Almost five months after the trade agreement between the United Kingdom and the European Union entered into force, the European Parliament has now also ratified it. It took a very long time, apparently because MEPs wanted to see more progress towards a negotiated solution on the implementation of the Northern Ireland Protocol, which foresees checks between Great Britain and Northern Ireland, something which many in the UK loathe.

MEPs had been attempting to “put pressure” on the European Commission, which however hasn’t given in, also because EU member states were getting increasingly annoyed at MEPs, as they considered the EP’s strategy of delaying ratification to be weakening the EU’s hand in negotiations. In the EU, MEPs aren’t exactly renowned for their great political insight.

Now, finally, the deal is ratified, even if a lot of implementation remains to be done, while new barriers to trade that will become permanent may lead to future renegotiation.

UK exports to the EU have recovered significantly from their January fall, even if they still remain below 2020 levels. Imports from the EU are yet to significantly rebound, with some optimistic that will happen.  

In any case, UK exporters – particularly those of fresh foods – remain overwhelmed by the new checks and forms introduced on EU-UK trade. Also on the other side of the Channel, in Flanders, which has intense trade with the UK, the damage has been felt, as exporting to the UK is estimated to have become 5 per cent more expensive. This while the UK hasn’t even fully activated all of the new trade bureaucracy.

Brexit has also led to partial relocation of UK financial services providers to the EU. According to one estimate by the think tank New Financial, more than 440 UK financial services firms relocated part of their business, asset, staff, or legal entities to the EU, and more than £900bn in bank assets, worth roughly 10 per cent of the entire UK banking system, are being moved.

The EU has secured the right to challenge UK regulatory divergence

Is that a lot? In job numbers, New Financial considers this “relatively small” but warns: “the bigger issue is not so much jobs leaving the UK but new jobs in the EU being created in future that might otherwise have been created in the UK”.

Also here, things are still moving. The French government has just threatened to restrict City of London market access to the EU, stating  “retaliation measures” are possible if the UK does not “deliver licenses [and] authorisation to access their waters for fishing”. Also European Commission chief Ursula von der Leyen has issued a warning that  “we will not hesitate to use” trade tools against the UK, which are foreseen in the EU-UK trade deal, “if necessary”. 

To be able to issue divergent regulation has always been a top concern for Brexiteers and supporters of UK sovereignty, and rightly so. This particular demand is why it took so long to conclude a deal. In return for no longer insisting on UK “dynamic alignment” with EU rules and a role for its own top court in disputes, the EU has secured the right to challenge UK regulatory divergence. For example, if the UK were to scrap EU regulations limiting the working week to 48 hours, an arbitration court could allow the EU to impose retaliatory measures – tariffs, for example –  if it could be demonstrated that there is a significant divergence which would have material impact on trade or investment, something that is quite a high bar. We’ll need to see what the EU’s so-called “non-regression” guarantees will mean in practice.

If Britain would scrap the EU’s burdensome and innovation-stifling GDPR data rules, which are now also considered by Axel Voss, a leading German MEP belonging to Angela Merkel’s CDU, as “getting in the way of digital innovation”, the EU may still be able to make a scene. The European Commission’s overzealous Margrethe Vestager has just come out with a proposal to ban “unacceptable” uses of artificial intelligence. Industry voices have complained that this involves “unhelpfully vague” “loose definitions like ‘high risk’” and that we don’t need “an ambiguous, tick-box approach to regulation that is overseen by individuals who may not have an in-depth understanding of AI technology will hardly inspire confidence.”

This is just one example of how the Brussels regulatory machine can now go all in, freed from the UK and its sympathy for innovation and light-touch regulation. In this case, when Britain prefers not to go along with Brussels, the latter’s “non-regression” guarantee will be of no use, given that Britain isn’t changing anything. 

Ultimately, UK regulatory divergence would prove a boon for EU businesses as well, who will be able to point at the British, alternative approach, similar to how the EU Commission’s deficient vaccine procurement, which has ignored expected industry production capacity issues, was put to shame in the light of Britain doing it better. 

Due to Brexit, a lot of extra bureaucracy burdening trade has been imposed. EU-UK trade is still free from customs duties, unless complex and burdensome “rules of origin” requirements, which are intended to determine that products originate from either the UK or the EU, are fulfilled. Even then, there is customs bureaucracy – such as import or export declarations  – and as mentioned, both sides may drag the other before an arbitration court in cases of breaches of the deal, which may lead to customs after all.

Some in the UK now argue in favour of aligning UK agricultural standards with those of the EU

On top of that, regulatory divergence and the EU’s refusal to declare many UK rules as equivalent, limits market access. This particularly hurts services, not only financial services, but also smaller service providers – think British ski instructors in France – due to the lack of recognition of professional qualifications. 

Some in the UK now argue in favour of aligning UK agricultural standards with those of the EU. This would alleviate a lot of the trade bureaucracy and non-tariff barriers for fisheries and agriculture, while the UK wasn’t going to diverge much in this area from EU standards anyway – at least that is the argument. The options include following the arrangement the Swiss have with the EU, where the UK copy and paste EU standards, or alternatively the arrangement New Zealand has with the EU: exempting EU-UK trade in this area from health certificates or inspections, something which would be most in line with sovereignty. The main drawback would be that this would make it hard to agree a deal to open up agricultural trade with the US, but this was going to be hard anyway.

To try to improve the Brexit deal, a cross-party group of MPs and several business figures have set up a commission to scrutinise and improve the UK’s trade arrangement with the EU. It has a “remain” feel to it, but also trade loving brexiteers should realise that a lot of trade has been burdened by Brexit, which means there is a lot of scope for improvement, for example through mutual recognition of standards, which leaves sovereignty intact. Sure, Brexit may allow the UK to become much more dynamic and it may allow it to beat the EU in opening up trade – that is if the UK seizes the opportunity – but there are also downsides. After all, if the EU had responded to the UK’s relentless call to reform it into an institution merely focused on scrapping trade barriers, Brexit would have hardly enjoyed any support. It was always a second best solution. Now that it has happened, it’s time to reform Brexit, so to optimise its gains.