The free-trade pact would help both sides avoid tariffs, but Britain would still face economic costs from being outside the European Union.

The British economy got a jolt of confidence Thursday as Britain and the European Union announced an agreement that will define their future trading relationship after years of negotiations since the country voted in 2016 to leave the bloc.

The deal, news of which spurred a jump in the pound and stock markets, still requires approval by the British Parliament and European leaders, but it removes a major potential economic liability that had been hanging over Britain: the start of tariffs between the country and its largest trading partner in January.

Even without tariffs, British authorities expect the friction of cross-border transactions, which will now require customs checks and new documentation, to weigh on an economy already laboring under severe lockdowns to curb the coronavirus pandemic. Citigroup estimated Brexit-caused disruption would curtail British economic activity by 2 percent in early 2021, according to an assessment after the deal was announced.

But investors and business groups were relieved that a break without a deal had been avoided. The pound rose to its highest level in three weeks against the euro. European stock markets, which ended their trading sessions early for the Christmas Eve holiday, all rose. The FTSE 250, which includes midsize British-based companies, ended 1.2 percent higher. On the continent, Germany’s DAX rose 1.3 percent. On Wall Street, the S&P 500 rose 0.4 percent.

“We have completed the biggest trade deal yet,” Prime Minister Boris Johnson said at a news conference in London as he sold the benefits of the deal, which he said was worth 660 billion pounds, or $900 billion, a year. “This is a good deal for the whole of Europe.”

The European Commission president, Ursula von der Leyen, described the deal as fair to both sides. “We have finally found an agreement,” she said in Brussels. “It was a long and winding road, but we have got a good deal to show for it.” For the rest of Europe, she added, it was time to move on from the issue.

Britain officially left the European Union at the end of January, but it immediately began an 11-month transitional period to work out a free-trade deal.

The talks had been prolonged into the 11th hour over three issues: business competition rules, fishing rights and how any disputes under the deal would be resolved. The final issue to be settled was European access to British waters for fishing.

Businesses will still have to wait to read the hundreds of pages of documents that will detail how the trading relationship will change in just a week, from rules-of-origin requirements (to determine, say, if an item is truly “British” if it contains parts made elsewhere) to the mutual recognition of qualifications (to allow a British lawyer or architect to work on a project in Lisbon).

But the fact that a deal was reached, and the potential for future cooperation, will reassure many.

“After such a torrid year, and during such a disrupted festive trading season, it’s a huge relief,” said Mike Cherry, the chairman of Britain’s Federation of Small Businesses, but he called on the government to give financial support for companies to spend on post-Brexit training and advice.

And the head of the Confederation of British Industry, which represents 190,000 businesses, said companies still needed more time to pore over the details and carry out changes. “It is urgent that both sides agree to smooth the cliff edge next week,” said Tony Danker, the group’s director general, who also expressed relief that a deal had been reached.

Some of the details published by the European Commission show the new trade agreement will apply immediately starting in January. It will be provisionally applied for up to two months to allow time for the European Parliament to scrutinize and ratify the deal.

Economists at Berenberg, a private bank, wrote in a note that a deal could “limit some of the damage” of leaving the single market and customs union. “By removing a major downside risk to the U.K. economy both in the near term and long term, a deal would unlock significant investment in U.K. and support the recovery once the ongoing coronavirus shock starts to fade,” they wrote. This would benefit stocks and the British pound next year, they added.

Without an agreement, the two sides would have ended up trading on World Trade Organization terms, the default set of trade rules between most countries. That would have led to high tariffs on agricultural products like cheese and meat, making them more expensive. Britons buying cars imported from Europe, and vice versa, would have faced costly tariffs, too.

The pound has been the financial asset most sensitive to the Brexit negotiations, a rough barometer of Britain’s economic prospects. Before the vote in June 2016, a pound bought 1.30 euros. The day of the referendum result was the pound’s worst on record, and it has never fully recovered.

On Thursday, £1 bought €1.11, a gain of 1.4 percent in the 24 hours before the deal was announced, but slipped from its highest levels later.

“Markets have been looking through the saber-rattling of recent weeks in broad anticipation of a deal. Hence we’ve already had a notable rise in sterling,” Karen Ward, a strategist at J.P. Morgan Asset Management, said in a statement.

The trade deal also increases the chances that Britain and the European Union will work out favorable arrangements on the cross-border movement of services, such as investment banking; the people who provide professional services; and data. Services make up four-fifths of Britain’s economy.

Britain has already suffered years of sluggish economic growth and low business investment since the referendum. And then the pandemic plunged the economy into a recession worse than anything in the past three centuries.

The economic recovery from the pandemic will be impeded by Brexit, analysts say. The Office for Budget Responsibility, an independent fiscal and economic watchdog, predicted that leaving the European Union would leave the British economy 4 percent smaller in the long run.

Even with a deal, everything from holiday travel planning to immigration rules and financial services will change at the end of the year.

Separation from the European Union means Britain can set its own immigration policies — a big appeal for many favoring stricter rules on who is allowed to settle in the country. In this regard, the Brexit vote appeared to have an immediate effect: In the first two years after the referendum, migration from the European Union into Britain plunged by nearly three-quarters. New, stricter immigration requirements for Europeans are expected to reduce migration even further.

European regulations compel banks to move some assets and employees out of London to other European capitals if they want to keep serving clients on the continental side of the English Channel. Some have chosen not to, so some British citizens abroad have already been told that their bank accounts in Britain will be shut down.

As a member of the European Union, Britain enjoyed almost frictionless trade with other countries in the bloc, with national borders making little difference. In 2019, British-E.U. trade amounted to nearly £670 billion. About half of Britain’s overall trade is with European Union countries.

In the short term, trade on both sides will be disrupted as thousands of companies adapt. Last month, the Bank of England said it believed that traders representing about 30 percent of goods exported to the European Union were not prepared for the customs and documentation checks that will begin next year. In the first quarter of 2021, fewer exports and the disruption to supply chains will cut economic growth by one percentage point, the central bank projected.

Even before the end of 2020, Britain’s ports were clogged with delays because of Brexit stockpiling, a pileup of pandemic equipment and a surge of shipments for holiday gift-giving. Shipping prices jumped, and a Honda factory west of London shut down because of delays in getting parts.

And then, thousands of truck drivers were stranded along highways in southeast England a few days before Christmas because France shut its borders to stop a new strain of the coronavirus spreading out of England. For those worried about post-Brexit trade delays, the long lines of motionless trucks offered a vision of what might come

Source: The New York Times

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