U.K., EU Reach Historic Trade Deal, Capping Brexit Saga

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U.K., EU Reach Historic Trade Deal, Capping Brexit Saga

A deal between the U.K. and the European Union came Thursday, days ahead of an end-year deadline, giving Britain significant freedom to depart from EU regulations and sign free-trade deals with other countries. Photo: Paul Grover /Pool

The U.K. and the European Union secured an agreement over their future relations, setting the seal on the 2016 British referendum decision to leave the bloc and bringing to a close years of economic uncertainty and fraught politics in the U.K.

The deal, coming just days ahead of an end-year deadline, calms the worst fears of a major economic disruption in coming weeks as Britain unmoors from its largest trading partner and is tackling another intense phase of the coronavirus pandemic.

“So we have finally found an agreement. It was a long and winding road but we have got a good deal to show for it. It is fair. It is a balanced deal and it is the right and responsible thing to do for both sides,” European Commission President Ursula von der Leyen said in a press conference after the deal was announced. “The European Union and the United Kingdom will stand shoulder to shoulder to deliver on our common goals.”

Prime Minister Boris Johnson said the accord ends the uncertainty that has bedeviled U.K. politics for years and puts its economy on a better footing to recover from the pandemic. “This deal above all means certainty,” he said.

Germany and France welcomed the deal, a sign that the EU’s two largest economies are likely to support it when leaders meet to ratify it, possibly as soon as next week.

German Chancellor Angela Merkel said the deal with the U.K. was of “historic importance” and she is confident her government will support it once ministers have examined the details.

French President Emmanuel Macron, in a message on his official Twitter account, said the agreement protects European citizens, businesses and fishermen. “Europe is moving forward and can look to the future, united, sovereign and strong,” he said.

The accord, which follows months of tense negotiations and will take effect on Jan. 1, sets out the terms of a much more distant relationship between Britain and the EU than at present.

It marks the capstone of the Brexit project, ending years of uncertainty over how tightly Britain will remain entwined with the EU after it voted to leave the bloc in June 2016. The agreement averts an acrimonious split between American allies in Europe.

At the end of the year, Britain will formally exit from both the EU’s single market—its zone of common regulation—and customs union. The late agreement leaves businesses responsible for trade worth close to $900 billion a year with just weeks to adjust to a complex set of new trading rules.

Under the terms of the accord, both sides will continue to trade free of tariffs but there will be significant new bureaucracy for importers and exporters. The free flow of workers between the two economies will end and trade in services will be much reduced. London’s vast financial center will no longer have guaranteed access to European markets.

The deal gives Britain significant freedom to depart from EU regulations and sign free-trade deals with countries like the U.S. But as the price for securing a deal without tariffs, the U.K. agreed that it wouldn’t seriously undercut EU standards on issues such as labor and the environment and would maintain similar constraints on the subsidizing of private industry.

The agreement must formally be ratified by the European and U.K. parliaments and signed off by EU leaders before the end of the year. Capitals have insisted they need proper time to comb through the text before approving it. Though their approval is likely, France has warned it could veto a deal if some of its key concerns, including access to British waters for its fishing fleet, aren’t met.

EU lawmakers have also said it is now too late to meet before the year’s end so EU governments may need to provisionally approve the accord and await the European Parliament’s approval in the new year.

Fishing rights were a contentious issue in talks over a deal between the U.K. and EU.

Photo: vickie flores/Shutterstock

In the final 24 hours, Mr. Johnson and Mrs. von der Leyen spoke repeatedly on the phone as fishing rights remained a major sticking point. Negotiators went line by line through each major species of fish to determine the maximum amount British and EU boats could catch for roughly five years, according to EU and U.K. officials. Discussions over rules for the trade of electric batteries, a crucial component of the electric-car industry, also went to the wire, the officials said.

The talks required frequent outreach between the EU team and capitals from the bloc’s coastal states, particularly to Paris to ensure President Emmanuel Macron was on board with the details, the officials said.

The agreement brings to an end an odyssey that started with a 2016 referendum that was won on the back of a campaign that sought to bring to an end the free movement of immigrants from the EU and criticized the EU as remote and undemocratic.

The referendum decision roiled British politics and cost the jobs of two Conservative prime ministers: David Cameron, who resigned in 2016 after the referendum result went against him; and Theresa May, who quit three years later after failing to get her version of a Brexit withdrawal deal through Parliament.

Britain left the trading bloc legally and politically on Jan. 31 but continued to follow EU rules until the end of the year during a transition period that allowed time for trade talks.

More on Brexit

Failure to seal an agreement before Jan. 1 would have resulted in the automatic imposition of tariffs, border delays for basic goods such as food and medicines, and serious recriminations among Britain’s European allies.

The lack of a deal also would have likely intensified sectarian tensions on the island of Ireland, raising fears that the peace process there could be jeopardized. After Jan. 1, Northern Ireland, which is part of the U.K., will in practice remain in the EU’s customs area and single market, meaning a customs border won’t be needed with EU member Ireland to the south.

Mr. Johnson’s compromise in continuing to abide by broad EU regulatory standards could still raise hackles among some in his Conservative Party who wanted a more decisive break with the EU. However, the main opposition Labour Party is likely to back the deal or abstain on the basis that failure to secure a deal would be worse, meaning any Conservative opposition is unlikely to derail U.K. ratification.

The agreement—which is well over 1,000 pages, including annexes—details how the two economies will interact on issues ranging from security cooperation to fishing rights.

The accord will result in greater friction to trade, making it a rare real-time experiment in deglobalization.

Most economists expect the U.K.’s economy to be significantly more dented by Brexit than the EU’s, although they say both will be less damaged than if the talks had failed and the two sides had been left to trade according to the rules of the World Trade Organization. According to official statistics, 43% of British exports in 2019 went to the EU, making it the country’s largest export market.

European Commission’s Head of Task Force for Relations with the United Kingdom Michel Barnier, right, speaks with European Commission President Ursula von der Leyen after addressing a media conference on Brexit negotiations at EU headquarters in Brussels on Thursday.

Photo: Francisco Seco, press pool

In 2018, the British government modeled that a basic free-trade agreement with the EU, along the lines of that just agreed, would leave the U.K. economy 4.9% smaller after 15 years than it would have been had it remained a member state—compared with a 7.6% shortfall in the event of no deal. The government hasn’t released a more updated estimate since.

Any trade agreements with more distant countries, such as the U.S., that the U.K. would be newly free to strike would yield minor benefits. They wouldn’t come close to making up for the losses in trade with Europe, the models showed.

Governments and companies on both sides of the English Channel have spent billions of pounds to prepare for bureaucratic requirements that exporters and importers will—even with a deal—need to fulfill for the first time in nearly half a century.

Underpinning the talks was a trade-off that the U.K. was trying to make between maximizing access to the trading bloc while restricting the amount of EU regulation it needed to accept to get that access.

The U.K.’s border with Ireland has been a major sticking point since Britain started negotiating its exit from the European Union. WSJ’s Jason Douglas traveled to the country’s only land frontier to understand why the issue is so divisive. Video: George Downs; Illustration: Jaden Urbi/Soarscape

EU negotiators worried about Britain maintaining favorable access to the bloc while also cutting costs to exporters by slashing regulation. The U.K., meanwhile, sought independence from EU regulations and law, and flexibility to manage its affairs in the future.

The talks got stuck for months over the question of how much the U.K. government should be free to subsidize or otherwise support its private sector. In the final days, there was a tug of war over fisheries trade that required intervention by Mr. Johnson and Mrs. von der Leyen to overcome.

U.K. businesses importing and exporting to the EU will have to fill out an extra 215 million customs declarations each year, according to U.K. government estimates. Large parking lots have been built in southern England and northern France in case there are snarls at the border and trucks are forced to line up for miles.

To ease pressures on businesses, the U.K. said it would delay applying some new border procedures on imports to the U.K. from the EU until July 1.

How Mr. Johnson’s and subsequent governments will use this newfound freedom from EU rules is unknown. Mr. Johnson has talked of increased government investment in postindustrial parts of the country as he seeks to appeal to Brexit-supporting blue-collar workers. The government is also setting out plans to bolster green business. Meanwhile, negotiators are busy rolling over dozens of trade deals the country currently has in place with non-EU countries via the bloc.

For the EU, the talks represent closure on the Brexit process, and an acknowledgment that Britain will from now on be an economic competitor, not a partner. It hopes the agreement underlines for member states why remaining part of the club yields significant economic benefits.

It could also smooth relations as a new U.S. administration enters office, making it easier for the U.K. and the EU to work together to bolster trans-Atlantic relations that were tested during the Trump administration.

Write to Laurence Norman at laurence.norman@wsj.com, Jason Douglas at jason.douglas@wsj.com and Max Colchester at max.colchester@wsj.com

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