No deal Brexit - an overview
Both businesses and individuals are currently trying to sort through the variety of potential scenarios if the UK leaves the EU without a deal on 29th March 2019.
We have pulled together an overview of the possible impacts and proposed solutions covering import and export of goods should that event occur.
Unless the UK government and the EU reach an agreement to continue trading under special arrangement for a temporary period, then at 11pm on 29th March WTO (World Trade Organisation) rules would govern imports and exports to and from the UK.
WTO rules come into play when member countries do not have a free trade agreement in place. Each member country has their own list of tariffs and quotas that they apply to other countries. Under WTO rules, the WTO schedule set by a member must be the same for all countries it trades with around the world. The UK would not be able to offer a preferential rate to particular countries, such as the EU or the USA.
The UK could choose to lower its tariffs after Brexit in order to stimulate trade, meaning products coming in to the UK are cheaper for people to buy, however this could have a significant and negative impact on producers based in the UK. These tariffs would also then apply (under WTO rules) to every other WTO member country that the UK trades with.
If tariffs are imposed on trade between the UK and the EU, then the cost of goods are expected to increase immediately for importers. The average EU tariff sits at 1.5%, however tariffs on agricultural goods are significantly higher. The UK automotive industry would be hard hit, as although the UK exports most of the cars it produces, a high percentage of parts are imported from the EU and the tariff on these items is currently set at 10% for countries outside of the EU.
The Confederation of British Industry advises that the extra administration and paperwork required under WTO rules could also add the equivalent of an extra tariff of 6.5%.
The IMF (International Monetary Fund) predicts that while industries such as agriculture and mining would benefit from Brexit, the majority would suffer losses of between about 1% and 33% if there is "no-deal".
The Chief Executive of the Food and Drink Federation, Ian Wright, said, "UK food and drink will instantly lose access to more than 70 markets around the world." Many industries are starting to stockpile goods in the event of a no deal. As warehouses start to fill with goods for this eventuality, this is likely to lead to a capacity issue.
The UK government has submitted documents showing that they wish to keep their schedules much as they are now, with a few changes taking into account the UK’s new status once it is outside of the EU. The splitting of quotas of some imported products (primarily agricultural, such as beef and sugar) currently shared with the EU seems more problematic as each country is trying to protect its own interests and this has received negative feedback from the countries that supply these products, such as the USA. This is evidently going to be played out politically with individual countries jockeying for position, but the outcome will impact trade in all countries involved. Under a no deal Brexit, reaching political agreement on these matters will undoubtedly become more difficult, particularly if the UK choose to leave without paying all or part of a “divorce settlement”.
If the UK trades under WTO rules, there are also “non-tariff” considerations, such as safety regulations and product standards. As members of the EU, our standards and safety are recognized and therefore no further checks are needed when the goods cross borders, however under WTO rules, the EU could demand inspection of all relevant goods. In the event of a no deal, this could start from 11pm on 29th March 2019, however an agreement for the mutual recognition of standards between the UK and EU could prevent this. The previously mentioned temporary period of continuing trade by special arrangement would allow time for these issues to be addressed without an abrupt and immediate change. Potentially, UK producers may need to produce one product for the UK and another for the EU if there is no concordance on standards and checks. This would lead to further cost increases and stifle their ability to compete in the market.
Roberto Azevedo, the WTO Director General has said that “Clearly this is not going to be a situation where all trade stops and there is collapse in terms of the economy as a whole”, however he also advises that it is impractical to think that there will be no disruption and that prices will rise to cover the costs involved.
The CEP (Centre for Economic Performance) predicts that if the UK moves on to WTO rules in a no deal Brexit, then UK trade with the EU would reduce by 40% over 10 years. The OBR (Office for Budget Responsibility) predicts a GDP loss of between 2% and 7% due to lower investment and slowed growth. In the event of the UK lowering its tariffs to stimulate trade, the CEP predicts that this will only make up 0.35% of the lost GDP. The UK government predict growth will be up to 10.7% less over 15 years.
The transportation of goods is also an area of great concern for importers and exporters in the event of no deal.
If customs check and other border checks are enforced immediately after Brexit in the event of a no deal, then the Chairman of Maritime UK has predicted waits of up to two days for lorries at ports, placing heavy strain on the manufacturing industry and causing severe problems for hauliers.
The smooth continuation of air traffic is also uncertain. With implications for air traffic and air safety, planes could be grounded in the event of no deal. The government has said that it will pass relevant legislation required to continue using the same rules and standards as the EU air safety legislation, however this will only lead to a frictionless air traffic if the EU reciprocate.
Another option put forward by the BPG (Border Planning Group) is for the UK to “throw open the borders” after Brexit, meaning that the UK government decides not to enforce customs and border checks in the hopes that the EU will do the same in return to maintain trade during for an initial temporary period.
This is how things stand at this point, with a deal on the table but the possibility of a no deal Brexit still looming.
With so many opinions and approaches, we would like to open a discussion on how businesses are looking to mitigate the potential effects of Brexit on their imports and exports, particularly in the event of no deal. We will continue to look at all the updates as they come in, and post updates on our website and on LinkedIn.