European Union committees voted 108-1 to approve the recently agreed upon trade deal between the European Union and the United Kingdom. On Christmas Eve 2020, the agreement was hammered out, and was ratified in April 2021. Now, the 27-nation bloc has accepted the terms of trade with the United Kingdom, pending the European Union Parliament’s consent. The vote was approved overwhelmingly, with just 4 abstentions and one rejection.
The Brexit went into full effect in January 2020, with the EU and the UK seeking the most favourable divorce agreement possible. Of special significance to the EU is the manner in which customs arrangements will be negotiated between Northern Ireland and Britain. These talks are ongoing, and remain a contentious issue between both sides. To this end, the UK Brexit Minister, David Frost is in high-level discussions the EU executive arm vice president.
After the EU initiates legal proceedings against the UK, the terms of which claim that the UK violated international law, with both sides intent on finding common ground vis-a-vis Northern Ireland which hangs in the balance. Several leading European Union officials are seeking good-faith guarantees from London with regards to the manner in which the withdrawal agreement will be negotiated.
Stocks React to Declining Imports and Exports between EU and UK
To this end, a mixed group of business figures and MPs have established an independent commission to examine the current UK trade agreements with the EU, and the global community. A recently launched trade & business commission features a wide-ranging group of representatives from across the political spectrum. After the Brexit transition period ended, UK imports declined 29%, and exports plummeted 41% in January (ONS – Office for National Statistics). Various business lobby groups levelled accusations against the UK government of prioritising UK sovereignty over the practical concerns of UK manufacturers, particularly pharmaceutical companies, chemical companies, and automobile manufacturers.
The declines in imports and exports are partially evident on the FTSE 350 index, with pharmaceuticals and biotechnology companies recording only modest gains or losses for the year to date. Top performing pharmaceuticals & biotechnology constituents such as Vectura and Hikma Pharmaceuticals are down between 6% – 8% for the year-to-date. Others like GlaxoSmithKline, and AstraZeneca are up less than 1% for the year-to-date. Top performing UK mystery: biotechnology constituents such as Indivior and Genus PLC are up 23.16% and 25.24% respectively YTD. Across the Atlantic, the best stocks to watch are those which have benefited from the pandemic such as Lowe’s Companies (NYSE: LOW), and Houghton Mifflin Harcourt CO (NASDAQ: HMHC). While the stock market focus in the UK is largely related to how post-Brexit trade deals play out, in the US it’s almost exclusively COVID-related.
UK Top Performing Index Records Robust Growth despite Brexit Deliberations
The premier UK stock market, the FTSE 100 is currently hovering around 7,019.53 (Monday, April 19, 2021), for a year-to-date improvement of 8.65%. This belies the figures released by the ONS which indicates significantly decreased imports and exports between the UK and its largest trading partner, the EU. Consider that in 2019, UK exports to the EU totalled £294 billion, or 43% of all exports from the United Kingdom. Conversely, imports from the European Union to the United Kingdom amounted to £374 billion, or 52% of all UK imports. With a radical revision of trading activity, the UK will likely be looking to shore up its commercial activity by renegotiating the terms of trade with individual EU countries, and others around the world such as the United States, Canada, Australia, and the Far East.
The Department for International Trade attests to the importance of the UK/EU relationship for commercial activity. The 2018 figures, much like the 2019 figures, indicate that almost 50% of UK trade takes place with the EU. 40% takes place with the rest of the world, and 11% between countries with EU trade agreements. The EU/UK trade deal is designed to preserve the important trading relationships between both entities. At the heart of the trade deal is the elimination of quotas and tariffs – major bugbears to cost-effective trading.
However, checks and balances will now become exceptionally more difficult as UK companies are not beholden to EU standards any more. The EU has imposed strict legislation on what animal products can be used, and how they can be manufactured. UK legislation is less stringent in that regard. While quotas and tariffs have been relegated for now, they can be reintroduced in the future. According to the Department for International trade, the EU rollover agreements effective January 1, 2021 or most significant with the following countries in £m:
- Switzerland – £ 37,063
- Iceland and Norway – £26,747
- Turkey – £18,559
- Singapore – £17,636
- Southern Africa Customs Union – £11,875
- South Korea – £11,777
- Vietnam – £5706
- Egypt – £3503
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