Would a no-deal Brexit scenario be a disaster for Britain?

14 Nov 2017

 

With negotiations between Britain and the EU stalling and any talk of a post-Brexit trade deal fading into the distant future, many politicians have taken the position that a ‘no-deal’ situation would actually be preferable for the UK. Indeed Prime Minister Theresa May even adopted the slogan “no deal is better than a bad deal”. But is this the case? And what would the consequences of a no-deal situation be?

 

The first area to be affected by a ‘no-deal’ would be the rights of UK citizens living in the EU (and vice-versa). This is one of the key topics upon which current Brexit negotiations have stalled, with the EU keen to secure more rights for their citizens living in the UK than currently proposed by our government. As a result, a no-deal scenario would also place the rights of UK citizens living in the EU at risk. Without individual EU countries striking specific deals with the UK, the rights of UK citizens to reside in the EU could completely disappear, meaning they would be subject to the domestic immigration rules of each country. This would affect nearly one million British citizens living in the EU and over three million EU citizens living in the UK. In this respect, a no-deal scenario would be unquestionably harmful to both parties.

 

Perhaps the most obvious factor a no-deal scenario would affect is trade. Britain would be far worse off without access to the single market (the likely result of a no-deal situation), with trade tariffs being immediately imposed upon goods passing between the UK and EU. Tariffs of 3-4% would be imposed on many industrial products, whereas agricultural goods could face charges as high as 20-40%. As well has negatively hitting British exporters, European firms would feel the bite as the UK remains a net importer from the Union.

 

The financial services industry in the UK, which had a trade surplus of £11bn in the third quarter of 2016, would be particularly hard hit. In a no-deal scenario, banks in the UK would lose what are called ‘passporting rights’ to the rest of the EU. This would mean that British banks could not do business in the EU without either setting up a continental subsidiary or fully relocating. This would clearly be harmful to the financial industry in the UK, in which five and a half thousand firms relying upon these rights.

 

On top of this, many banks could relocate to cities such as Paris, Frankfurt or Dublin in order to still do business with hundreds of millions of EU citizens. Existing trade agreements the UK has with other countries as part of the EU will also need to be re-negotiated, something which may prove problematic as the global trend for protectionism grows.

 

When looked at from this perspective, the no-deal scenario seems highly damaging to UK trade. But, of course, there is another side to it.

 

Without a specific trade deal Britain would be forced to trade under World Trade Organisation rules. China and the US already rely on little more than the minimum WTO requirements to trade, so it is certainly not impossible for Britain to thrive without a bespoke trade deal with the EU. In addition, whilst WTO tariffs would be high for food and car exports, most manufactured goods would have a low export duty. Given time, the UK would almost certainly be able to then engineer a personalized deal with the EU. When viewed from this angle, the potential damage to British trade seems slight.

 

It is also important to consider the growing amount of trade that the UK is conducting with countries outside the EU. One standout figure is that, whilst exports to the EU increased by 25.2% between 2005 and 2015, exports to non-EU countries increased by 75.9%. It is clear that the UK has other trading partners to fall back upon should a deal with the EU failed to materialise.

 

So while it is clear that it wouldn't be completely catastrophe for the UK to leave the EU with no trade deal, it would still be far from ideal, with many short-term negative consequences for the economy.

 

Another area at risk of a no deal situation is regulations. By leaving the EU without a deal, the UK would suddenly cease to be a member of many regulatory agencies. New regulations and laws would need to be put in place, which takes a lot of time and resources. New customs arrangements would also be a considerable hassle, inevitably resulting in congestion at ports and borders as one hundred and thirty thousand UK exporting businesses suddenly find themselves face to face with a customs barrier.  

 

Perhaps, however, there is something to be said for leaving the EU without a deal in that it would mean that the UK could avoid paying the settlement bill, which would cost the country several billion pounds. A no deal situation would save the UK from being forced into paying the cost, which has been highly controversial ever since its announcement last year.

 

Overall, it is clear that a no-deal scenario for the UK would be harmful, especially in the short term. Whilst it may not be the complete catastrophe some make it out to be, the negative effect on citizens’ rights, trade, customs arrangements and regulatory issues are highly significant. The UK would certainly be able to improve its position over time, but perhaps not to the point it would be at if it was able to agree to a deal prior to leaving. In any case, while the effects of the no-deal scenario wouldn't be disastrous, a deal with the EU is highly preferable, and the UK should clearly prioritise the negotiation of one before March 2019.

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