What does a no-deal Brexit really mean?

If an agreement is not reached during the negotiation period following the triggering of article 50, then the UK will drop out of the EU on 29 March. What does this mean, and what questions will remain?

A no-deal Brexit is a scenario where no formal agreement is reached during negotiations between the UK and the EU under the terms of Article 50 of the Lisbon Treaty.
 
In the absence of a deal, there would still be a need to formalise a relationship for trade, security and other bilateral ties between the UK and the EU. With the Article 50 process abandoned, the UK would drop out of the EU on 29 March 2019, leaving critical decisions about a future relationship unresolved.
 
Among these would be the UK’s financial settlement, or ‘divorce payment’ – the absence of which would create a giant hole in the EU budget. While the UK would not be under obligation to settle the agreed £39bn divorce bill, it would still be liable to settle any amount due under legal contracts.
 
A no-deal Brexit would also leave the EU with no clear terms in place for EU nationals residing in the UK, no UK representation in the dozens of European regulatory agencies that govern many aspects of daily life in the UK, no trade agreements to prevent a sharp increase in tariffs on goods and services and no customs agreements to minimise travel disruption.
Secretary of State for Foreign and Commonwealth Affairs Jeremy Hunt speaks during the annual Conservative Party Conference on September 30, 2018 in Birmingham, England. The Conservative Party Conference 2018 is taking place at Birmingham's International Convention Centre (ICC) from September 30 to October 3. (Photo by Jeff J Mitchell/Getty Images)

Foreign secretary Jeremy Hunt (pictured) warned at the end of July that the chances of a no-deal Brexit are “increasing by the day”. Bank of England governor Mark Carney, who has long opposed Brexit, said in early August that the chances of a no-deal Brexit were “uncomfortably high”.

Secretary of State for Foreign and Commonwealth Affairs Jeremy Hunt speaks during the annual Conservative Party Conference on September 30, 2018 in Birmingham, England. The Conservative Party Conference 2018 is taking place at Birmingham's International Convention Centre (ICC) from September 30 to October 3. (Photo by Jeff J Mitchell/Getty Images)
 
Some UK-based goods and service exporters have begun setting up satellite offices in the EU to ensure business continuity in such a scenario, while others that have the option have started to relocate their corporate head offices to the continent.
 
Back in the UK, the government plans to stockpile food and essential medicines that might be difficult to source from outside the EU  in the event of no deal, amid warnings around goods shortages, the grounding of flights and chaos at the borders. A near-term deadline for setting out the conditions of a withdrawal agreement is the EU summit on 17 – 18 October.
 
A political declaration on the future relationship would allow enough time for the UK and EU parliaments to ratify it – though the EU has suggested that fallback deadlines in November or, at the latest, the 13 – 14 December EU summit could still offer a chance to finalise a deal if the UK still wants one.
 

The World Trade Organization outcome

In the event of no deal, the UK would fall back on World Trade Organization (WTO) rules. Those rules would apply to UK trade with the EU and with other countries with which the EU has free-trade deals.
 
Every WTO member has a list of tariffs and quotas that they can apply. The average EU tariff for non-EU imports is quite low, but in some sectors can be high. For example, cars and car parts would be taxed at 5% – 10% every time they cross the UK-EU border. Agricultural tariffs would be even higher, rising to an average of over 35% for dairy products.
 
Considering that as a member of the EU, there are currently no tariffs on the  transport of these to and from the UK, the potential impact of such a sharp rise in tariffs on dairy, meat, cereals and other essential food products has drawn expressions of deep concern from British farmers.
 
After Brexit, the UK could choose to lower its own tariffs or waive them altogether in an attempt to stimulate free trade. This could mean cheaper imports and good deals for consumers, but it could also mean competition from low-cost producers around the world, which could drive some UK companies out of business.
 
5% – 10%
Average EU tariff on cars and car parts under WTO rules every time they cross the UK-EU border
35%
Average EU tariff on dairy products under WTO rules
Under WTO MFN rules, any tariff would have to apply to all countries, so no special deal could be struck with Europe.
 
Once the UK has left the EU, a new system for mutual recognition of regulation and standards would need to be put in place. In the event of an abrupt no-deal Brexit, this may not happen immediately. Indeed, the EU would be within its rights to insist on product checks at its borders.
 
Once the UK has left the EU, a new system for mutual recognition of regulation and standards would need to be put in place.
The implications for services businesses, which would operate by default under the General Agreement on Trade in Services, would be greater still. Not only does trade in services represent some 80% of the UK economy, it is also the largest contributor to the UK’s trade surplus with the EU, with financial services and insurance accounting for 26% of all service exports to the region.
 
Central to being able to continue delivering these into the EU is the UK’s participation in the EU’s single market for financial services. Any failure to agree Brexit terms that allow UK-based financial service providers to retain passporting rights could jeopardise their business. 

Brexit insights and analysis from Investec