Trade Knowledge Exchange > Commentary > What if Brexit Leads to “No Deal”?

What if Brexit Leads to “No Deal”?

Throughout the Brexit process an eventual “No deal” situation has been held out to the public of the United Kingdom variously as a horror scenario or as a launch-pad for future national development. The prospects of a “No deal” outcome, and the conflicting views as to what it means, have been expressed with considerable force over the last two weeks. Perhaps paradoxically, the focus on the “No deal” outcome has increased after the publication of the government’s White Paper on future arrangements with the EU. The White Paper a proposed  free-trade area agreement for goods only supported by a special set of customs administration arrangements, a “common rule book” on regulation, a bespoke set of agreements on services that would replace the UK’s participation in the single market for services, and curbs on migration from the EU.

The positions in the White Paper initially elicited a hostile reaction from within government and partisans of a looser arrangement with the EU. Two ministerial resignations followed, and a series of amendments to the Customs Bill raised questions as to whether the government’s position would be acceptable to the EU. The European Commission, for its part has repeated long-standing objections to the UK’s approach, and in parallel  distributed to EU member State  a communication published in 19 July outlining the steps businesses and citizens may need to take in the event the UK were to leave without an agreement with the EU.

In sum, as the negotiations grind on towards the legal Brexit day of 29 March 2019, with the UK government divided over its stance and the EU unconvinced by proposals made to date, no deal appears increasingly possible as an outcome.  But what does No deal actually mean?  The mantra, copiously invoked by Brexit supporters, of “No deal is better than a bad deal” has been resurrected.  What does that mean too?

Consideration of the legal and economic impacts of the UK’s withdrawal from the EU is further confused by the loose use of terms such as “hard Brexit”, meaning that no agreement on terms was reached between the parties – essentially the No deal scenario – and “soft Brexit”, which could mean any of many possible compromise settlements between the extremes of continued full UK observance of EU laws, regulations and procedures at one end, and total repudiation of those rights and obligations at the other.

Process

Brexit is not a single finite event, but a process:

  • In the referendum held on 23 June 2016 52% of the votes cast were in favour of withdrawal from the European Union;
  • Article 50 of the Treaty on European Union, triggered by the UK Government on 29 March 2017, provides a period of two years for the negotiation of withdrawal terms;
  • The two year period can be extended, but only by unanimous agreement of all the parties, that is the governments of the UK and the remaining 27 EU member states (EU27);
  • Within the two years, or an extended period if agreed, the parties are required to agree on terms of withdrawal; if they do not do so, the withdrawing member state leaves the EU with no agreement in place and snaps back into the status of a “third country”;
  • Article 50 requires the EU and a withdrawing state to “take into account” the framework for future relations. The term “framework” is vague and has been variously interpreted either as broad principles for future negotiations; or as a comprehensive agreement on relations.  It is commonly accepted now that with less than nine months to go till Brexit day, it is not feasible within that period to reach agreements on the many and complex policy and technical issues still outstanding;
  • So substantive negotiations between the parties on future relations will be essentially conducted, and any agreement reached, after 29 March 2019. This is one reason for the agreement in principle reached between the UK and EU27 negotiators to observe an implementation, or transition, period ending on 31 December 2020: effectively an extension of the two years without calling it that.  During this period the UK will continue to accept in full the obligations and procedures of EU membership and will hope to complete negotiations on future trade, economic, social, security and other relations.

“Red lines”

The UK Government has severely limited its own negotiating freedom by laying down from the outset a number of “red lines”.  These are: an end to unrestricted migration from the EU into the UK; freedom from jurisdiction of the EU Court of Justice; no compulsory contributions to the EU budget; an independent UK international trade policy with freedom to make trade agreements on a national basis; leaving the EU customs union; and also leaving the Union’s Single Market.  The EU27 for their part insist that the Union must maintain intact the “four freedoms” of movement of goods, services, capital and people, which they see as indivisible, and that a withdrawing state cannot expect to continue to enjoy benefits equivalent to membership.  A withdrawing member will not be allowed to “cherry-pick” those elements in membership which it finds advantageous and reject the rest.  The Cabinet statement of July 6 and the subsequent resignations from the Government now appear to be bringing that argument sharply to a head.

This article does not consider the range of compromise agreements currently being debated.  It concentrates solely on the practical consequences of failure to reach any UK/EU27 agreement on future trade relations.

Different versions of No deal

No deal could arise at either of two key stages, specifically:

  1. At the point of legal Brexit, i.e. 29 March 2019 (or any agreed later date), if it had proven impossible to agree on exit terms. In this event there would be no implementation period after March 2019 and the most drastic post-Brexit scenario, namely the UK shut out of the EU and everything to do with it, would kick in at once. There would be no negotiations on future relations.
  2. At the end of the implementation period in December 2020, if exit terms had been agreed but negotiations for a comprehensive agreement on long-term trade and other relations had failed. This might represent a more orderly break, but depending on what contingency preparations the parties had made for No deal, it would still be extremely untidy in practice.

Version (1) would entail a failure to agree both on the immediate formal withdrawal terms and on arrangements for the long-term bilateral relationship.  It could mean the UK’s reneging on agreements already reached in principle in December 2017 on calculation and settlement of its outstanding financial liabilities deriving from EU membership, and on the respective rights of EU citizens in the UK and UK citizens in other member states, i.e. more than 4 million people. Such a failure would raise very grave moral as well as political and operational issues for the UK, quite apart from the immediate practical problem that no agreed basis for the post-Brexit trade and other relationships between the parties would be in place.  For these reasons the parties are likely to try hard to avoid version (1), but it could still come about.

Version (2) assumes that it would have been possible to agree on the immediate withdrawal terms, but impossible to agree on a basis for future bilateral economic, trade and administrative arrangements.

Consequences

The practical consequences for UK/EU27 trade and traders would be essentially the same following both versions (1) and (2): they would just kick in at different times after the formal Brexit date.  Either way, the essential features of No deal would be:

  • The UK would be outside the EU’s common commercial tariff (CCT), which it is currently inside, so UK exports to the EU27 of goods which are dutiable under the CCT would be immediately subject to those tariffs.
  • After Brexit it will be for the UK to determine what tariffs to levy on imported goods from all sources, including the EU27. In December 2016 Ministers said that in order to minimize disruptions of trade, the UK would draw up tariff schedules which as far as possible reproduced the CCT tariff rates which it currently applies.  On Brexit the new UK rates would immediately apply to UK imports from the EU27.
  • Whatever the eventual UK/EU27 settlement, but most starkly under No deal, cross-Channel trade in both directions will be subject to new forms of declaration for the purposes of customs classification of goods and statistical purposes, together where appropriate with health, safety and conformity checks. Much of this work can be accomplished through online submission, or through the grant of “trusted trader” status to qualified operators; but new checks and associated delays in customs clearance will be inevitable.
  • This would impact immediately on highly-integrated Europe-wide production chains, particularly those that rely on just-in-time delivery of components and could be severely affected by delays of consignments at ports.
  • Many components used in complex manufacturing processes, e.g. of vehicles, cross internal EU frontiers several times during the course of manufacture and in the UK/EU27 case tariffs would be chargeable on each frontier crossing in either direction. Jaguar Land Rover recently estimated that this could cost them up to £1.2 billion annually. Facilities exist in customs law for drawback (repayment) of multiple payments of duties or for suspensions of duty where items are imported for processing and re-export, but these are complex and expensive to implement.
  • The UK would be outside all EU regulatory systems for goods including health and safety and conformity checks and recognition of qualifications. The UK’s EU Withdrawal Act, recently passed by Parliament, incorporates into UK law as from Brexit day all current EU law including regulatory requirements.  This is in order to avoid sudden changes in UK import procedures and checks following Brexit, but it is far from clear whether EU authorities will automatically recognise UK national standards without further checks, even standards based on the EU’s own.  If new conformity checks on UK goods are imposed at EU ports of entry, or if UK regulatory standards diverge from those in the EU27, affecting imports to the UK, the result could be severe build-ups of consignments on both sides of the Channel awaiting clearance.
  • No deal would also mean the UK‘s dropping out of all aspects of EU regulation of services sectors (which account for 80% of the UK economy, and in which the UK currently enjoys a healthy trade surplus with the rest of the EU). It is also not clear whether the EU would recognise without further scrutiny UK professional qualifications and regulatory standards for service suppliers, even where these comply with current EU practice.

Ireland

No deal would be the worst possible outcome for the Irish border question, which is of such grave concern for both the UK and the EU.  It would render a border unavoidable, because there would then be different systems of tariffs, standards, regulation and inspection in place respectively in Northern Ireland and in the Republic, while the UK commitment to maintaining the UK/Ireland common travel area could conflict with Ireland’s integration into EU freedom of movement.  This border might not involve customs posts, watch towers and barbed wire, but legally and procedurally it would be no less real.

WTO scrutiny

On the wider international front, the UK’s new national schedules of tariffs for goods and of market access commitments for foreign service providers must be notified to the World Trade Organisation immediately following Brexit.  In the event of a tariff rate or a restriction on access to the UK services market which increased UK protection above the level currently applied, WTO members whose goods or services trade was adversely affected by the change would have the right to demand compensating reductions in UK protection elsewhere.  This could lead to protracted negotiations with other WTO members in Geneva.

“No deal is better than a bad deal” – or is it?

Since the outset of Brexit negotiations UK ministers have repeated this claim.  It suggests that UK economic interests would be served better by a clean break with the EU and all its laws, requirements and procedures than by an agreement which improved access to the EU27 markets but continued to impose some degree of limitation on the UK’s freedom of trade action.  Brexit supporters argue that the UK has regular customs and conformity assessment procedures in place governing imports from non-EU member countries, and that these could simply be extended to trade with the EU27.

It is true that the UK conducts just over half of its trade with non-EU countries (particularly the United States), and that customs and other procedures related to this trade work smoothly.  But it is far from the case that this regime could be applied, effectively overnight, to UK trade with the EU27, which is procedurally very different.   A large volume of UK/EU merchandise trade is carried on not through the major international seaports but by road traffic using the Channel Tunnel or carried on ferries to and from the Channel ports.  No deal would entail new requirements for data collection and submission in relation to millions of cross-Channel transactions in both directions every year which are currently procedure-free within the Single Market.  Thousands of trucks ply back and forth across Europe and the Channel every day, each one of which under No deal would require customs clearance and possible inspection.

Looking at UK/EU27 trade, any agreement which mitigated the new requirements for tariffs, customs declarations, physical inspection of cargoes and increased scrutiny respectively of UK and EU cross-border service suppliers that would result from No deal (and especially in the case of Ireland) must logically be “better” than No deal, because it would improve the trade prospects of both sides and reduce the adverse impact of procedure-related costs.  Recent modelling prepared by the IMF suggests that a no-deal option would cost the EU 1.5% in lost output to 2030, and 4% for the UK. The average result for the EU masks wide variation, with Ireland (which stands to lose around the same amount as the UK), the Netherlands and Denmark significantly exposed.

As everyone agrees that it is desirable to reduce impediments to trade, what therefore could constitute a “bad” deal from the UK point of view? Brexit supporters make it clear that any long-term agreement with the EU27 which breached any of the UK’s “red lines” – say, on limiting migration from the EU or retaining a relationship with the EU customs union which limited the UK’s ability to negotiate its own bilateral trade deals – would be unacceptable to them.  So in the last resort it is political preferences rather than economic reality and the interests of business and consumers which lead to the protestation that “No deal is better than a bad deal”.


About the Author

Michael Johnson

Michael
Johnson

Michael Johnson was a senior official of the UK’s former Department of Trade and Industry, where he worked on international commodity policy, UK bilateral commercial relations with developed country markets, and the UK’s input to EU external trade policy. He is in demand as an independent consultant, and has advised governments of more than twenty developing or former Communist countries on trade policy formulation and on trade-related development projects.


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