The European Union (EU) and United Kingdom (UK) reached a deal governing their future economic relationship days before the end of the Brexit transition period on December 31, 2020. Britain had sought to preserve its sovereignty at the expense of close economic ties with the EU. Although the EU-UK Trade and Cooperation Agreement (TCA) in principle guarantees tariff-free trade in goods, it imposes new constraints that will dampen economic growth and employment opportunities for Britons.

British manufacturers now have to meet stringent “rules of origin” requirements that goods made in Britain must have certain shares of locally produced inputs to qualify for TCA tariff-free status. Firms that do not meet the necessary requirements have to find UK sources for inputs or pay EU tariffs on their products.

Services were not included in the agreement, but the EU has retained the right to determine whether the regulatory framework in the UK is “equivalent” to the EU’s before it allows freer commerce in services. For British professionals, the EU’s refusal to recognize professional qualifications could require retraining to work with EU clients. In the agricultural sector, the lack of mutual recognition of sanitary and health regulations adds costs and obstacles to the cross-border trade of fresh produce.

UK nationals can still holiday in Europe but have lost the right to work and settle in the EU. Short-term work remains legal for up to 90 days, but with strict limits on what visitors can do. For a major services-oriented economy like the UK, the restrictions could severely disrupt cross-border trade.

This PIIE Chart was adapted from Jacob Funk Kirkegaard’s blog post, “The Brexit agreement: An economic guide for the perplexed.”