British PM Johnson intensified pressure on EU for an FTA

calendar 18/10/2020 - 18:00 UTC

Overall, it seems that British PM Johnson intensified his pressure on the EU for an FTA in favor of the U.K.; otherwise, the U.K.-EU has to trade under WTO like tariffs. The EU has a trade deal with Canada called the comprehensive economic and trade agreement (CETA). In 2016, after the Brexit referendum, the EU Chief negotiator Barnier indicated it may be possible for a CETA like free trade deal for the U.K.

Under CETA, there would be checks on imports and exports and a great deal more red tape for businesses as the U.K. would be outside the EU rule book. But such a deal does involve reducing tariffs, or taxes, on imports and quotas. What the UK and EU have been attempting to negotiate is something more than that enjoyed by Canada, however, both sides say they want a zero-tariff - zero quotas (ZTZQ) agreement by 31st Dec’20. The CETA deal is almost like ZTZQ except on some farm products (poultry, meat, eggs) as-well-as some other products (only 2%); 98% of products are under ZTZQ in CETA.

But the EU said CETA was not possible because of lack of time: If they (Britain) wanted a Canada-style deal they should have extended the transition period and then we could have gone through all the products and put tariffs and quotas in place in return for lower demands on maintaining EU standards--.

The U.K. said the EU is offering less generous terms than are included in the CETA. There are various examples including the length of stay for short-term business visitors and the lack of sector-specific provisions for key industries with particular technical barriers such as motor vehicles, medicinal products, organics, and chemicals.

Britain said the EU demands on level playing field provisions also go beyond anything contained in the CETA. These include non-regression from EU standards, and a UK commitment to follow the EU’s domestic subsidy policies. The EU has said the sheer level of trade between the UK and the EU means it needs to be vigilant in maintaining fair competition. It has also watered down its original demands on standards and state aid, but not enough, as far as the Johnson admin is concerned.

The AU trade deal is almost a general trade deal under WTO. Britain started using the term at the beginning of the year as an alternative for a no-deal. The EU does not have a free-trade deal with AU, although they are in negotiations since 2018. The two sides (EU-AU) operate mainly on World Trade Organization (WTO) rules, with normal tariffs on imports and exports. Although both EU-AU published a partnership framework back in 2008 that aims to facilitate trade in industrial products between them by reducing technical barriers, no rules were set for tariffs.

The AU is the 2nd largest trading partner of the EU after China. The EU imports mainly commodity products from the AU like gold, coal, and oilseeds, while the EU mainly exports passenger cars and pharmaceuticals.

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The EU is trying its best from the very beginning to delay the actual Brexit by various strategies for the sake of the overall ‘EU’ concept/unity. After Irish border issues for almost 3-years, the EU and U.K. are now warring with fisheries, a political issue for both Britain and France.

The British PM Johnson is a master of dealmakers (like Trump). Johnson also likes to play EU spin in the front foot rather than in the back foot and thus his policy is ‘attack is the best defense’. Johnson knows very well that under WTO (AU) trade deal exit from the EU, Germany will suffer more than the U.K. Export heavy German economy was already under contraction even before COVID-19 due to Trump trade war and Brexit uncertainty. Thus, Germany (Merkel) may not allow a no-trade deal Brexit, everything being equal.

And Johnson is pressuring the EU by publicly announcing that the U.K. has no problem with a Brexit under AU (WTO) trade deal rather than a bad trade deal. Johnson effectively put the ball back in EU’s court and the question is now who blinks first-most probably it will be the EU.

Now all the focus will be renewed intense negotiations for the next few weeks and the Nov EU summit as Johnson is almost determined to leave the EU on 31st Dec, deal or no deal. But a short extension may not be also ruled out even if a deal (FTA) like CA+++ signed by mid-Nov for the implementation of the same and COVID-19 resurgence issues. The market is still confident about a Brexit trade deal before Dec’20 as both the U.K. and EU can’t afford another trade/economic disruption for a no-trade deal Brexit, especially in such a time of corona recession.

The EU may blink first in Brexit deal negotiation

On Friday, the British PM Johnson said:

Opening statement by Michel Barnier at the joint press conference with President Michel following the European Council meeting of 15 October 2020:

Effect of Brexit on the British stock market: FTSE-100 and currency (GBP)

Overall, a no-trade deal (FTA) Brexit will be negative for the British economy, GBP, and the market, at least in the short term. But at the same time, a lower GBP will be also helpful for the export-heavy FTSE-100. At a glance, the FTSE-100 may slide almost 10% in a no-deal Brexit scenario and may also rally around 10% in the alternative scenario. Even under AU/WTO trade deal, overall damage will be limited as there will be no more Brexit uncertainty. But in any case, Britain will lose the last 4-years dual advantage of a devalued currency and a free trading zone (EU). And the increasingly broken relationship between the EU and U.K. may not be restored in the foreseeable time.

Bottom line:

Both GBP and FTSE may slip in the coming days on the trifecta of Brexit, national corona lockdown 2.0, and U.S. political uncertainty.

Technical View: GBPUSD

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