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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 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 stocks, in our view, although we never thought a no-deal Brexit would be disastrous to begin with.
This agreement ends the saga that began in September, when the UK released legislation called the Internal Market Bill. That lengthy tome 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. The bill aimed to strike the tricky balance between maintaining frictionless cross-border transactions between Northern Ireland and Great Britain as well as the UK and Ireland. That is despite the fact Brexit turned the UK/Irish border into an EU border. In the months that followed the Withdrawal Agreement’s finalization, it seems the UK government realized this was easier said than done. Hence, the Internal Market Bill contained some provisions that aimed to preserve free commerce between Northern Ireland and the rest of the country, preventing a de facto border running up and down the Irish Sea. Many argued these provisions violated the Withdrawal Agreement and broke international law. 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 finalized a deal with Japan, suggesting the initial reaction was overblown. Several other deals have followed or are in the works now.
Still, it 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 pundits warning ad nauseam 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 offending passages from the Internal Market Bill (and a related bill on taxation), which is back in the House of Commons after the House of Lords vetoed it.
The new Irish border agreement isn’t part of the trade deal—it is a side issue, and it will take effect whether or not there eventually is a trade deal. This is because with or without a trade deal, Northern Ireland will be in the EU’s customs union while the rest of the UK will be out, requiring a bespoke logistical arrangement. So as far as trade talks are concerned, Tuesday’s agreement is mostly 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—both sides say there are significant differences to overcome. 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 the rules are 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 sit around thinking about how to negotiate with the UK without appearing hypocritical (to the extent any politician worried about hypocrisy ever). To the extent that greases the wheels for big trade deals, so much the better.
As a general rule, 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 digested worst-case-scenario chatter for years now, even a Brexit with several speedbumps probably qualifies as a positive surprise, as it wouldn’t be as bad as pundits suggest. As this continues dawning slowly on investors, it should help UK stocks. They may not outperform, as Brexit uncertainty isn’t the only driver for their underperformance this year. But clearing fog is generally positive—and that, dear readers, is what the UK seems to be getting.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.