Influential ratings agency Moody's pours cold water on Brexit free-trade agreement plans

Jasper Jolly
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Conservative Party Conference 2017- Day One
Prime Minister Theresa May said she will pursue a free-trade agreement covering goods and services (Source: Getty)

Influential ratings agency Moody’s today poured cold water on government plans for a wide-ranging free-trade agreement with the EU after Brexit, hot on the heels of downgrading UK sovereign debt.

In a report published today, Colin Ellis, a Moody's managing director, said Prime Minister Theresa May’s objective of a comprehensive free-trade agreement (FTA) covering both goods and services is “unlikely to be met”.

Moody’s base case is the UK and the EU will agree a trade deal that “mimics many – but not all – of current trade arrangements, particularly those focusing on goods” after a transition period.

Read more: Moody's downgrades UK credit rating amid Brexit fears

No existing model for post-Brexit trade will achieve the government's goals, Moody's said (Source: Moody's Investors Service)

Ellis wrote: “This will have a negative impact on the UK economy, relative to its current position as an EU member state, for instance via non-tariff barriers disrupting business activity.”

Last week, in a speech to the City, Theresa May insisted the UK will pursue a trade deal securing mutual market access for financial services on both sides of the Channel, as part of a broad FTA.

Despite her new, conciliatory tone towards the EU – notably dropping reference to the “no deal” scenario feared by many businesses – May’s objectives are unlikely to be met, Moody’s said.

A bilateral FTA based on the recent Canada-EU trade deal would offer control of migration as well as regulation and legal issues to the UK, but would be lacking most of the benefits of the Single Market for services and would impose significant barriers to trade at the border, Moody’s said.

Read more: Looking forward to a new era of UK-Canada free trade

Other options, such as negotiating a customs union, would involve multiple trade-offs between controlling migration, accepting EU regulations, and imposing barriers to goods trade at the border.

City lobby groups last week produced a report suggesting a model for an FTA allowing mutual market access, but the report's authors acknowledged such a deal would be unprecedented in scope, with significant political barriers.

The latest intervention from the ratings agency comes after it last month downgraded UK sovereign debt, pointing to damage to the British economy from the Brexit process and rising public debt levels at a time when the government is under pressure to increase spending.

While sovereign debt ratings are essentially subjective judgements by the agencies, they are politically important. Protecting the UK’s debt rating was a central promise of the Conservative government under chancellor George Osborne.

Read more: Theresa May has warned against "needless" City trade barriers after Brexit

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