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How would UK-EU trade be affected by a ‘no deal’ Brexit?

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How would UK-EU trade be affected by a ‘no deal’ Brexit?
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The deadlock in the British parliament over Brexit means much debate has focused on the possibility of the United Kingdom leaving the European Union without an agreement.

As things stand, the legal position is that the UK will leave the EU on 29 March, 2019 – deal or no deal.

The Withdrawal Agreement and Political Declaration on future ties, negotiated by London and Brussels, need the approval of both the British and European parliaments. Otherwise the agreed measures – including a 21-month transition period after Brexit – will not apply.

The “meaningful vote” in the UK House of Commons has been put back until mid-January because of the scale of opposition to the deal. Most MPs also oppose a “no-deal scenario”, and other possibilities are being mooted. Yet there appears to be no majority for any particular path forward.

REUTERS/Eric Vidal
UK Prime Minister Theresa MayREUTERS/Eric Vidal

Both the UK and the EU have been stepping up preparations for “no deal” in a full-scale race against the clock. Disruption to a certain extent is inevitable when legal arrangements covering many aspects of everyday life abruptly cease to apply.

There has been talk of a “managed no-deal” where both sides work to mitigate a disorderly Brexit – though its effectiveness in practice has been called into question.

The consequences of a “no-deal Brexit” have been the subject of fierce and increasingly acrimonious debate in the UK. Here we consider the impact on trade.

No deal – better than a bad deal?

The British government acknowledges that with no exit agreement in place, the EU would consider the UK “a third country for all purposes”.

  • Theresa May’s mantra that "no deal is better than a bad deal", has been seized upon by Brexiteers who argue in favour of leaving the EU without an agreement. They say the UK could save money by avoiding paying much, if not all, of the estimated €40 billion financial settlement to cover money the UK is said to owe as part of existing commitments to the EU. Breaking free of the EU’s structures will open up new opportunities, they add, enabling the UK to boost trade with the rest of the world.

  • Opponents argue that such opportunities exist already – and that “no deal” would harm not only trade, but destroy 45 years of smooth arrangements between the UK and the continent. They say it would bring severe economic damage and legal chaos, wreck Britain’s international credibility, and jeopardise hard-earned peace on the island of Ireland.

Trade rules would change from those of the European Union – based on its single market and customs union – to those of the World Trade Organisation (WTO).

WTO rules mean each member must grant the same market access, including charging the same tariffs, to all other members – except developing countries and those that have free trade agreements. Trade experts agree that the EU could not treat the UK differently to other states: rules currently imposed on third countries would apply.

  • Pro-Brexit economists argue that most world trade is done on WTO terms, which will still give the UK access to EU markets.
  • Many other economists and academics argue that although the UK could indeed adjust, WTO terms would be damaging for several sectors of the British economy including services, manufacturing and agriculture.

The impact of no deal for the UK would extend beyond its trade with the EU. At the moment Britain trades with the rest of the world as an EU member. Under “no deal”, existing trade agreements fully or partly in place between the EU and 83 countries would no longer apply to the UK – although some Brexit supporters claim many of these can be “rolled over”.

Tariffs would apply

The Confederation of British Industry (CBI) estimates that with no deal, 90% of the UK’s goods exports to the EU by value would face tariffs. The average tariff on UK exports to the bloc would be 4.3 percent, it calculates, while the average on imports from the EU into the UK would be around 5.7 percent. Tariffs in some sectors – for example in agriculture and food, the car industry and textiles – would be “significantly higher”.

  • Brexiteers say higher tariffs faced by exporters could be offset by a more favourable exchange rate created by the fall in the value of the pound. However, a report by one group of economists found that UK exports had been damaged, not boosted, since the referendum.
  • Pro-Brexit economists also quote estimates suggesting that import tariffs from EU countries could generate significant revenue for the UK. But a report by the think-tank UK in a Changing Europe says revenue gains from import tariffs would come at a cost of higher consumer prices.
  • Some no-deal economists have also claimed that the UK could unilaterally drop all tariffs, slashing consumer prices. Their critics agree that prices would come down – but, they argue, so would protection for various sectors of the economy. There’ve been warnings that much UK manufacturing, including the car industry, as well as British farming would be severely damaged by total exposure to global competition.

Non-tariff barriers: checks and regulations

“The free circulation of goods between the UK and EU would cease,” says the UK government’s no-deal advice to businesses.

It says there would be “immediate changes” to procedures for businesses trading with the EU — and the details make it clear they involve more bureaucracy. The papers reveal that UK companies exporting and importing to and from the bloc face a mass of new red tape — potentially devastating for smaller firms.

The advice goes on to say that trade under “third country” status would mean customs declarations, upfront VAT payments, and higher costs. Some firms may need export licences which could bring delays, or to employ customs brokers.

The UK would no longer be part of the EU system of mutual recognition. The government says the UK would continue to follow EU regulations in many areas – but firms would have to deal with new regulatory regimes, for instance for medicines. Pharmaceutical firms are advised to stockpile six weeks’ supplies. New certification is needed in farming, leading to warnings that trade in organic food may effectively be suspended.

  • The National Audit Office said in a report in October that the number of customs declarations the UK authorities need to process might rise from 55 million a year to 260 million. New border systems would be needed, but in September the body responsible reported that 11 out of 12 projects might not be ready in time.
  • The CBI estimates that non-tariff barriers are likely to hit competitiveness even more than tariffs, especially for smaller companies. Highly regulated industries such as food, chemicals, aerospace and cars would suffer most – subject to new checks for safety and quality standards.
  • “The biggest costs would come not from moving to new regulatory arrangements for trade, but from a partial or complete breakdown of the regulatory arrangements that make trade possible at all,” UK in a Changing Europe has estimated.

The prospect of sudden barriers going up under no deal has brought warnings of chaos hitting UK ports, especially Dover, and surrounding areas. Reports by Dover and Kent councils have warned of massive disruption, with long delays and jams on the roads. The UK government has estimated that Channel ports could be hit for up to six months in a worst-case scenario.

Similar warnings have come from industries relying on “just-in-time” supplies of parts – such as the car industry – or the food and drink industry which relies on the efficient distribution of fresh produce.

Improvements

The British government says it has successfully negotiated continued membership of the Common Transit Convention (CTC) after Brexit, including in the event of no deal. This will ease trade flows, it argues, as customs declarations will be made and import duties paid not at border points but at the final destination.

The news has been welcomed by the UK Road Haulage Association, which warns however that “setting it up will take time and significant upskilling”.

However, a UK parliamentary committee report in September said that CTC membership would not be enough to achieve “frictionless” trade. It would displace but not remove customs controls, and did nothing to address new regulatory barriers such as inspections.

The EU has dropped plans to limit quotas for road haulage permits that UK truckers would need on the continent. But the measure to allow access is temporary and conditional.

Services

The UK services industry makes up an estimated 80 percent of the country’s economy. Whereas the EU sells more goods to the UK than it buys from Britain, the UK has a “trade surplus” in services, exporting more to the EU than it imports.

Latest figures show a large rise in activity between the UK and the EU. Half of the UK’s trade in services in 2016 was with Europe, and most of that was with the EU.

A “hard Brexit” option under WTO rules offers only limited integration for services, and according to the UK Institute for Government many countries consider WTO rules do not address trade barriers sufficiently.

Banks and financial services firms are set to lose “passporting rights” enabling them to serve clients in the EU from the UK. Some UK companies have been moving operations to the continent.

Impact on the EU

The United Kingdom was the European Union’s second largest economy in 2016, according to Eurostat, accounting for 16 percent of its GDP, as much as the 19 smallest EU countries put together.

The UK accounts for about 13% of the EU’s trade in goods and services, according to the International Monetary Fund. The IMF has warned that economic growth across the remaining 27 EU states would fall by up to 1.5 percent in the long run and employment would fall by 0.7 percent, if the UK fell back on WTO rules to trade with the bloc after Brexit.

Ireland would suffer an output loss of four percent, it concludes, while the economies of countries geographically close and with strong trading links to the UK – such as the Netherlands, Denmark, Belgium and the Czech Republic – would be hit to a lesser extent.

German carmakers are among the major EU exporters to the UK market, with industry figures showing that the UK imported more than three quarters of a million German cars in 2017. They could be hit by reciprocal UK tariffs once the EU levied a 10 percent tax on UK car imports under WTO arrangements.

The European Commission has updated its contingency plans for a “no deal” Brexit. Far from envisaging the sort of “managed no-deal” that some in Britain are calling for, it sets out a series of basic arrangements to limit disruption.