What does a no-deal Brexit mean?

LONDON – Negotiations between the UK and the EU to try to reach a post-Brexit trade deal are on edge and even those in charge have admitted that talks could go either way – towards a deal, a free trade agreement between the two parties, or a no-deal.

The UK post-Brexit transition period ends on December 31, so the race is on to reach an agreement before then; both the EU and UK parliaments should ratify a deal and there are expectations that this could happen soon given the need to mitigate a cliff-edge scenario for businesses on both sides of the English Channel on January 1 .

There is a ray of hope that another deal can be reached. British Prime Minister Boris Johnson and President of the European Commission Ursula von der Leyen agreed to continue the talks after last Sunday. Subsequently, on Monday, von der Leyen noted that there had been some “movement” in the talks and said on Wednesday that while she could not say whether or not there would be a deal, “there is now a road to an agreement.”

“I am pleased to report that the issues related to governance have now largely been resolved. The next few days will be decisive,” Von der Leyen noted, but, she added, the competition rules (to enforce what the EU one “mentions” level playing field “) and fishing rights remain unresolved.

If no trade deal is reached in the coming days and there is no extension of the transition period (the EU has not ruled out extending talks beyond December 31, but the UK has repeatedly rejected the idea), then the UK and the EU will have to trade under World Trade Organization (WTO) terms.

This basically means that import duties are levied on each other’s products and that trade becomes more expensive and more complex. As a result, consumer prices for goods are very likely to rise, and UK supermarkets are already stocking up on some durable goods in the event of shortages or delays in ports.

In 2019, UK exports to the EU were £ 294 billion or $ 393.5 billion (43% of all UK exports), while UK imports from the EU were worth £ 374 billion (accounting for 52% of all UK imports) , according to government data. .

Experts note that trading on WTO terms would be more difficult for some sectors than others.

“Without an agreement on their future trade relations – in particular some sort of free trade agreement – trade between the UK and the EU will be based purely on WTO terms,” ​​Catherine Barnard and Anand Menon, senior fellow and director of ‘The UK in’ respectively. a Changing Europe ‘think tank, noted in a detailed report on the matter.

This means that import duties and various controls will be imposed on trade between the UK and the EU, with effects concentrated in agriculture and industries relying on products repeatedly traversing between the UK and the rest of the EU, such as parts to make cars. or ingredients for food processing. “

In a no-deal scenario, other areas of past collaboration would also collapse overnight. Access to UK waters for EU fishing fleets (and vice versa) could disappear overnight, travel to the EU from the UK may have to be halted (at least temporarily due to the coronavirus pandemic) and the service sector could be in no time all are seriously affected. deal scenario. These are all unknown things as the negotiations continue.

Acting on WTO terms would mean that the UK services sector, a large part of its economy that previously had “ relatively free access to the entire EU internal market, would only get the much more limited access of the EU and UK commitments in the WTO, ”the UK said in Barnard and Menon in Europe.

Financial services are still an area of ​​uncertainty. The EU has not yet decided whether to grant market access to UK banks and other financial firms after December 31, and may not make a decision until January. The lack of clarity has already led some banks to relocate their offices and staff to mainland Europe.

Fisheries has also been a constant bottleneck in negotiations with the EU to maintain access for fishing fleets and the UK to largely restrict fishing rights. In a no-deal scenario, EU access to UK waters could end abruptly, and vice versa, and the UK has already threatened to use gunboats to protect UK waters. There is concern that some fishing fleets could ignore any restrictions, leading to potential collisions. These are not unheard of; there have been physical skirmishes, the so-called “Scallop Wars”, between British and French fishing fleets in recent years in the midst of disputes over fisheries.

Travel is an area that concerns many people in the UK when it comes to deal or no deal; The Covid-19 pandemic has increased uncertainty about possible travel disruptions after the end of the transition period as the UK becomes a “third country” and leaves the EU, meaning British travelers may not be allowed to enter the region given the high level of infection . rate in the country, unless specifically exempted.

The EU has already published emergency measures for aviation and road transport in case of no agreement.

The measures are designed to provide “basic air connectivity … to guarantee the provision of certain air services between the UK and the EU for six months, provided the UK guarantees the same”, as well as measures to ensure aviation safety. It also proposes a regulation on basic connectivity with regard to both road freight and road passenger transport for six months, again subject to a response from the UK

Finally, and controversial for the UK seeking to take back control of its territorial waters, the EU has proposed an emergency fisheries measure ‘for continued reciprocal access of EU and UK vessels to each other’s waters beyond 31 December 2020. fisheries and in light of the importance of fishing to the economic livelihood of many communities. “

Economists, analysts and strategists on both sides of the English Channel have debated the economic impact of Brexit for months, if not the last four years since the Brexit referendum in June 2016 (and most likely before that) (deal or no-deal) could affect the pound, gross domestic product (GDP), foreign direct investment, property prices and the price of goods, among others.

Peter Oppenheimer, Chief Global Equities Strategist at Goldman Sachs, The potential impact of a deal and no deal this week weighed in a note. He and his team concluded that “if a deal doesn’t come in the end, (UK) domestic companies would be affected along several dimensions.”

These would be: “1) Lower GDP growth due to frictions in manufacturing and trade; 2) higher costs in GBP (pound sterling) if pound sterling falls against other currencies, and 3) lower real revenues for consumers as basket of goods they buy will become more expensive in sterling. “

Goldman reiterated its no deal Brexit target for EUR / GBP to 0.96 (one euro is currently trading at around 90p) “but would expect markets to price that only partially, even if talks are unsuccessful in the coming weeks.”

Paul Dales, Capital Economics’ chief UK economist, said in a note this week that a “no deal” scenario would be “very different from the” no deal “people have been talking about since the EU referendum in June 2016.”

At the time, ‘no deal’ meant that the UK left the EU without any agreement on anything. But now a ‘no deal’ would most likely include all those agreements in the Withdrawal Agreement (the financial settlement, civil rights, Northern Ireland) , the substantial progress made on financial services equivalence and the rollover of most of UK trade deals with third parties in the EU, ”he noted.

A no deal at this stage would therefore be a less disruptive ‘cooperative’ no deal than a more disruptive ‘non-cooperative’ no deal. As a result, the economic impact would likely be less than most people fear, ”he said . Although he admitted that “the economy would not come out free”.