By: Mahnoor Awais
What it might mean for Britain
The United Kingdom is scheduled to leave the European Union at 11pm UK time on Friday 29 March 2019. As both parties have, for long, failed to agree on terms of their divorce, concerns have been rising that Britain may crash out of the bloc with a no-deal Brexit. In August, Britain’s Foreign Secretary, Jeremy Hunt, said that the chances of a “no deal” Brexit were “increasing by the day” whereas the governor of the Bank of England, Mark Carney, terms them “uncomfortably high.”
The United Kingdom is due to leave the EU on 29 March next year – with the British government insisting it is still confident of negotiating a deal on the divorce terms. But, with fundamental differences remaining between the two sides as talks enter the crucial phase, recent weeks have seen an increasing focus on the prospect of a “no-deal Brexit”. Since the European Union’s negotiator has already rejected central elements of Prime Minister Theresa May’s proposals for a new trade agreement, the chances of Britain entering a no-deal Brexit are looking increasingly likely. In addition, PM May believes Britain would negotiate a good agreement but that “no deal is better than a bad deal”.
Following are some details on what a no-deal Brexit might mean.
A no-deal Brexit?
A no-deal British departure from the European Union currently can mean a number of things. In the current climate, it would mean that during the negotiations under Article 50 of the Lisbon Treaty, no formal agreement had been reached between the UK and the EU.
The two-year period outlined by Article 50 comes to an end on 29 March 2019 and unless all 28 EU countries agree to extend that period, the withdrawal agreement will have to be done and dusted well before then. And no withdrawal agreement would also mean there would be no transition period. Instead, there would be an abrupt rupture in UK–EU relations. Moreover, failure to reach a deal at talks with the other EU nations could result in the overnight disappearance of rules underpinning Britain’s economic and regulatory structure, without any replacements.
The consequences of ‘no deal’ would affect almost every aspect of life, and it is impossible to say exactly how events would unfold. But here are a few examples:
Money: With no agreement in place, according to a House of Lords report, there would be no legal obligation for the UK to make any payment as part of a financial settlement.
Read More: BREXIT DEAL and European Security
That would leave a huge hole in the EU budget. It would save the UK money in this instance, but it would antagonise the rest of the EU and further sour relations. Legal action, possibly via the International Court of Justice in The Hague, could not be ruled out.
Citizens: Without a deal or other residency rights, the entitlement of EU nationals to reside in the UK, or of UK nationals to reside elsewhere in the EU, could technically disappear overnight.
In theory, they could become third-country nationals, subject to domestic immigration rules. Given the fact that this would affect more than three million EU citizens in the UK, and nearly a million UK citizens in the EU, it could well be that individual EU countries would try to strike deals with the UK to guarantee citizens’ rights. Common sense should prevail, but that cannot be guaranteed.
Trade: With no new trade agreement with the EU, the rules of the World Trade Organisation would apply. Tariffs would be imposed on goods that the UK sends to the EU, and on goods the EU sends to the UK.
It would not be the frictionless trade – certainly to begin with – that the British government hopes to promote. Tariffs on many industrial products would be 2-3%, but on cars they would be 10% and on many agricultural products between 20% and 40%.
The trade in services would also suffer, if nothing is agreed in advance. Under a pure ‘no deal’ scenario, businesses would lose their passporting rights, which allow them to sell their services across the EU without having to obtain licences in each individual country.
The financial services industry would be particularly vulnerable, and it accounts for a significant slice of the UK economy. Again it is worth emphasising that all these restrictions would apply to EU businesses wanting to trade in the UK as well. ‘No deal’ is not a one-way street.
Without any deal, and with no transition period negotiated, the UK would be free to sign trade agreements around the world as soon as it could finalise them. How might it try to go about this? There are a few pointers here.
Customs: A government White Paper on customs sets out options for a ‘no deal’ scenario in more detail.
A customs bill will make provision for the UK to establish a stand-alone customs regime from day one, applying the same duties to every country with which it has no special deal.
Traders would need to present goods to HM Revenue and Customs “inland as much as possible” to avoid congestion at ports, and consignments would need to be pre-notified to customs authorities, to try to ensure that trade continues to flow as seamlessly as possible.
The White Paper promises to minimise disruption for business and travellers – but to give some idea of the scale of the challenge, HMRC estimates that about 130,000 businesses that export to the EU would be dealing with customs for the first time.
‘No deal’ is not the government’s preferred option; and the detail in the customs paper hints at how disruptive it could be. The border between Northern Ireland and the Republic of Ireland would, in particular, be a huge concern, with serious ramifications for the Northern Ireland peace process.
Regulations: With no deal of any kind in place, the UK would suddenly cease to be a member of dozens of regulatory agencies that govern many aspects of daily life.
In time, it would need to replace all of them with agencies of its own. Thousands of new employees would need to be recruited and trained – a process which should have already started if there were to be any chance of it being completed before Brexit.
EU bodies that regulate the aviation industry and the pharmaceutical industry are often cited as prime examples. One of the main concerns associated with a ‘cliff edge’ Brexit is that there would be no time to put new measures in place, even if plenty of contingency planning had been done.
In theory – under a worst case scenario – that could mean that planes would be grounded temporarily, and drugs could not be imported.
But again, the hope would be that common sense would prevail, and that some kind of interim arrangements would be made to keep things moving.
It would be in the interests of neither the UK nor the EU for chaos to ensue.
The ‘no deal’ WTO option
Recent debate about no deal has focused on the fact that the UK would automatically fall back on World Trade Organization (WTO) trade rules. Those rules would apply automatically to UK trade with the EU and other countries with which the EU has free-trade deals.
The WTO is the place where countries negotiate the rules of international trade – 164 countries are members and, if they don’t have free trade agreements with each other, they trade under “WTO rules”, which are:
1. Every WTO member has a list of tariffs (taxes on imports of goods) and quotas (limits on the number of goods) that they apply to other countries. These are known as their WTO schedules.
2. The average EU tariff is pretty low (about 2.6% for non-agricultural products) – but, in some sectors, tariffs can be quite high.
3. Under WTO rules, cars and car parts, for example, would be taxed at 10% every time they crossed the UK-EU border. And, agricultural tariffs are significantly higher, rising to an average of over 35% for dairy products.
4. After Brexit, the UK could choose to lower tariffs or waive them altogether, in an attempt to stimulate free trade. That could mean some cheaper products coming into the country for consumers but it could also risk driving some UK producers out of business.
5. It is important to remember that, under the WTO’s “most favoured nation” rules, the UK couldn’t lower tariffs for the EU, or any specific country, alone. It would have to treat every other WTO member around the world in the same way.
UK economy since the Brexit vote
David Cameron, his Chancellor George Osborne and many other senior figures who wanted to stay in the EU predicted an immediate economic crisis if the UK voted to leave and it is true that the pound slumped the day after the referendum, but it has now regained its losses against the dollar, while remaining 15% down against the euro. Predictions of immediate doom were wrong, with the UK economy estimated to have grown 1.8% in 2016, second only to Germany’s 1.9% among the world’s G7 leading industrialised nations.
The UK economy continued to grow at almost the same rate in 2017 although there was slower growth, of 0.1% in the first three months of 2018. Inflation rose after June 2016 but has since eased to stand at 2.4%. Unemployment has continued to fall, to stand near a 40-year low of 4.2%. Annual house price increases have steadily fallen from 9.4% in June 2016 but were still at an inflation-beating 4.2% in the year to March 2018, according to official ONS figures.
What is Article 50?
Article 50 is a plan for any country that wishes to exit the EU to do so. It was created as part of the Treaty of Lisbon – an agreement signed up to by all EU states – which became law in 2009. Before that treaty, there was no formal mechanism for a country to leave the EU.
It’s pretty short – just five paragraphs – which spell out that any EU member state may decide to quit the EU, that it must notify the European Council and negotiate its withdrawal with the EU, that there are two years to reach an agreement – unless everyone agrees to extend it – and that the exiting state cannot take part in EU internal discussions about its departure.