breinlich, H, E Leromain, D Novy and T Sampson (2022), The Brexit vote, inflation, and UK living standards, International Economic Review 63(1): 63-93.

Deloitte (2016), European CFO Survey: Politics takes centre stage, May.

Graziano, A G, K Handley and N Limo (2021), Brexit uncertainty and trade disintegration, The Economic Journal 131(635): 1150-1185.

Graziano, A G, K Handley and N Limo (2023), An Import (ant) Price of Brexit Uncertainty NBER Working Paper 31600.

Handley, K and N Limo (2022), Trade policy uncertainty, Annual Review of Economics 14: 363-395.

Ilzetzki, E (2022), Surging inflation in the UK, VoxEU.org, 10 February.

UK Fashion & Textile Assoc (2021), "Brexit Bureaucracy Hits UK Fashion and Textile Companies Hard", July.

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Brexit inflation: The role of trade policy uncertainty in increasing UK import prices - CEPR

British Prime Minister Rishi Sunak announced a breakthrough in the ongoing discussions with the European Union regarding the postponement of post-Brexit tariffs on electric vehicle (EV) sales. The European Commission, reversing its initial stance, recently approved a one-time extension until the end of 2026 for the planned 10-percent tariffs. The decision, influenced by concerns raised by the UK and EU automotive industries about potential increased costs, set the stage for Thursday's agreement. The deal involves a more gradual implementation of "rules of origin" regulations and associated tariffs. In a statement, Sunak acknowledged the industry's concerns, expressing relief for stakeholders. The prime minister emphasized that the delayed tariffs would help "keep costs down for businesses and for people at home who want to make the switch to electric vehicles." Attributed to disruptions in the global supply chain caused by the pandemic and the conflict in Ukraine, the need for the tariff delay became apparent. The UK officially left the EU in January 2020, finalizing a post-Brexit free-trade agreement during the subsequent transition period, effective in 2021. As per the agreement, tariffs were originally scheduled to commence on January 1, 2024, for vehicles lacking at least 45 percent UK- or EU-made content, along with batteries sourced at least 50-60 percent from these regions. The anticipated delay is anticipated to result in savings of up to 4.3 billion ($5.5 billion) for both car manufacturers and consumers, according to Sunak's office. Sigrid de Vries, the director-general of the European Automobile Manufacturers' Association (ACEA), welcomed the decision, stating that it provides "much-needed certainty" to the EV battery supply chain. She emphasized that the move recognizes the time required to develop emerging value chains and signals the EU's commitment to maintaining the competitiveness of critical industries. Mike Hawes, chief executive of the UK's Society of Motor Manufacturers and Traders (SMMT), lauded the agreement as a "win for motorists, the economy, and the environment." He highlighted that maintaining tariff-free trade in EVs ensures consumers have a broad and affordable choice of models during a crucial period for encouraging the transition to electric vehicles.

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UK and EU Reach Accord on Post-Brexit Electric Car Tariff Postponement - IndiaTimes

French vineyards wont have to worry about cheaper Aussie merlots squeezing them off the shelves at Carrefour. Italian mozzarella makers wont have to fret about southern hemisphere rivals. After years of talks, a bid to agree a free-trade deal between the EU and Australia has collapsed.

I came to Osaka with the intention to finalise a free-trade agreement, said the Australian trade minister Don Farrell. Unfortunately we have not been able to make progress.

There was just too wide a gulf between the two sides on agricultural exports and the EU was unwilling to lower the steep tariffs it puts on Australian food. There is little chance of talks reopening again. Australia and Europe will still trade with each other, but there will be cumbersome tariffs and quotas in the way.

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The contrast with the UK could hardly be more clear. After leaving the EU, we negotiated a free-trade deal with Australia fairly quickly, and it came into force in May this year. A few farmers and hardcore Remainers complained that we gave away too much. But the UK stopped trying to protect its farming industry in the 1840s. Cheaper Australian food and wine will be phased in over several years, which will help many families cope with the cost-of-living crisis. It was a win-win for both sides.

Why the EU cant do trade deals The bigger point is that the EU is no longer able to do trade deals. An agreement with the Mercosur group made up of Brazil, Argentina and a host of other South American countries has been in the works for 20 years, but still hasnt been signed off. A deal with the US, Europes largest trade partner, was put on hold indefinitely back in 2019. Even a deal with Morocco, eight miles from the EUs mainland border, was frozen by the European Court last year. It managed to get a deal with tiny New Zealand over the line. But that is about it. Nothing else is on the horizon.

It is not hard to work out why. First, under French influence, and with the British out of the way, the EU is getting more and more protectionist. We can see that in the constant demands for huge industrial subsidies, for secure supply chains, and for making sure that domestic production is prioritised over any other consideration. An EU-Australia trade deal was meant to allow farmers greater access to European markets, in exchange for French and German firms having easier access to Australian minerals. Any deal involves compromises, but the EU is no longer willing to make any. Incapable of any sustained growth, the EU is shrinking all the time as a percentage of global GDP. It is down to 15%, half the level of 30 years ago, and getting smaller.

Small economies can do deals, as the UK has shown. But they have to be willing to open, and the EU refuses to do that. Its regulatory systems are becoming more and more cumbersome. From the GDPR data rules to new laws on artificial intelligence, gene editing and carbon emissions, a deal with the EU involves taking on board a vast number of new laws over which you have no say. It is no longer worth the bother for other countries.

Why the UK is better off outside the EU During the long process of leaving the EU, we kept being told that it was a far more effective trade negotiator than the UK could ever hope to be on its own. Its sheer size, and the formidable skills of its officials, meant that it could conclude many more deals, and on far better terms, than the UK ever could by itself.

It hasnt turned out that way. We managed to get a pretty good deal with Australia and have joined the CPTPP trade pact that covers most of the emerging Asian nations as well as Canada and Mexico, which the EU is still not a part of. We should soon have a trade deal with India, the fifth largest economy in the world and heading for the top three.

Membership of the EU has become a barrier to trading globally. Remainers, and the leadership of the Labour Party, can carry on insisting that getting closer to Brussels would be better for British trade if they want to. The reality is that the UK is better off out of it.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

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Britain was right to Brexit | MoneyWeek - MoneyWeek

John Curtice unpacks the recent drop in support for re-joining the EU, highlighting a swing among those who do not think Brexit has made much difference to Britains economy or its control over its own affairs.

UK in a Changing Europes Redfield & Wilton Brexit tracker polls can be foundhere, and the data tables can be downloaded here.

The latest poll from Redfield and Wilton Strategies for UK in a Changing Europe shows something of a drop in support for re-joining the EU. Once those who say dont know or indicate that they would not vote are left aside, 56% now say they would vote to re-join, while 44% state they would back staying out. That represents a three-point swing in favour of staying out as compared with the previous poll in October and indeed as much as a five-point switch since that undertaken in August.

On its own this movement might be thought somewhat inconsequential. Perhaps it could be no more than the product of the random variation to which all polls and surveys are subject. However, it is not an isolated finding. Most other polls have recorded a fall in support for re-joining in recent weeks.

In their last two polls, Omnisis/WeThink, who ask people every week how they would vote in another Brexit ballot, have put support for re-join at 57-58%. In contrast, four of the five readings they took in November put the figure at 60%. Deltapoll, who also poll on the subject every week, now suggest that only 52-53% would vote to re-join. In November their average was 57%. Meanwhile, in their latest monthly reading BMG put staying out narrowly ahead, by 51% to 49%. This represented a swing of three points against re-joining and was the first poll since May 2022 to put staying out ahead.

Are there, then, any clues in the finer details provided by the Redfield & Wilton poll as to why re-joining may have become somewhat less popular?

The swing appears to have occurred irrespective of how people voted in 2016. Table 1 shows the relationship between how people voted (or did not vote) in 2016 both in October and in our latest poll. As compared with two months ago, those who voted Remain in 2016 are now three points more likely to say they would vote to stay out. Equally, those who backed Leave are three points less likely to state they would vote to re-join. Meanwhile, support for staying out has increased by as much as eight points among those who did not vote seven years ago.

Table 1: Current EU preference by 2016 referendum vote, October and December 2023

Note: Data not weighted by reported likelihood of voting.

Yet there is little sign of any marked change in voters evaluations of the consequences of Brexit. Table 2 shows, for the three key issues in the 2016 Brexit debate, the economy, sovereignty, and immigration, how voters regard those consequences now and two months ago. Also included is how voters view Brexits impact on the handling of the pandemic, an issue which we have previously shown has some influence on Leave voters current Brexit preferences.

The figures for the two months are very similar to each other. There is certainly no consistent evidence that the consequences of Brexit have come to be regarded more favourably in recent weeks. Voters are still inclined to believe that, thanks to Brexit, immigration is higher and that the economy has suffered, while they are divided on whether or not it has given Britain more control over its own affairs.

Table 2: Evaluations of the consequences of Brexit, October and December 2023

Note that in the case of immigration, higher has been classified as worse.

If how people would vote in another referendum has changed but evaluations of the consequences of Brexit have not, there must have been a change in the relationship between peoples evaluations of Brexit and how they would vote in another referendum.

We have previously reported that, for 2016 Leave voters, statistical analysis reveals that their current Brexit preference is most strongly related to their perceived impact of Brexit on (i) Britains economy and (ii) how much control Britain has over its own affairs. In fact, the equivalent analysis among those who voted Remain in 2016 reveals that these two evaluations are the ones most strongly related to their current Brexit preference too. Meanwhile, the economy also appears to be the central issue for those who did not vote in 2016.

Table 3 therefore looks more closely at the relationship between peoples evaluations of the economic consequences of Brexit and how they would vote in another referendum.

Table 3: Current Brexit preference by 2016 EU referendum vote by evaluations of the economic consequences of Brexit, October and December 2023

One striking pattern stands out. Among all three groups of voters, the swing in favour of staying out of the EU since October has been most marked among those who think the economy is in much the same state as it would have been if Brexit had not happened. In the case of 2016 Remain voters there has been a nine-point increase in support for staying out among those of that view, while among Leave supporters and non-voters the equivalent figures are 11 and 15 points respectively.

Table 4 undertakes the equivalent analysis of peoples evaluations of the impact of Brexit on Britains ability to control its own affairs. Here too, among 2016 Leave voters and non-voters at least, there has been a marked increase (of seven and twelve points respectively) among those who think Brexit has not made much difference, though in the case of Leave voters those who think Britain has less control are also especially less likely to say now that they would vote to re-join the EU.

Table 4: Current Brexit preference by 2016 EU referendum vote by evaluations of the impact of Brexit on Britains control of its own affairs, October and December 2023

Two implications follow.

First, it is far from certain that another referendum would produce a majority for re-joining. Despite widespread doubts about the benefits of Brexit, the anti-Brexit lead in the polls is not that large, differs between polling companies, and is far from invulnerable.

Second, much might rest in any referendum on the preferences of those who reckon Brexit has not made much difference. Seemingly many of them could yet decide it would be better for Britain to make the best of the bed it has now made for itself rather than pursuing the uncertain prospect of trying to reclaim its old one.

ByJohn Curtice, Senior Fellow, UK in a Changing Europe, Senior Research Fellow, National Centre for Social Research, and Professor of Politics, University of Strathclyde.

This post also appears on the What UK Thinks website.

The December data tables can be downloaded here.

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Have voters cooled on the prospect of re-joining the EU? - UK in a Changing Europe