Coronavirus and Brexit are a poisonous combination for UK business

Hello and greetings from the UK, where queues are snaking down the pavements at outdoor markets, primary schools and the doors of Ikea, as more areas of the economy tentatively reopen.

Another activity that is starting up again is the post-Brexit trade negotiations, with a new round of talks beginning on Tuesday in Brussels — the final round before a high-level political summit. A deadline is looming at the end of June for the UK to request any extension to the transition period, which we’ll be examining in the main post. Our chart of the day looks at the slump in US imports of pharmaceuticals from India amid restrictions, while Policy Watch looks at EU plans to overhaul online regulations.

Business shouldn’t put Brexit on the back burner

No one is expecting a breakthrough in this week’s post-Brexit trade negotiations, with the EU and UK still at odds over issues such as fishing rights and Brussels’ insistence on a regulatory level playing field.

Yet UK ministers are still adamant that they will not seek any extension, despite pleas from London mayor (and Labour politician) Sadiq Khan, who argued on Monday that further disruption after the country was already dealing with the coronavirus economic fallout would be “needless and hazardous”.

David Henig, director of the UK Trade Policy Project, and a former UK government trade official, says that the refusal of ministers to budge on the deadline “likely means choosing between a problematic deal and no deal in September”.

Given this prospect, business groups have been surprisingly quiet about the likely fallout — as have markets, with sterling suffering far less than it did in the run-up to last year’s key Brexit deadlines.

True, there are more immediate worries. The pandemic has displaced Brexit as the chief source of uncertainty for business; and for the large number of companies now reliant on state support for their short-term survival, speaking out against the government may seem foolhardy.

A new migration regime is a threat on the horizon for UK businesses, but proposed quarantine arrangements are already making it all but impossible for them to recruit from abroad. Likewise, why worry about how future tariffs might affect an automotive sector that made a total of 197 vehicles in April?

But it would be a mistake for businesses to put any concerns about the EU/UK trade deal on the back burner. The fact is that coronavirus and Brexit are likely to prove a poisonous combination.

Construction and financial services are expected to be among the worst-affected sectors under a no-deal Brexit © Isabel Infantes/AFP/Getty

Alan Winters, director of the University of Sussex’s UK Trade Policy Observatory, noted last week that the pandemic along with Brexit — in its no deal or free trade agreement (FTA) form — were interrelated shocks, because “Covid is creating a mountain of debt and this will make the already difficult job of adjusting to Brexit more difficult”.

Developing new export markets was costly, time-consuming and risky, and heavily indebted companies were less likely to attempt it, he wrote, with co-authors Mattia Di Ubaldo and Palitha Konara.

Meanwhile, the Social Market Foundation, a think-tank, has published detailed analysis of the regions that could face the biggest double hit to their economy as a result of Covid-19 and Brexit.

Even if the UK did secure an FTA by the end of the year and avoided a no-deal scenario, the worst impact would be in London and the south of England, the SMF found, because of their reliance on sectors such as financial services and construction that the SMF expects to be among the most severely disrupted.

Without a deal, the economic impact would be worse. London and the south-east would still be hard hit but so would areas in the north-west and West Midlands that are far less resilient.

If the UK did fail to secure a deal, it would probably need to rush through a stimulus package for certain industries and parts of the country, the SMF noted. Given the gaping hole that the coronavirus crisis has left in the public finances, paying for Brexit will be an even bigger struggle. 

Charted waters

In March, India restricted exports of various medical products including paracetamol as it sought to shore up its own supplies amid the pandemic. It removed some of these restrictions the following month, then last week it also ended restrictions on the export of active pharmaceutical ingredients of paracetamol. But India’s protectionism had already dealt a blow to US imports of pharmaceuticals, with a drop of almost 40 per cent in the first half of May compared with a year earlier.

Policy watch

An employee pushing a cart at an Amazon fulfilment centre. EU regulators have been criticised for not doing enough to curtail the might of big internet platforms © Alex Kraus/Bloomberg

The European Commission is undertaking what promises to be one of the most far-reaching and politically charged overhauls of EU online regulation for decades, as it launches a public consultation on Tuesday on its flagship digital platform regulation, writes Javier Espinoza.

Issues to be considered include the level of responsibility big platforms such as Amazon or eBay should have for goods sold online, a particularly topical issue during the pandemic as internet users have been tricked into buying faulty protective equipment or medical products.

The EU will also examine what fair competition looks like in an era where platforms have dominant positions online and high barriers to entry for smaller rivals. Some have criticised EU regulators for acting too slowly or not doing enough to curtail the growing might of companies such as Google and Facebook.

Officials expect that the process will generate thousands of responses from businesses, governments and the public.

Don’t miss

• UK prime minister Boris Johnson is planning crunch talks with European Commission president Ursula von der Leyen this month in an effort to unblock post-Brexit trade negotiations, with UK officials warning that the haggling cannot be allowed to drag into the autumn.
  Read more

• The impact of the slowdown in German industry is rippling through central European supply chains that have become tightly intertwined with the fortunes of Europe’s biggest economy.
  Read more

• The United Arab Emirates is caught between the US and China as the two powers vie for influence in the Gulf. The UAE, like other Gulf states, has strengthened trade and political relations with China in recent years — but also has an obligation to appease its historical ally, the US.
  Read more

Tokyo talk

The best trade stories from the Nikkei Asian Review

• Japan is in a diplomatic bind over the US move to revoke the special trade status it had given Hong Kong, which hosts more than 1,400 Japanese companies and is Japan’s ninth-largest trading partner.
  Read more

• Even as Asian governments warn that the pandemic is far from over, many are beginning to explore the idea of “travel bubbles” that would allow citizens to cross borders with minimal or no quarantine periods.
  Read more