How prepared are Britain and the EU for a no-deal Brexit?

09 Oct 2019

George Brown and Ryan Djajasaputra

Investec UK economists

Recent legal arguments may have diminished the risk of the UK crashing out of the EU on 31 October, yet we seem further from an agreement than ever before. Read our concise guide to find out what you need to do and discover how you can mitigate the risks of a no-deal Brexit

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The rhetoric is rising and the blame game is well under way. But whatever side you support, such a sharp adjustment from the current frictionless flow of goods and services to erecting trade barriers would represent a significant supply-side shock. 
 
Under the government’s own ‘Operation Yellowhammer’ contingency plan for a no-deal Brexit, it assumes that unpreparedness among hauliers would see the cross-Channel flow rate of HGVs reduced to 40-60% of current levels for the initial three months before then improving to around 50-70%.
 
In terms of the economic fallout, the Bank of England estimated in September that under a worst-case scenario there might be a peak-to-trough GDP decline of 5.5%, a rise in the unemployment rate to 7% and inflation peaking at 5.25%. But this is more modest than it had presumed last year - when it assumed 8%, 7.5%, 6.5% respectively - due to a number of mitigating steps taken by the UK and some EU states.
 
We have noted a deal of confusion as to what these mitigating measures are and what they would entail. This is perhaps unsurprising given that the relevant information is not collated in one centralised depository, but rather spread across numerous sources. This ‘cribsheet’ is not intended to be an exhaustive list of all the contingency plans put in place by the UK and the EU for a no-deal Brexit; to do so would require a document spanning hundreds, if not thousands, of pages. Instead, it aims to serve a concise reference point for the most significant measures put in place to date. You can also keep up to date with the latest news and insights from Investec experts on our Brexit update page.

Trade in goods

One of the most visible consequences of a no-deal Brexit will be the re-establishment of customs controls between the UK and the remaining 27 EU states. Beyond the direct cost impact of tariffs being levied, businesses will also be burdened with more red tape that will need to be meticulously researched and implemented. But even if a firm were to be fully compliant, the speed at which it can clear customs will be dependent upon the adequacy of border infrastructure and the preparedness of other hauliers. As such, both sides have taken a number of steps to try and alleviate any potential customs bottlenecks.

UK customs preparations

Temporary Tariff Regime
The UK would set most-favoured nation (MFN) tariff rates at zero for 87% of UK imports by value, with tariffs being imposed on the remaining 13%. It has said that this tariff schedule would be in place for up to 12 months. Those which would be subject to tariffs include:

  • Beef, lamb, pork, poultry, and some dairy would face tariffs and quotas.
  • Finished vehicles, tyres, and wheels would face tariffs, but not EU car parts
    to limit supply chain disruption for UK car manufacturers.
  • Certain ceramics, fertiliser, and bioethanol in order to combat against instances of unfair global trading practices (e.g. dumping).
  • Bananas, raw cane sugar and certain fish would face tariffs (i.e. agricultural produce exported by developing countries). Note: This is being reviewed following the change of government with any potential changes due to be announced shortly. The FT reports that the government is set to make modest adjustments, including cutting the
    tariff rate on HGVs and raising those levied on bioethanol and textiles.
 
Transitional Simplified Procedures
For a temporary period, HMRC will allow most goods imported from the EU to leave a UK port or Eurotunnel terminal before being informed that they have arrived. Firms will need to register to use transitional simplified procedures and – if tariffs have to be paid – a duty deferment account.
 
Once registered, firms will be able to either make a simplified frontier declaration or make an entry in their own records once the goods cross the border. To inform HMRC that the goods have arrived, the firm (or a nominated customs agent) will then need to update the declaration electronically no later than the end of the next working day, while a more detailed supplementary declaration will normally have to be submitted on the fourth working day of the month after the goods’ arrival in the UK. This system will be reviewed 3 to 6 months after its introduction, with the government pledging to give businesses 12 months’ notice if it decides to withdraw them.
 
EORI number
Businesses need an Economic Operator Registration and Identification (EORI) number to move goods into or out of the EU. In August 2019, the government announced that all VAT-registered UK firms which had not already signed up for an EORI number would be automatically assigned one by HMRC. The government has said that this will see a further 88,000 companies allocated an EORI number on top of the 72,000 who had already registered themselves.
 
Recognition of EU certification marks
For a ‘time-limited period after Brexit, the government will allow most manufactured goods to be sold using the Conformité Européenne (CE) certification mark to ease their transit into the UK. This indicates conformity with health, safety, and environmental protection standards for products sold within the EEA. Other EU conformity marks will be accepted for a temporary period including the reversed epsilon (Э) for aerosols and container measurements. Eventually, this will be phased out in favour of a UK Conformity Assessed (UKCA) marking.
 
EU Community Licence
In addition to a standard international operator license, hauliers require an EU Community License for journeys made to, through or from the EU, the EEA, and Switzerland. Hauliers will be able to use their existing community license until 31 December 2019 even if there is a no-deal Brexit but will need a European Conference of Ministers of Transport (ECMT) permit for journeys to, through or from Switzerland. Firms who subsequently apply for or renew their operator license after a no-deal Brexit will get a ‘UK Licence for the Community’ which will work in the same way and have identical rules as an EU Community Licence.

EU border controls

1,000

Additional customs staff recruited in Ireland

700

Customs officials due to be recruited in France by 2020

1,045

Extra customs officials in Rotterdam, including 145 vetinarians

 

 

 

EU customs preparations

Relative to the UK, the EU has disclosed little detail of what unilateral contingency measures it would adopt in the event of a no-deal Brexit. But the bulk of the EU’s publically known contingency measures have centered on the Republic of Ireland given its geographic isolation from the EU and as it is the only member state to share a land border with the UK. Notably, it has tried to broker a ‘backstop’ with the UK to prevent the need for physical border infrastructure so as to uphold the processes put in place by the Good Friday Agreement.
 
In the event that a mutually acceptable solution cannot be found, it has established direct maritime routes to the EU from the ports of Dublin and Cork, thereby making it easier for the UK ‘landbridge’ to be bypassed. Shipping routes have been chartered to the Belgian ports of Zeebrugge and Antwerp as well as Rotterdam in the Netherlands, while additional ones are set to be launched to the two countries as well as to Spain.
 
Meanwhile, a number of member states with strong trade links with the UK have initiated their own individual preparations:
 
Ireland
An additional 1,000 staff have been recruited: up to 700 staff for customs controls, 200 veterinarians for sanitary and phytosanitary checks and 120 additional officials for export certification. Also, the port of Dublin is expanding its infrastructure to accommodate checks on freight originating from Holyhead, Liverpool, and Milford Haven.
 
France
An additional 700 customs officials are due to be recruited by 2020 in UK-facing ports such as Le Havre, Calais, and Dunkirk as well as Eurotunnel terminals. As part of preparations, 580 customs and veterinary control staff will be assigned to the most affected regions.
 
The Netherlands
An additional 900 customs officials will be recruited at the Port of Rotterdam as well as a further 145 veterinarians. 

UK trade and mutual recognition agreements signed

Trade agreements that have been signed by the EU will cease to apply to the UK once it leaves the bloc. Consequently, the UK government has sought to strike a number of new agreements to replace those signed by the EU. It has so far succeeded in signing 13 new agreements representing about 7% of total UK trade in 2018.
 
These are:
  • Andean countries
  • CARIFORUM trade bloc
  • Central America
  • Chile
  • Eastern and Southern Africa (ESA) trade bloc 
  • Faroe Islands
  • Iceland and Norway
  • Israel
  • Liechtenstein
  • Pacific states
  • Palestinian Authority
  • South Korea
  • Switzerland
Note: A trade deal with the Southern Africa Customs Union and Mozambique (SACU+M) trade bloc - representing roughly 0.75% of total UK trade - has been agreed in principle and is expected to be signed before Brexit.
 
The 25 remaining agreements that are being negotiated represent roughly 6.75% of UK trade. Although 4 of these will not be signed or transitioned to before Brexit, including the biggest (Japan at 2.3%). See Appendix for the full list.
 
Mutual recognition agreements
Australia, New Zealand, and the United States have all signed mutual recognition agreements with the UK. While discussions are ongoing with Japan, they are not expected to be completed before Brexit. Under a mutual recognition agreement, countries recognise each other’s conformity assessments which, when applied to products, are tested to an established performance standard. Inspections, quality management, surveillance, accreditation and declarations of conformity also take place.

Trade in services

Financial services

The broad assessment of the Bank of England is that most of the risks to financial services from a no-deal Brexit have largely been mitigated through the passing of legislative measures here in the UK or via other means, although there are still some issues. Most of the mitigation addresses the ability of EU institutions to conduct business with UK clients. However reciprocal measures have not necessarily been forthcoming in all areas. 
 
OTC (Over-the-counter, cleared) derivatives
Perhaps one of the biggest question marks with regards to a no-deal scenario was over the ability to continue clearing derivatives. This issue has largely been overcome through an agreement on equivalence, albeit on a temporary basis.
 
On the UK side the Temporary Recognition (TRR) of Central Counterparties (Amendments, etc., and Transitional Provision) (EU Exit) Regulations 2018 has been passed, which effectively ensures UK entities can continue to access EU based clearing in the event of no-deal, no transition. This also applies to non-EU based Central Counterparties (CCP), because at present UK institutions have the ability to access non-EU based CCPs based upon ESMA (European Securities Market Association) recognition.
 
As of 28 August, 48 CCPs have notified the BoE to enter the TRR if the UK leaves the EU. Under TRR, recognition of non-UK CCPs will exist for 3 years and be extendable by the Treasury (HMT) in 12-month increments. In the opposite direction, the European Commission via ESMA has approved the temporary equivalence recognition for three UK CCPs (LCH, ICE, and LME).
 
However, the continued access to UK based CCPs for EU based institutions is only on a temporary basis and is currently set to cease on 30 March 2020, given that this 1-year temporary access was based on the initial Brexit date. To date, this has not been adjusted to reflect the new Brexit date of 31 October 2019, but the EU has spoken of ‘adjustments to take into account the new timeline’, suggesting the end date could be pushed back to October 2020.
 
OTC (Over-the-counter, uncleared contracts not cleared through a CCP, margin posted bilaterally) derivatives
Although risks around OTC derivatives disruption are deemed to be low, there is deemed to be a risk around uncleared derivative contracts, whereby questions exist over the continuity of institutions to action cross-border derivative lifecycle events. The UK has legislated for EU institutions to continue providing these services to UK clients, but there have been no reciprocal arrangements, meaning that UK based contracts are having to be novated to the EU to prevent disruption.
 
Banking Services
In the event of a no-deal, UK based institutions look set to lose their ability to provide regulated activities to EU based clients (passporting rights). Nonetheless, the BoE still judges the risk of financial services disruption to be low, given that major UK banks have been transferring EU clients to EU-based subsidiaries, which have now largely been authorised. At the same time, the UK government has legislated for the continued ability of EU institutions to provide financial services to UK based households and businesses.
 
Insurance
As with other areas of financial services, there has been a lack of reciprocal arrangements in the insurance sector. To date, the UK has legislated for the continued provision of insurance products to UK households and businesses by EU institutions. However, the same measures have not been implemented by the EU, as such UK based insurance companies have been restructuring businesses to allow the continued servicing of EU clients. Certain member states have also taken unilateral decisions on temporary permission regimes to allow continued access.
 
Asset Management
Co-operation agreements have been struck between the FCA, ESMA and EU National Competent Authorities. These co-operation agreements permit the continued 'delegation' of funds to be domiciled and regulated in another EU country. This is effectively what happens currently with non-EU member states. It is also noted by the BoE that the UK's largest asset managers have completed the establishment of EU authorised management companies.
 
A final point to note on financial services more widely in both a no-deal and even in the event of a deal is that access to EU financial markets is driven by the idea of equivalence. This is the principle that the regulatory regime in a ‘third country’, which the UK would be after exit is deemed to be equivalent to or greater than that of the EU.
 
However, there is a risk that such recognition becomes politicized. For example earlier this year the EU ruled against renewing Switzerland’s ‘recognition of equivalence’ following disagreements over an overarching framework agreement that would govern the multitude of bilateral agreements between the two. The effect of this is that Swiss shares can no longer be traded on EU exchanges.

Airline services

Legislation passed by both the UK and the EU prevents a situation whereby aircraft would be unable to fly between the UK and the EU. EU Regulation 2019/502 (Mar-19) allows EU countries to provide UK airlines permission to operate in EU airspace in the event of no-deal.
 
This was intended to apply until March 2020, but an EC proposal for an extension to October 2020 was put forward in September. The UK has made reciprocal arrangements via a policy statement (Mar-19), that confirmed reciprocal arrangements for EU airlines.
However there are some nuances within the EU regulation, in that it allows for point to point traffic between the UK and EU, but it does not allow UK airlines to operate flights between two points within the EU (cabotage), this applies to codeshare operations too. Additionally, all-cargo flights will be permitted for 5 months after exit day on point to point flights between the UK and EU and onwards to third countries.

Other services

Labour markets
Leaving the EU without a deal would mean that the freedom of movement of people across the EU would end immediately. For those businesses offering services to EU customers that poses several challenges. For one, different member states may apply different rules. On a high-level basis it means UK businesses may need to acquire the appropriate authorisations and licences to operate as well as being aware of certain EEA nationality requirements that apply to some sectors.
 
Additionally, the current system encompasses a system of reciprocal recognition of professional qualifications (for example lawyers) allowing practitioners to work across the EU. However, that system will lapse in the event of a no-deal, meaning that individuals providing professional services within the EU will need to gain recognition of qualifications and approval from local regulators. Visas, work or residence permits may also be required.
 
Data sharing
Leaving the EU without a deal could potentially lead to firms facing issues around data protection rules. This may hinder business operations should they receive personal data from the EEA and have not undertaken relevant measures. Under GDPR (General Data Protection Regulation) countries outside of the EU can only handle EU personal data if they meet certain criteria.
 
For UK firms this can be addressed though the implementation of Standard Contractual Clauses (SCC) or Alternative Transfer Mechanisms (ATM). Failure to do this would see firms potentially losing access to EU data. The European Commission must also deem the UK’s data protection regime to be adequate.
 
VAT on digital services
On leaving the EU, UK firms providing digital services to the EU will no longer be able to declare sales and pay VAT in the UK. Instead, they will need to register for VAT MOSS (Mini One Stop Shop) in any member state or register VAT in each EU country where they provide digital services.
 
Business structure
A no-deal Brexit could have implications and certain restrictions for UK citizens that own, manage or direct a company registered in the EU, as well as those UK businesses which operate across the UK-EU border. Effectively this means that UK citizens will subject additional local country and sector rules that could impact business operations.


 

 

Conclusions

While the planned contingency measures ought to mitigate the immediate disruption caused by a no-deal Brexit, their effectiveness will nevertheless be dependent on the level of preparedness among both UK and EU businesses. Surveys and anecdotal evidence suggest this varies considerably by company size, sector and location. At the same time, there remain many unanswered questions on how the various aspects of the UK-EU trading relationship would change in a no-deal scenario.
 
Most significant among these is the treatment of the Irish border in the absence of a mutually agreed protocol or ‘backstop’ which would, in theory, require customs and regulatory checks to be re-imposed on goods travelling between the Republic of Ireland and Northern Ireland. But so far, neither side has clarified how they would accommodate these checks without the installation of physical border infrastructure which would risk reigniting the sectarian conflict. Understandably, this has presented a challenge for Irish businesses on both sides of the border wishing to plan for a no-deal Brexit.
 
Meanwhile, it is clear that the UK has announced more comprehensive and effective measures than the EU. Logically this makes sense as the EU has less flexibility to construct such measures without compromising on either the Single Market or the Customs Union. Doing so would reasonably displease the remaining 27 member states and risk flaming further secessionist sentiment. Additionally, it is less dependent on trade with the British Isles than the UK is with the EU. For this reason, any mitigating measures would disproportionately favour the UK and arguably lessen the likelihood of a post-Brexit trade agreement being reached.
 
Overall, we do not believe that the contingency measures put in place will be significant to fully offset the significant supply-side shock a no-deal Brexit would present to the UK economy. However, they should help to smooth the sharp overnight adjustment to the new trading relationship and provide some basis for which businesses can make contingency arrangements. 

Appendix: trade agreements still in discussion (as of 7 October 2019)

Country or bloc Nature of agreement  Status of discussions % of total UK trade (2018)
Albania (Western Balkans)  Association agreement  Engagement ongoing  0.00%
Algeria  Association agreement  Agreement unlikely before Brexit  0.21%
Andorra  Customs union  Will not be signed for Brexit  0.03%
San Marino  Customs union  Will not be signed for Brexit  0.00%
Bosnia & Herzegovina (Western Balkans)  Association agreement Engagement ongoing  0.01%
Cameroon (Central Africa) Economic partnership agreement Engagement ongoing  0.01%
Canada   Free trade agreement Engagement ongoing  1.41%
Côte d’Ivoire  Economic partnership agreement Engagement ongoing  0.03%
Egypt  Association agreement  Engagement ongoing  0.23%
Georgia  Association agreement  Engagement ongoing  0.01%
Ghana (Western Africa) Economic partnership agreement Engagement ongoing  0.09%
Japan  Free trade agreement  Agreement will not be transitioned before Brexit 2.27%
Jordan  Association agreement  Engagement ongoing  0.03%
Kenya (East African Community) Economic partnership agreement  Engagement ongoing  0.01%
Kosovo Association agreement Engagement ongoing  0.00%
Lebanon  Association agreement Engagement ongoing  0.05%
Mexico  Free trade agreement  Engagement ongoing  0.34%
Moldova  Association agreement Engagement ongoing  0.05%
Montenegro (Western Balkans) Stabilisation and association agreement  Engagement ongoing  0.01%
Morocco  Association agreement Engagement ongoing  0.17%
North Macedonia (Western Balkans) Association agreement Engagement ongoing  0.16%
Serbia (Western Balkans)  Association agreement Engagement ongoing  0.04%
Southern Africa Customs Union and Mozambique Economic Partnership agreement Agreed in principle  0.75%
Tunisia  Association agreement Engagement ongoing  0.03%
Turkey  Customs union  Will not be signed for Brexit  1.37%
Ukraine Association agreement Engagement ongoing  0.10%
Country or bloc Nature of agreement  Status of discussions % of total UK trade (2018)
Albania (Western Balkans)  Association agreement  Engagement ongoing  0.00%
Algeria  Association agreement  Agreement unlikely before Brexit  0.21%
Andorra  Customs union  Will not be signed for Brexit  0.03%
San Marino  Customs union  Will not be signed for Brexit  0.00%
Bosnia & Herzegovina (Western Balkans)  Association agreement Engagement ongoing  0.01%
Cameroon (Central Africa) Economic partnership agreement Engagement ongoing  0.01%
Canada   Free trade agreement Engagement ongoing  1.41%
Côte d’Ivoire  Economic partnership agreement Engagement ongoing  0.03%
Egypt  Association agreement  Engagement ongoing  0.23%
Georgia  Association agreement  Engagement ongoing  0.01%
Ghana (Western Africa) Economic partnership agreement Engagement ongoing  0.09%
Japan  Free trade agreement  Agreement will not be transitioned before Brexit 2.27%
Jordan  Association agreement  Engagement ongoing  0.03%
Kenya (East African Community) Economic partnership agreement  Engagement ongoing  0.01%
Kosovo Association agreement Engagement ongoing  0.00%
Lebanon  Association agreement Engagement ongoing  0.05%
Mexico  Free trade agreement  Engagement ongoing  0.34%
Moldova  Association agreement Engagement ongoing  0.05%
Montenegro (Western Balkans) Stabilisation and association agreement  Engagement ongoing  0.01%
Morocco  Association agreement Engagement ongoing  0.17%
North Macedonia (Western Balkans) Association agreement Engagement ongoing  0.16%
Serbia (Western Balkans)  Association agreement Engagement ongoing  0.04%
Southern Africa Customs Union and Mozambique Economic Partnership agreement Agreed in principle  0.75%
Tunisia  Association agreement Engagement ongoing  0.03%
Turkey  Customs union  Will not be signed for Brexit  1.37%
Ukraine Association agreement Engagement ongoing  0.10%
Source: Department for International Trade