Trade

The U.K. left the European Union on Jan. 31, 2020 and entered a set of transitional arrangements for trade and customs that applied through Dec. 31, 2020. On Dec. 24 the two sides signed a provisional “ EU-U.K. Trade and Cooperation Agreement Agreement” (TCA) that will provide a framework for relations going forward.

S&P Global has written extensively extensively about the United Kingdom’s exit from the European Union over the past four years. This report provides a brief overview of the newly signed trade deal, the issues to watch in 2021 with potential outcomes and data points to watch.

Credit Implications

Companies within the European Union (EU) have experienced significant turbulence over the past year with the COVID-19 pandemic and are braced for more with the finalisation of the UK’s exit from the EU. Figure 1 shows historical speculative default rates provided in CreditPro®, an S&P Global Market Intelligence offering that provides rating transition, default and recovery rate analytics.

For the EU including the UK (EU+UK), S&P Global Market Intelligence saw spikes for speculative grade companies in 2002 with the tech bubble and in 2009 following the global financial crisis.

COVID-19

This report reviews the events that were emblematic of the changes in trade policy, logistics sector and industrial supply chain operations in 2020, based on Panjiva’s monthly most-read research review and the 1,200 reports published by Panjiva research in 2020. For each report we outline what it covered, why it mattered and what the data told us, with charts updated for the most recent data available.

Auto Sector

The U.K. will strive to boost investment in its car industry, with battery cell manufacturing a top priority, now that a Brexit free trade deal has assuaged uncertainty over its prospects, the head of the British automotive industry association said Jan. 27.

The trade deal, agreed upon on Dec. 24, 2020, removed the threat of tariffs on exports of U.K.-made cars from manufacturers including Nissan Motor Co. Ltd., Tata Motors Ltd. subsidiary Jaguar Land Rover, Toyota Motor Corp., Stellantis NV subsidiary Vauxhall and Bayerische Motoren Werke AG's MINI brand. Honda Motor Co. Ltd. is ending U.K. production this year.

Sector Impacts

EU sugar production in the 2020-21 campaign (October-September) is set to fall for the third consecutive year due to unfavorable weather, a high incidence of virus yellows due to the ban on neonicotinoid pesticides and a smaller acreage.

As far as trade flows go, Brexit and the rollout of COVID-19 vaccinations will continue to be in focus in 2021. Looking further ahead, S&P Global Platts Analytics expects EU+UK production in 2021-22 to increase on the year.

Poor EU crop prospects are likely to cause the EU to remain a net importer in 2020-21. One trader said that there could be a sugar deficit of 2 million mt and that "it will be hard to find [this volume] to make up for the deficit." The trader also said that, "although the EU can't supply [regionally], it still has to export due to its long-term obligations." Platts Analytics estimates the 2020-21 EU sugar deficit at 1.585 million mt, almost five times the 343,000 mt in 2019-20.

Finance & Insurance

Solvency II equivalence continues to be a goal for U.K. insurers despite the mechanisms companies have set up to ensure continued trade after the U.K. left the European Union. But they should not expect it to be granted any time soon.

Clare Lebecq, CEO of the London Market Group, recently met with the U.K.'s economic secretary to the Treasury. Following that meeting, Lebecq in an interview said "everything is on hold at the moment."

The transition period for the U.K.'s exit from the EU ended Dec., 31, 2020, cutting the automatic access EU and U.K. insurers had enjoyed to each other's markets. The trade deal struck the day before Brexit went into effect was silent on financial services, but most insurers had ensured trade could continue by setting up EU subsidiaries, or making more use of existing ones, and transferring relevant business to them.

Utilities

U.K. utilities are facing a unique set of challenges. Decarbonizing operations and staying buoyant amid the COVID-19 pandemic are worldwide concerns, but U.K. utilities also have regulatory obstacles to overcome and the effects of Brexit to consider.

Energy Transition

UK Prime Minister Boris Johnson has appointed former business and energy secretary Alok Sharma as full-time president of the United Nations Climate Change Conference in November. The conference, known as COP26, is to be held in Glasgow.

The move comes as Energy Minister Kwasi Kwarteng was appointed to take over from Sharma as UK secretary of state for business, energy and industrial strategy, the prime minister's office said.

"To meet the high ambitions for the summit in the year of COP26, Alok Sharma will solely focus on driving forward coordinated global action to tackle climate change," the PM's office said in a statement. "A successful summit in November will be critical if we want to meet the objectives set out by the Paris Agreement and reduce global emissions."

Tech

A Brexit deal struck at the 11th hour has thrust the U.K. in the middle of a politically turbulent tussle over data privacy between its two leading trade partners, the U.S. and the EU.

In the U.K.'s recent deal with the EU finalizing their post-Brexit relationship, an entire chapter was devoted to digital trade. But the biggest decision on data transfers — allowing data to move freely between the two regions without the need for cumbersome safeguards such as individual corporate contracts — has been delayed by the bloc until April, with the ability to extend the deadline by an additional two months. In the interim, the U.K. will continue to get all the perks of an EU member state, including on data, as part of a temporary data adequacy agreement.

Further Reading