Brexit is finally done. It will leave the UK poorer

The United Kingdom and the European Union have agreed on a trade deal, closing the book on more than four years of uncertainty over how the country would conduct business with its biggest export market following Brexit.

UK companies are heaving a collective sigh of relief at retaining tariff-free trade with a market of 450 million consumers that buys more than 40% of Britain's exports and provides more than half its imports. The country left the European Union on Jan. 31 but had continued to enjoy its previous trade privileges under transitional arrangements.

The deal spares the United Kingdom some of the most dire potential consequences from Brexit as it battles a crippling pandemic, and should give a short-term boost to the economy. But the trade agreement will still leave the country poorer at a time when it faces a jobs crisis and the worst recession in more than 300 years.

"The United Kingdom has chosen to leave the European Union and the single market, to renounce the benefits and advantages held by member states," EU chief negotiator Michel Barnier told reporters. "Our agreement does not reproduce these rights and benefits, and therefore despite this agreement there will be real changes in a few days from now."

The new relationship is expected to lead to a long-run loss of output of around 4% compared to remaining in the European Union, according to the UK Office for Budget Responsibility, which produces economic forecasts for the government. Leaving the EU's single market and customs area means higher costs for UK companies, which could lead to higher consumer prices and even more job losses, as well as reduced export prospects, economists say.

Another drawback: The deal appears to mostly cover trade in goods, where the United Kingdom has a deficit with its EU neighbors, and excludes key service industries like finance, where it currently enjoys a surplus.

"The good news is that a disruptive and acrimonious 'no deal' has been avoided," JPMorgan's Malcolm Barr wrote in a research note Thursday before the deal was finalized. "The bad news for the UK, in our view, is that the EU appears to have secured a deal which allows it to retain nearly all of the advantages it derives from its trading relationship with the UK, while giving it the ability to use regulatory structures to cherry pick among the sectors where the UK had previously enjoyed advantages in the trading relationship."

Here are some of the major challenges facing the battered UK economy when the Brexit transition ends on Jan. 1.

Trade barriers

UK companies are losing unfettered access to the European Union. While a deal means that exporters have been spared the pain of having costly tariffs slapped on their goods, new import and export declarations alone will cost UK companies £7.5 billion ($10.3 billion) annually, according to Britain's revenue authority.

Costs will rise rapidly if new customs checks delay goods at the border and snarl supply chains, forcing factories to pause production. UK ports are already gridlocked, partly as a result of stockpiling ahead of Brexit, with industry groups representing retailers and food producers warning that pressure will only increase when the transition period ends.

Even before France abruptly closed the border following a warning from UK officials of a new, more infectious coronavirus variant, Honda was forced to halt production at a major plant in England for three days in December because it couldn't get the parts it needed.

While the government will phase in border checks over the coming months to avoid choking off vital supplies, truckers and transportation companies are among those warning of dire consequences. Rod McKenzie, head of policy and public affairs at the Road Haulage Association, told CNN Business earlier this month that supply chain hiccups could mean that factories aren't able to work. There could also be "gaps on supermarket shelves," he added.

That situation could be made worse by backups from this week. While France has reopened ferry ports and the Eurotunnel rail link, thousands of trucks remained stranded Wednesday morning with their drivers waiting for the negative Covid-19 tests they need to travel. Supermarkets such as Tesco (TSCDY) and Sainsbury's (JSAIY) were struggling to keep their shelves stocked with fresh fruit and vegetables, and Toyota (TM) closed its UK and French plants early for Christmas.

"The clock is still very much ticking for businesses," Jonathan Geldart, director general of the Institute of Directors, a lobby group, said in a statement Thursday. "Digesting what the changes mean in practice and adapting, in the middle of a pandemic and the festive season while border disruptions continue, is a huge ask."

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