Brexit: What happens if UK leaves the EU with no deal?

(Reuters)

Brexit negotiations appear to be in trouble, with seeming deadlock between Britain and the EU on the issues of the Northern Ireland border and the form a potential trade deal might take. With just three months left until the October talks deadline and few routes to a solution, many are predicting a no-deal. But what does no-deal mean in practice?

1. No transition period

   Theresa May has negotiated a transition period with the EU, during which the UK would continue to follow EU rules (without any say in what they are) for just under two years after it leaves the EU in March 2019.

   This “implementation period” is supposed to allow time for new post-Brexit arrangements to be put into place – such as a new trade deal for British goods.

   But this transition period is conditional on a withdrawal agreement being signed. If there is no withdrawal agreement, there is no transition period, and the UK economy faces an abrupt cliff-edge.

2. Trade takes a hit

   Under this cliff-edge, the UK would be forced to trade with the EU under World Trade Organisation (WTO) rules. Currently, goods moving between the EU and UK don’t need to be checked at borders and face no tariffs, and complex supply chains in industries like car-making cross national boundaries.

   But under WTO rules there would be immediate customs and regulatory checks and the UK and EU would have to pay tariffs on each others’ goods.

   This isn’t something the EU can just opt-out of: the WTO effectively requires countries to charge the same tariffs to countries they don’t have a trade deal with, a rule called the “most favoured nation” tariffs. Grant someone a special favour, and you have to do it to all members.

   A parliamentary report into a no-deal concluded that “this would almost certainly involve the immediate imposition of tariffs across a range of sectors”.

   Some tariffs would be more significant than others: the highest would be on British farmers, who would face 30-40 per cent charges for exporting to the EU, effectively making many exports unviable. Lower tariffs would be on things such as automotive parts, where a 5 per cent charge would apply.

   These tariffs are what Britain, currently a member of the EU, charges countries outside the EU, as a member of the trade area. Britain would, now outside the EU and without any special opt-out, be on the other side of the fence.

3. Britain’s wider economy

   We don’t know what precise effect these massive reduction in trade and UK exports would have on the British economy, but it’s fair to say it would not be good. HM Treasury forecast ahead of the referendum, whose most pessimistic scenario was predicated on talks collapsing, suggested that such a Brexit would “push the UK into recession and lead to a sharp rise in unemployment”.

   Under the WTO rules scenario, the Treasury’s modelling expects unemployment to rise by 820,000 in two years, sterling to fall by 15 per cent, and inflation to rise by 2.7 per cent.

4. Disruption at ports and airports

   As well as economic disruption there would almost certainly be significant physical disruption at ports such as Dover because of the need for customs and regulatory checks on goods.

   Even a high-tech system of checking freight lorries requires them to be held for at least five or 10 minutes – longer if something goes wrong, which it sometimes does.

   These thousands of lorries a day have to physically be held somewhere. The Independent reported earlier this year that huge dedicated lorry parks planned for coastal areas in Kent won’t be ready for in time for a no-deal in March, after project planning setbacks meant officials had to start from scratch. Instead, the government is planning to close part of a nearby motorway and use it as a massive lorry park.

   If Britain leaves the single market and customs union the EU says it would have to impose similar border checks anyway, but a transition period would give the UK time to expand its infrastructure to cope.

   There would be disruption abroad too at ports like Rotterdam which process a lot of British goods.

5. Prices in the shops

   The prices of consumer goods would likely increase significantly under a no-deal, particularly for foods like meats and cheese.

   LSE research commissioned by the dairy industry says dairy products would be particularly hit and “see shortages of products and a sharp rise in prices, turning everyday staples like butter, yoghurts, cheese and infant formula, into occasional luxuries”.

   This, the research claims, is because of the dependence on imported products from Europe and the complex supply chains which would be very sensitive to delays.

6. The effect on the EU

   rexit secretary Dominic Raab tried to claim at the weekend that the EU would be worse off than the UK from a no-deal, but officials later admitted that he only had evidence that this might be the case for one economic area – financial derivatives.

   The EU economy would likely be damaged by the collapse of talks, but the effects are difficult to quantify.

   53 per cent of British imports come from the EU, and any disruption in trade would work both ways.

   But the EU27’s economies are about $13.5 trillion compared to the UK’s $2.6 trillion – the two are not equal in size and so the relative importance of the UK’s economy to the EU as a bloc is less than the other way around.

   The effect would likely be uneven – certain sectors and businesses that trade closely with the UK would be hit hardest. Where there are fewer links, the effect would be less.

7. People living abroad

   Under a basic no-deal, EU citizens living in Britain, and British citizens living in the EU, would have no legal status and would technically be illegal aliens in the countries they call home.

   EU officials say they want to make contingency plans to stop this happening, but it is unclear what these will be. Like the transition period, the provisions negotiated in the EU withdrawal agreement to protect EU citizens’ rights do not apply in the event of a no-deal, because the whole deal comes as a package.

   Ministers have previously said they are using EU nationals as a “bargaining chip” in negotiations.

   The3Million, a campaign group that represents EU citizens living in the UK, warns that EU citizens are already living in “a new political landscape and an unprecedented uncertainty as to the nature of their resident status in the UK post Brexit".

8. The politics

   It is questionable whether there would be a majority in parliament to actually allow a no-deal – MPs have defeated the government before to soften Brexit. They could potentially collapse the government over the issue before it happened.

   Theresa May has however repeatedly said that “no deal is better than a bad deal”, so not getting a deal would not necessarily be the end of her.

   While the resulting economic malaise and perception of incompetence would probably seriously damage the government in the eyes of the public, many Tory MPs who favour no-deal would probably be fairly content with the outcome.

   Because it is Tory MPs and party members who choose who the prime minister is, in absence of an election it would be down to them whether the prime minister survived.

   On the other hand, Boris Johnson and anyone else with leadership ambitions currently keeping a low profile might see any political hit for May as their opportunity to strike.

   From the EU’s perspective, the resulting punishment meted out in the UK economy would probably ensure nobody ever tried leaving the EU again for the near future – lest they turn out like Britain.