October 17, 2019 / 3:54 PM / a month ago

UK Brexit deal points to more distant trade ties with EU

LONDON, Oct 17 (Reuters) - Britain will be on course for more distant economic ties with the European Union, making the country poorer, if Prime Minister Boris Johnson wins parliamentary backing for the Brexit deal he clinched with Brussels on Thursday.

Compared with the deal his predecessor Theresa May reached last year - which parliament rejected three times - Johnson’s deal aims for less regulatory alignment with the EU, and greater trade barriers between Britain and its largest trading partner.

“This is more damaging than Theresa May’s Brexit in terms of economic impact,” said Anand Menon, director of The UK in a Changing Europe, a think-tank based at King’s College, London.

Both Britain’s finance ministry and almost all external economists have forecast that increased trade barriers will cause Britain’s economy to grow more slowly than if it were to stay in the EU, and the damage increases as trade barriers rise.

Based on what was known of Johnson’s plans last week, UK in a Changing Europe estimated that they would make Britons more than 6% poorer on a per capita basis than staying in the EU - equivalent to 2,000 pounds ($2,570) per year in the medium term.

May’s deal would have reduced income by just under 5% per head, while a so-called no-deal Brexit - which would leave Britain trading purely on World Trade Organization terms - would lower incomes by just over 8%.

Menon said he did not think these estimates needed to be changed significantly, based on the final deal reached on Thursday. He expected Johnson to reject the ‘level playing field’ requirements on regulatory alignment that the EU wants to make a condition of a future close trading relationship.

FINANCIAL MARKETS

Financial markets have reacted positively to the deal, as it lowers the risk of a disruptive no-deal Brexit.

But Dean Turner, an economist with UBS Wealth Management, said that although it might give a brief fillip to British growth, there was too much uncertainty about the longer-term trading environment to revive moribund business investment.

“I wouldn’t be getting the flags out just yet,” he said. “I think we will see a little bump in activity, but not anything that will be meaningful enough to get the UK out of a weak growth trend.”

While the bulk of the Johnson deal was seen as largely the same as that agreed between the EU and May, analysts noted that May’s aspirations for a close future trading arrangement had been watered down in the political declaration accompanying it.

Whereas the May version aspired to “as close as possible” a future trading relationship with the EU, that line was replaced by merely “ambitious” in the revised text.

“Theresa May’s deal would have ended up in a softer arrangement than just a free trade agreement,” Alex Stojanovic of the Institute for Government said.

“This government appears to want an FTA and that is very different: that means there would still be regulatory barriers particularly in goods between Great Britain and the EU.”

He added that Britain’s new freedom to sign its own bilateral trade deals around the world was unlikely to offset the lost economic activity.

“If the UK did a deal with everybody ... it would benefit in 15 years the UK GDP by 0.2%. Most free trade agreements do not benefit GDP very much.” ($1 = 0.7779 pounds) (Reporting by David Milliken; Editing by Giles Elgood)

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