While the UK government may say that it is prepared for all outcomes including a no-deal with EU post BREXIT, the government is still holding on to the hope of striking a deal with the EU as the UK-EU relationship is deeply integrated in aspects such as trade, customs and citizens' rights, and it is a difficult task to stray away from bonds which have been in place for nearly 40 yearsDuring...
While the UK government may say that it is prepared for all outcomes including a no-deal with EU post BREXIT, the government is still holding on to the hope of striking a deal with the EU as the UK-EU relationship is deeply integrated in aspects such as trade, customs and citizens' rights, and it is a difficult task to stray away from bonds which have been in place for nearly 40 years
During her speech in Florence, UK Prime Minister Theresa May told the audience that the post-Brexit relationship between the United Kingdom and European Union "can be imaginative and creative". Mrs May went on to propose a twoyear transitional deal before a permanent trade deal comes into place. While this portrays a rosy future relationship between the UK and the EU, it is difficult to cast aside Mrs May's previous warnings for Britain to prepare for a no-deal Brexit. Moreover, several ministers such as Dominic Raab have also suggested that "while the UK had to strive for the very best outcome" from Brexit negotiations, it had to "prepare for all eventualities".
So, what exactly does a no-deal mean and why are many people worried about this? A no-deal scenario would see the UK and EU being unable to reach a formal agreement during the negotiations. Recent events have highlighted that despite many talks and official dinners to discuss potential deals, both parties have been unable to come to any robust outcome. Many Eurosceptic and pro-Brexit MPs would prefer to see a no-deal scenario as opposed to what they may consider to be a bad deal. A nodeal, in their eyes, would free the UK from EU rules. However, even if there is a no-deal under Article 50, there would still have to be some kind of formal relationship between the two, whether it is for trade, security or citizens' rights. After all, it is difficult to completely sever a relationship which has been in place for decades. This article looks into potential options for the UK in the event that it is unable to reach an agreement with the EU.
What will a no-deal look like?
- Trade
In order to consider the impact of a no-deal scenario, it may be useful to look into various aspects, which are currently intertwined with EU rules and regulations. Since trade is one of the most important considerations during negotiations, let us start with this.
The UK currently enjoys being part of the single market, where it is able to trade with other member states without incurring any restrictions or tariffs. However, with the UK preparing to depart from the EU, it may no longer have the privilege to be in the single market. If the UK and EU are unable to reach a trade agreement, World Trade Organization (WTO) rules will come into place. Under WTO rules, various tariffs would apply. For instance, tariffs on industrial output would be 2-3%, whereas tariffs on cars would go up to 10%, and agricultural products would see tariffs between 20% and 40%. Moreover, the UK could impose £9bn worth of additional tariffs on imports, whereas exporters could face an extra £5bn of tariffs on their sales abroad. This may create uncertain trade relations; at least in the short-term (it is difficult to predict long-term outcomes).
However, cutting itself away from the single market would also allow the UK to freely sign trade agreements around the world. This is something Brexiteers were keen to highlight during the referendum last year. How easy will it be for the UK to strike global deals post Brexit? Below are some ideas which may be worth exploring.
- Replicating EU agreements
International trade secretary Liam Fox has spoken about wanting to replicate agreements between the EU and third parties, which cover approximately 60 countries. These 60-odd countries receive approximately $55bn goods from the UK at the moment. The largest national markets covered by these deals, accounting for around $35bn of goods exports, are Switzerland, Norway, Canada and Korea. Looking at the size of trade deals, it is important for the UK to carry on with these agreements once it leaves the EU. However, replicating existing deals is a complex process and may not always be practical. For instance, to sell a car to Korea under EU-Korea deal requires 55% of the content to be EU made. The UK's contribution will not count once it leaves the EU, even if it manages to strike a similar deal with Korea. Hence, replicating EU agreements may be more complex than Mr Fox had initially contemplated. - Joining Trans-Pacific Partnership (TPP) or North American Free Trade Agreement (NAFTA)
Once the UK exits from the EU, it will no doubt look into securing alternative trade arrangements. One option could be for the UK to look into joining partnerships such as TPP and NAFTA, which will help strengthen trade links with countries across the globe. While we have reasons to be optimistic about these possibilities, these treaties are not without their share of problems. While the future of TPP is under scrutiny after the US's recent withdrawal from the agreement, NAFTA is unstable due to ongoing tension between the US and Mexico. Moreover, both agreements contain provision which allows foreign investors to sue governments for damages in the event that unpredictable policy changes affect them in a negative manner. This would not go down well with the more left-leaning political parties in the UK, namely the Labour party, who may see this policy as interference on the business' part. Hence, the government may face a difficult time convincing their political opponents to join agreements containing such unpopular provisions. - Unilateralism
Unilateralism or dropping tariffs is another tool the government could use to encourage more trade flow. Dropping tariffs would reduce import prices for the UK and help liberalize trading arrangements. This, in effect, could make the UK appear as an attractive trading partner. However, a promise of reducing tariffs is an effective negotiating tool. Eliminating tariffs may weaken the government's position when it comes to trade negotiations. While on the surface, unilateralism may seem like an attractive prospect, the government has to lay down some ground rules if it wants to pursue this route.
- Customs
After trade, it is worth exploring the impact of a no-deal on customs. A government White Paper on customs sets out options for a 'no-deal' scenario in more detail. A custom bill will make provisions for the UK to establish a system where it will be able to apply similar duties to countries with which it does not have a special deal. Businesses which currently trade with the EU may be subjected to customs declaration and customs checks for the first time. Furthermore, certain goods may require import/export licences, and trade exporters to the EU may be required to submit an export declaration. This may cause delay and disruption in trade practices. For instance, the UK sources roughly 70% of the food it imports from the EU, leading to concerns that items may be at risk of rotting at the borders if there are hard customs checks.
Without any concrete deal in place, there may be ambiguity surrounding issues such as products which could be legally transported to the EU. Currently, EU food inspectors check hygiene standards in farms, abattoirs, factories for the UK not only in the EU, but around the world. They also ensure that electrical goods meet European safety standards. Without a deal in place, the UK would have to invest in developing technology and training staff in order to carry out the various requirements previously carried out by EU officials. This will no doubt be a costly investment. - No-deal not a nightmare scenario?
Shadow foreign secretary Emily Thornberry has voiced her concerns regarding the UK "heading for no-deal". According to Ms Thornberry, a no-deal "is a serious threat to Britain and it is not in Britain's interests for that to happen." Governor of Bank of England Mark Carney supported Ms Thornberry's views by suggesting that the repercussions of a no Brexit deal "in the short term, without question, if we have materially less access [to the EU's single market] than we have now, this economy is going to need to reorient and during that period of time, it will weigh on growth." Liam Fox on the other hand has stated that a no-deal situation was "not exactly a nightmare scenario". To what extent is Mr Fox's optimism justified? Would inability for the UK and EU to reach a deal be as disastrous as many believe?
Secretary of State for Transport, Chris Grayling, shared Mr Fox's optimism by stating that British farmers would produce more food in the event the UK leaves the EU without an agreed deal in place. Mr Grayling's justification rests on food prices rising sharply if there is no deal, in which case, the UK would respond by "growing more here and buying more from around the world." At the moment, the UK only produces around 60 per cent of its own food. Professor Sue Hartley, Director of the Environmental Sustainability Institute at York University explained that "increasing that figure is a sensible and important policy goal but there is clearly a long way to go". Ms Hartley identified key questions which require answering for Mr Grayling's suggestions to come into fruition, including the question of who will grow the food. She pointed out that farming is an aging profession with growing skill shortages in many sectors, such as dairy, Moreover, as Ms Hartley addresses, many parts of the UK agricultural sector, particularly horticulture, are "heavily reliant on EU workers". Post Brexit, EU nationals may be potentially subjected to domestic immigration rules and in this regard, there may be a decline in the number of EU workers working in the UK. Hence, it is not totally clear at the moment whether Mr Grayling and Mr Fox's optimistic outlook is completely reasonable.
Moreover, there is conflict surrounding the £78bn divorce bill, which the UK is refusing to pay. The EU expects the UK to make a financial settlement on exiting the EU. The full balance in relation to this has yet to be negotiated. The bill will be calculated based on factors such as the ongoing EU budget, which the UK had signed until 2020, and liabilities for loans, through which the UK had backed EU development lending to other member states. If the UK and EU do not reach an agreement, there is no legal obligation for the UK to pay any divorce bill. While this may be positive from an economic viewpoint, it may further sour relationships between the UK and EU and undermine chances of potentially attractive deals.
Conclusion - What does the future hold?
Although Chancellor Philip Hammond insists that the government is "prepared for all outcomes, including a no-deal scenario", he has, as of yet, refused to open up Treasury coffers to prepare in the event of a no-deal. The Chancellor's actions could suggest that despite warnings, the government is still holding on to the hope of striking a deal with the EU. This is hardly surprising. As discussed throughout the article, UK-EU relationship is deeply integrated in many aspects such as trade, customs and citizens' rights, and it is a difficult task to stray away from the bonds which have been in place for nearly 40 years. Many Brexiteers have argued that a no-deal will give the UK more flexibility when it comes to forming new trade relations. While this may be true to a certain extent, it is important to consider that the UK is due to leave the EU by 2019, and thus, the government has to act swiftly if it wishes to strike new deals. Moreover, adhering to existing deals with the EU may ensure continuity and clarity where businesses are concerned. Forging new relationships may show off the UK's new found sovereignty, but it will also mean that the country is plunging into the unknown. While the gamble may pay off, it may also result in short (or long) term economic jeopardy.
Disclaimer
– The views expressed in this article are the personal views of the author and are purely informative in nature.