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They say good news comes in waves, so is it really any surprise that Brits began receiving the COVID-19 vaccine on the same day the UK and EU finally solved one of the most contentious pieces of Brexit? No, not fishing rights. But they did agree on how to implement last year’s agreement on the Irish border, prompting the British government to remove the bits of its highly contentious Brexit legislation critics argued violated international law. Tuesday’s developments don’t take a no-deal Brexit off the table, but we think they do remove some uncertainty over what that outcome would look like and what the UK’s international standing would be—an incremental positive for equity markets, in our view, although we never thought a no-deal Brexit was likely to be disastrous economically to begin with.
This agreement ends the saga that began in September, when the EU expressed its opposition to provisions in the Internal Market Bill, which set out the legal framework for post-Brexit trade in the event the EU and UK couldn’t strike a trade deal—a fallback position. Several EU officials stated they believed the provisions related to Northern Ireland violated the Withdrawal Agreement agreed last year, and even one UK cabinet minister said the provisions would “break international law in a very specific and limited way.”[i] That touched off a diplomatic firestorm, with several prominent people warning it would hurt the UK’s ability to sign free trade deals. Of course, mere days later, the UK finalised a deal with Japan, suggesting the initial reaction was overblown. Several other deals have followed or are in the works now.
Still, the Internal Market Bill remained a thorny issue between the UK and EU, with the latter threatening to sue. It also loomed large over trade talks between the two, with many commentators we follow warning that it raised the likelihood of the transition period expiring at yearend with no trade deal. This standoff is what ended Tuesday. The UK and EU haven’t released the details of their agreement, but the BBC reports it covers medicine and customs checks. It was apparently satisfactory enough that UK Prime Minister Boris Johnson felt comfortable removing the related passages from the Internal Market Bill (and a related bill on taxation).
In our view, Tuesday’s agreement probably doesn’t impact the likelihood of the UK and EU finalising a trade deal, as several contentious issues remain. We think it is primarily a symbolic development that suggests the UK is more willing to compromise than headlines often suggest. Maybe that means a trade deal is likely, maybe it doesn’t—but it does perhaps inject more goodwill into the proceedings.
Most important, in our view, is the big question mark this erases: What are the specific procedures businesses will have to follow when shipping goods across the Irish Sea or the Irish border? Once the new agreement is published, we will know. That is pretty major for businesses. Even if some consider the rules suboptimal, businesses will at least know what they are dealing with, enabling them to plan. The other big plus is that politicians internationally can stop grousing about the UK and international law and get on with trade talks. In our view, those were always likely to progress, but getting those contested items out of the Internal Market Bill can probably speed the process along, as politicians in other countries won’t have to ponder how to negotiate with the UK without appearing hypocritical (to the extent any politician worried about hypocrisy ever). If that helps grease the wheels for big trade deals, so much the better.
Our research indicates markets enjoy falling uncertainty, and they seemingly got a small dose of it today. They probably get more of it in the weeks ahead, whether or not trade talks yield a deal, as the reality of Brexit and what it means for UK commerce becomes more and more apparent. With markets having heard and dealt with worst-case-scenario chatter for years now, we think even a Brexit with several speedbumps probably qualifies as a positive surprise, as it wouldn’t be as bad as many financial commentators we follow suggest. As this continues dawning slowly on investors, we think it is likely to help UK shares.
[i] “Northern Ireland Secretary Admits New Bill Will ‘Break International Law,’” Staff, BBC News, 8 September 2020.
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