Britain breaks from the European Union’s regulatory orbit on Jan. 1, casting off nearly half a century inside the bloc. While it formally left in January 2020, for 11 months Britain was in a transition period, operating under E.U. rules as negotiators settled on terms of the two sides’ future commercial relations.
The split, known as Brexit, has now been finalized, setting in motion what analysts say will be the biggest overnight change in modern commercial relations. A trade agreement between the two sides, far from closing the book on Britain’s tumultuous relationship with the rest of Europe, has opened a new chapter, starting with an avalanche of trading obstacles on Jan. 1.
Let’s start with the basics.
A portmanteau of the words Britain and exit, Brexit caught on as shorthand for the proposal that Britain split from the European Union and change its relationship to the bloc on trade, security and migration.
Britain has debated the pros and cons of membership in a club of European nations almost from the moment the idea was broached, in the years after World War II. In the 1960s, it applied twice for membership in what was then the European Economic Community, only to be vetoed both times by France.
In 1973, Britain finally joined the club — and held its first referendum on whether to leave less than three years later. At the time, 67 percent of voters supported staying in the bloc.
But that was hardly the end of the argument.
In 2013, Prime Minister David Cameron promised a national referendum on European Union membership with the idea of settling the question once and for all. The options offered to voters were broad and vague — Remain or Leave — and Mr. Cameron was convinced that Remain would win easily.
That turned out to be a serious miscalculation.
As voters in Britain went to the polls on June 23, 2016, a refugee crisis had made migration a subject of political rage across Europe.
Why is leaving such a big deal?
Europe is Britain’s most important export market and its biggest source of foreign investment, and E.U. membership has helped London cement its position as a global financial center.
Had the split been finalized without a deal governing future commercial relations, businesses feared enormous logjams at the borders and deep uncertainty about rules of trade across the English Channel.
But even with a deal, the path forward is uncertain. The Office for Budget Responsibility, an independent official body that assesses the British government’s economic plans, has estimated that economic output in the country could be 4 percent lower cumulatively over the next 15 years than it would have been inside the European Union.
The trade agreement saves Britain from crashing out of the E.U.
British companies have long been able to move goods to and from the European Union without paying taxes or tariffs. Had the two sides failed to reach a deal before the Dec. 31 deadline, tariffs would have been imposed, raising the price of cars considerably and making it much more difficult for British farmers to sell meat, for example, elsewhere in Europe.
A no-deal separation also looked likely to create gridlock at British ports and strand trucks on either side of the border.
The new agreement means that Britain avoids onerous tariffs or quotas on goods. But problems at the border could still emerge, with checks increasing and traders having to complete new customs declarations. And commercial relations face more restrictions.
Pro-Brexit lawmakers got many of their wishes.
Citizens of E.U. member states can look for jobs elsewhere in the bloc, work there without needing special permits and stay after they have left their jobs. But the trade deal ends the free movement of people between Britain and the rest of the continent.
It also ends Britain’s involvement in the Erasmus exchange program, which since 1987 has seen hundreds of thousands of young people each year traveling abroad for study, work experience and apprenticeships.
The European Union operates a single market, with member countries accepting shared rules and regulations so that goods, services and capital can move freely between them. It’s also a customs union: Members agree to apply the same taxes on goods from outside the bloc, meaning that they can be shipped within the European Union without further tariffs.
Britain will now leave both the single market and the customs union and can pursue separate trade deals with other countries. Those points were among the demands made by the most fervently pro-Brexit lawmakers in Britain.
But the European Union won assurances, too.
In return for allowing British companies to avoid tariffs, the European Union wanted to ensure that those companies would not gain unfair advantages over E.U. rivals. The bloc’s leaders worried that Britain would give its own companies a leg up through additional state aid or by lowering environmental or labor standards.
Britain did not want the European Union to be able to automatically impose sanctions over any departure from European rules. So the two sides worked to devise a mechanism by which either could raise a complaint if it had evidence that one had changed regulations in a way that put the other’s businesses at a disadvantage.
As a last resort, if Britain and the European Union cannot find common ground in such a scenario, tariffs could be imposed to ensure that one side does not have too much of an advantage.
The British economy faces enormous hurdles.
The new trade deal left Britain’s services sector — encompassing not only London’s powerful financial industry, but also lawyers, architects, consultants and others — uncertain about its future dealings with the E.U., despite the sector’s accounting for 80 percent or more of British economic activity.
The agreement does smooth the flow of goods across British borders. But it leaves financial firms without the biggest benefit of E.U. membership: the ability to easily offer services to clients across the region from a single base. This has long allowed a bank in London to provide loans to a business in Venice or trade bonds for a company in Madrid.
That loss is especially painful for Britain, which ran a surplus of 18 billion pounds, or $24 billion, on trade in financial and other services with the European Union in 2019, but a deficit of £97 billion, or $129 billion, on trade in goods.
After Jan. 1, the sale of services, once assured, hangs on patchwork decisions by European regulators about whether Britain’s new financial regulations are close enough to their own to be trusted. While London’s expertise is difficult to match, putting its financial and service firms in a strong position to weather the storm, some obstacles are inevitable. Already, many Britons living in Europe have been told their bank accounts in Britain will be closed.
For bankers, traders, truckers, architects and millions of migrants, the Dec. 24 trade agreement was only the beginning, Day 1 of a high-stakes and unpredictable experiment in how to restitch a tight web of commercial relations across Europe.
In the four years since Britain’s referendum, the number of Europeans migrating to the country for work has plunged, and British companies have sent employees to Paris and Frankfurt to set up toeholds on the continent. But for all those preparations, businesses braced themselves for considerable difficulties after Jan. 1.
British food distributors, spared the calamity of a no-deal separation, nevertheless scrambled to prepare the first of hundreds of thousands of new export certifications to allow their meat, fish and dairy to be sold to the bloc. Once exempt from such burdensome checks, they now face the same inspections as European imports from countries like Chile or Australia.
Britain is short of customs agents to deal with the tens of millions of customs declarations that will now be needed, and even the veterinarians who will have to carry out new health assessments, industry experts said.
The deal also did little to assuage fears about how the country’s new immigration rules could complicate the lives of E.U. citizens living in Britain. People from other European countries have been allowed to apply for “settled status” in Britain, the right to stay indefinitely, and more than two million of them have been granted that status.
But few provisions have been made for those who cannot complete the process online, much less for those who do not realize they need permission to stay somewhere they have lived for decades.