Breaking Down a No-Deal Brexit

No deal is better than a bad deal. This phrase has been one of the hallmarks of Theresa May’s Brexit process. With the March 2019 deadline looming, the prospect of a no-deal is looking ever-more likely. The EU has warned that despite best efforts, the chance of a no-deal Brexit is 50-50. In August 2018, the government produced a report providing advice on how to approach a no-deal scenario. A no-deal refers to the terms on which we will leave the European Union, covering factors like a transition period and the Irish border. In his speech, Brexit Secretary Dominic Raab recognised there were many challenges of no-deal Brexit but also significant opportunities in light of the state of negotiations. The government has outlined its preparations and provided advice to business in its publication.  This article will explain some of the key issues arising from a no-deal scenario and explore the practical implications for the UK.  

Opportunities

  • Given the government’s current negotiating position, a no-deal Brexit may be the only way to achieve any benefits of Brexit 
  •  The UK would no longer be subject to the jurisdiction of the European Court of Justice (ECJ)
  • The UK would no longer pay into the EU and this money could be used for other purposes. We may also not be liable to pay the £39 billion divorce bill
  • The UK will be completely free to strike trade deals with whomever they want
  • EU medicinal product standards will still be accepted by the UK

Challenges 

  • A no-deal could leave the UK in deep economic and political uncertainty
  • The UK cannot immediately “fall back” on to World Trade Organisation (WTO) rules.
  •  Customs declaration and checks at borders would have to be introduced. Transport would also be heavily disrupted. In this event, businesses have been advised to account for these and invest in new goods tracking software.
  • No-deal would leave a hard-border in Ireland
  • There would be no arrangement securing the rights for EU nationals living in the UK and vice versa. Access to pensions and banking for UK nationals living in the EU could face disruption


Analysis

Sovereignty

The Chequers Agreement laid out the UK’s final negotiating position for talks with the EU. A no-deal Brexit may be the only way to achieve the benefits that people voted for. The government will request access to the single market for all goods but free movement as we know it will end. The ECJ will not have jurisdiction in its current form but will still have influence in some way (view our summary here).

Any final deal will inevitably be a watered down version of the Chequers Agreement. Critics argue, if we leave the EU under an amended Chequers deal, we will leave only name, not in practice. The EU has already made clear the UK cannot have tariff free single market access without accepting the four freedoms. The fear is that any deal could still require us to accept freedom of movement in some form, in direct opposition to the sentiment of the Brexit movement.

The Chequers Agreement led to the resignation of former Cabinet ministers and Brexiteers Boris Johnson and David Davis. They claimed the position adopted by Theresa May was too much of a compromise that would “kill the Brexit dream”. Unless the EU becomes uncharacteristically accommodating in the negotiations, a no-deal could be the only way to deliver Brexit where the UK takes back control.

WTO Rules

One of the most common misconceptions about a no-deal Brexit, is that we can immediately fall back on WTO rules. The process of getting on to WTO terms is not so straightforward. WTO members do have standard terms, for example, members must subject all other members to the same barriers, tariffs and customs checks. The WTO is however, a member led organisation and the challenge arises with quotas. Quotas impose quantity limits of duty free trade on individual products with each individual member.  

Currently the UK’s trade flows, which are the basis for determining quotas, are calculated with regards to EU as a block, not as an individual state. The UK must clarify the exact proportion of all prior EU individual import/export products it accounted for and what proportion of these went to  or came from each individual WTO member. This task in itself requires a significant amount of work. We then must predict future trade flows and agree duty free quota levels with each individual member. Ian Dunt details the importance of calculating these flows. Inaccurate predictions can lead to quotas that flood the UK’s market with cheap imports or alternatively could heavily restrict essential goods. (Politics.co.uk). Then, the process of actually setting quotas involves more political negotiations with the 140+ WTO members themselves. This whole process may not be as straightforward and quick as many claim.

Even if we smoothly fall onto WTO rules, the UK would need to strike new deals very quickly. Mauritania is the only nation that trades solely on WTO terms (Medium). The small west African country’s main export is iron ore and it only has a population of 4.5 million. In the event of a no deal, we would have complete freedom to strike deals with any trading partners. The task of negotiation is lengthy though. On average, it takes 42 months for a trade deal with the US to reach implementation stage. The fastest US trade deal to reach implementation was 18 months with Jordan (We Forum). In total however, the UK will have 795 bi-lateral deals and treaties to negotiate and agree in the event of no deal (FT). Brexit does provide freedom in the long term to strike trade deals with countries all over the world. In the short term while we negotiate these deals however, international trade may be challenging. 

Non-tariff trade barriers

A key barrier to trade is regulatory conformity. The UK would need to agree regulatory standards of goods with trading partners before trading. We are currently on EU regulatory standards and trade on this basis. A common solution is a Mutual Recognition Agreement (MRA). The MRA requires goods to be independently reviewed and our product assessments approved as an equivalent standard. It is irrelevant that our standards conformed to EU standards even 24 hours prior. If we leave the EU without a deal, we will no longer have evidence, as an independent state, of product conformity for certain goods. MRA’s are also complex and product specific. The US and China have 135 and 65 MRAs with the EU respectively (Chris Grey). The UK would have no MRA’s with anyone and this would lead to all UK exported good being checked or blocked at the borders, significantly slowing down the flow of goods. A no-deal Brexit could be disruptive, if not a complete barrier to goods international trade.

The service sector would also be heavily impacted by a lack of regulatory conforming. Services account for 80% of the UK economy but a no-deal would mean a loss of crucial regulatory framework. For example, UK financial service firms would lose passporting rights which allow them to do business in the EEA without further authorisation. The vast majority of UK  financial firms operate in EEA markets so no clarity on this matter could have huge economic ramifications.

While regulatory standards are finalised, the UK is likely to incur costs and businesses will suffer disruption to the movement of goods and provision of services. This is why the government has advised businesses to begin stockpiling, particularly medicines. Brexit is an unprecedented process so, given the circumstances, the UK may be able to agree regulatory standards with trading partners relatively quickly. In the short term however, there would be significant disruption without any contingency plans.

Immigration

One of the focal points of the negotiations is the Irish border. Ireland has been borderless in practice since 1993 and the reinstatement of a hard border has been deemed undesirable on all sides. With no arrangement in place to accommodate a soft border, a border with customs check would be required. Furthermore, there would be no clarity on how this border would be enforced in practice. It is estimated that a hard Brexit could reduce Ireland ‘s GNP by as much as 7% (Irish Times). 

Rights of EU nationals currently living in the UK and vice versa would be in jeopardy. A deal would provide crucial clarity on their legal status. There are an estimated 3.8 million EU nationals currently living in the UK (Full Fact). Furthermore, due to the legal uncertainty insurers may be unable to pay out pensions to UK citizens living in the EU. A current reciprocal deal with the EEA outlines pension regulations for the blocs’ citizens, covering payment of pensions. Without a deal, this arrangement would no longer apply. A no-deal would inevitably create severe immigration uncertainty in the short term.

Legal Sector

The Law Society has forecast that a no-deal Brexit could cost £3 billion by 2025. Under a no-deal, legal sector growth is predicted to fall to 1.1%, compared to 2.3% with a soft Brexit (view here). This is due to a likely decline in the wider economy in a no-deal scenario. Growth in legal services is largely contingent on the strength of the wider economy. As seen in the 2008 financial crisis, some legal sectors thrive in economic decline like insolvency and litigation but the majority suffer. The economic uncertainty of a no-deal, at least in the short term is likely to have an adverse effect on the legal sector. 

Conclusion

There is no doubt whatsoever, that a no-deal leaves the UK in an economic and legal quagmire, without clarity on fundamental issues. Rights of EU nationals living in the UK, and vice versa would be unclear, the reinstatement of a hard border in Ireland could occur and the movement of goods could face disruption. Theresa May has been tasked with a near impossible challenge with the Brexit negotiations. The government must find a proposal which is agreeable to a deeply divided Parliament. Both sides of debate, “remainers” and “hard Brexiteers” deem each other’s fundamental proposals as wholly unacceptable, if not destructive. Therefore, the middle ground, which the Chequers agreement sought to find, simply displeases both sides equally.

Ultimately however, even if the government proposed the perfect deal for the UK, these proposals must be accepted by the EU in the negotiations. Much of the discourse surrounding Brexit ignores this fundamental aspect. The government must propose what they think would reasonably be accepted by the EU. As early as 2016, the EU had laid out its red lines and confirmed it would take a tough stance. EU leaders have consistently said the UK cannot “have its cake and eat it”. For the EU, maintaining the political integrity of the union is more important than negative economic consequences of no-deal Brexit. Euro-scepticism is gradually increasing within EU member states. The EU commission appears keen to prove that departure from the Union will not grant nations the ability to cherry pick aspects of the Union they like.  This is why the prospect of a no-deal is becoming ever more likely.

On balance, a no-deal could be the only way the political objectives of gaining true autonomy and legal sovereignty. Economically however, the uncertainty will inevitably have a detrimental impact. The Brexit Secretary was confident that a deal was by far the most likely outcome. A no-deal scenario however, is becoming a very real option.

Be the first to comment

Leave a Reply