Preparing for the worst – what would no-deal actually look like?

28.10.2020
Paul Briddon
Brexit

In the fourth of our series of weekly Brexit Blogs, Paul Briddon of Lovewell Blake looks at what awaits if a trade deal with the EU can’t be agreed before the end of the transition period.

After a brief hiatus, trade talks between  the EU and the UK are back on again, but even with a history of last-minute agreements being pulled out of the bag, there is no guarantee that a trade deal will be done before the end of the transition period on 31st December.

If a so-called ‘Canada deal’ is the best case scenario, a no-deal (or what some politicians insist on calling an ‘Australia-style deal’ – even though Australia does not in fact have a free trade deal with the EU) is widely seen by business leaders as the worst-case scenario.  So what would it mean in practice, and how would trading on ‘WTO terms’ affect the UK economy?

The most obvious result would be that under WTO rules, the UK would have to apply tariffs and quotas to goods coming into the country, and the EU would apply its own ‘third-country’ tariffs and quotas to UK imports.

These tariffs can be at punitive levels: 10% on car exports, 11.1% on agricultural goods, 15.7% on animal products, and a whopping 35.4% on dairy products.  Whichever way you cut it, these will make UK exports less competitive than under a free trade deal.  The CBI estimates that 90% of the goods the UK exports to the EU would attract tariffs – against 0% right now.

The government has talked about waiving import tariffs on certain goods so that, for example, trade with Commonwealth countries is protected. But if it offers such exceptions, they have to be to every WTO member, potentially opening the door for the market being flooded with cheap imports.

Much has been said about possible border delays in the event of a no-deal.  The French government has made it clear that it will implement border controls on 1st January if no deal is done, and the UK government itself estimates that between 50% and 85% of lorry drivers will not have the necessary documentation to enter the EU. At least in the short-term no-deal would result in significant border delays, jeopardising ‘Just-In-Time’ type operations throughout the UK.

Your view on the effect of no-deal on the UK economy will depend on your position on Brexit, but even the WTO director-general Roberto Azevedo is quoted as saying that WTO terms ‘will impose a number of adjustments and those can be painful’.

No-deal will certainly impact the UK’s important service sector, which makes up nearly 80% of the economy and 45% of UK exports.  The removal of things like equivalence of qualifications and passporting from the City of London could severely hamper economic prospects.

No-deal would mean losing all the benefits of the EU’s trade deals with 72 non-EU countries.  Some of these may be replaced in time (and some already have been, such as Japan), but by no means will all proposed new deals be in place by 1st January.

It is likely that some sort of deal will be agreed at the last minute, but no-deal is not just a concept.  It could yet happen – and business needs to be ready in case it does.

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