Potential Consequences of a “No-Deal” Brexit

As negotiators are still running against the clock with the end of the transition period around the corner – and the deadline to reach an agreement coming even faster – now is the time for businesses to accelerate preparations for the future relationship between the UK and the EU, whatever it might look like. The negotiations have not seen much progress, despite recent intensification, and both parties have repeated that they are ready for a “no-deal” scenario. What would be the consequences of a no-deal Brexit? What would happen if no agreement is signed by 31st December 2020?

The United Kingdom officially left the European Union on 1 February 2020 but entered a transition period during which the UK is still part of the Single Market and Customs Union.

In November 2019, the EU and the UK have signed a first Withdrawal Agreement. This agreement settles the UK’s financial obligations (or so-called “divorce bill”), the status of citizens in the UK and the EU and arranges how goods trade between Northern Ireland and the EU would continue after Brexit. This agreement is not a trade deal and has little bearing on what a possible future agreement would look like.

Trade between the EU and the UK is significant, with the EU27 being the UK’s most important trading partner. In 2019, the rest of the EU had exported to the UK £372 billion of goods and services, and the UK had exported goods and services to the EU worth £300 billion.

The consequences of a no-deal Brexit

The UK will, no matter what, leave the Single Market and the Customs Union on 1st January 2021. Without a specific Free Trade Agreement, EU and UK trading relations would fall under “WTO terms”. The World Trade Organisation sets rules on international trade which all members must follow. WTO terms are the basic trading terms that can apply. Without an FTA with the UK, this will lead to the re-establishment of tariffs and non-tariff barriers and, for example, the loss of preferential access to the EU market.

Therefore, if an agreement is not found before the end of the transition period, from 1st January 2021, UK goods and services being imported in the EU would face the Union’s existing external tariffs for “third countries”. Reciprocally, the UK would also have to apply tariffs to EU goods entering the UK. In anticipation, the UK has adopted new “Global Tariffs” which will be imposed from 1st January 2021 to all countries with which it does not have trade deals.

Additionally, quotas restricting the number of goods allowed to be imported and regulatory barriers would also be applied. A whole new set of costly and time-consuming administrative procedures would also need to be complied with.

All these new barriers would have repercussions on the price of UK products sold in the EU, and vice versa. For example, the automobile industry estimates the application of the EU standard 10% tariff on imported vehicles would make UK imported cars about £1,900 more expensive.

One of the consequences of a no-deal Brexit is that the free movement would also come to an end, meaning that customs border checks would be imposed. This would put significant pressure on both British and EU businesses that are currently benefiting from unbarred trade and clear sets of rules. The UK Government is already anticipating significant lines and delays at border-crossing points. Truck drivers looking to cross over to France would also need a whole new set of documents to be allowed entry. This would impact industries relying on expeditive supply chains, such as the automobile or agri-food industries.

These new formalities would increase costs for businesses, which would impact the price of their products, and in turn, their competitiveness. This would be especially true for SMEs, which might not have the cash flow to sustain said costs.

How to mitigate the impact of a no-deal Brexit?

The Commission urges stakeholders to start preparing for the end of the transition period, under any scenario, as, even if a deal was to be found, significant disruption to trade would still appear on 1st of January. Although the consequences of a no-deal Brexit would be more impactful and far-reaching than in case of a deal, preparing for the UK’s exit in general will still help businesses and Member States bear the repercussions that the lack of agreement would have.

The EU Commission recommends companies to talk to their business partners, to contact local authorities and advice centres for further information and to consult EU Commission readiness notices.

First published while the EU and the UK were negotiating the Withdrawal Agreement, the readiness notices have now been updated by the Commission and cover over 100 sectors providing information on measures that should be taken by Member States, business and citizens in order to prepare for the UK’s exit, with or without a deal.

The Commission also prepared a checklist so business can make sure they have taken all the steps necessary to fully prepare.

Businesses that currently import or export goods from or to the UK should make themselves aware of rules applying to trade with third countries and obligations of importers or exporters, especially if they do not have experience trading with third countries.

With regards to customs formalities, checks and controls, the Commission also advises businesses to get acquainted with existing formalities and procedures for doing business with third countries. They should also assess the actions needed to mitigate the impact of increased administrative formalities and procedures, especially on supply chains.