What does a no-deal Brexit really mean?

01 Dec 2019

Investec Focus

Digital content team

If a withdrawal agreement is not reached by 31 January 2020 or a deal is not in place by the end of the transition period at the end of the year then the UK will drop out of the EU on WTO terms. What does this mean, and what questions will remain?

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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, 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.
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 is stockpiling 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. 

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
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.