No-deal impacts on trade

brexit-fact-base-london — Photo of a Yellowhammer by WildMedia/Shutterstock

Introduction

Many of the no-deal impacts on trade from leaving the EU under ‘no deal’ would have been the same as with an FTA. The big difference is that an FTA removes most tariffs and quotas. However the non-tariff trade barriers under an FTA remain almost the same as under ‘no deal’. For details, see this section’s contents and ‘No deal versus FTA and TCA’.

On tariffs, the UK’s Global Tariff would apply immediately to goods imports from the EU, while the EU’s Common External Tariff would apply to exports from the UK.

Non-tariff barriers (NTBs) would apply to goods and services, raising costs and causing delays. Many of the NTBs that would have applied under ‘no deal’ now apply with the Trade and Cooperation Agreement.

Some argued that leaving with ‘no deal’ should have preceded negotiation of an FTA with the EU. This was nonsense. As Sir Ivan Rogers, the former UK Permanent Representative at the EU, said at UCL on 22 January 2019:

“You obviously gain nothing by tumbling completely out to WTO rules, and then having to try and scramble your way back up the hill to a preferential deal, under huge time pressure.You just hand the perfect negotiating hand to the other side.”

Further, some politicians argued (incorrectly) that, in the event of ‘no deal’, under Article 24 of GATT, UK-EU trade would continue on current terms for up to ten years as an ‘interim agreement’. This was a fallacy as the government itself confirmed.

Instead, Article 24 relates to the phasing in of an agreed trade agreement to reduce trade barriers – the complete opposite of ’no deal’. It also requires a detailed implementation plan, which clearly would not have applied to a no-deal Brexit. Nevertheless, the Article 24 fallacy managed to be part of the ‘Malthouse Compromise’ proposed by Kit Malthouse, Nicky Morgan and others.

Sources:
UK Trade Forum, Why claims about a ‘WTO Article 24’ interim agreement are a red herring, Peter Ungphakorn, January 2019
Sir Ivan Rogers, Where did Brexit come from and where is it going to take the UK?, January 2019
Richard Barfield, ‘No deal’ and WTO rules, February 2019

Tariffs under ‘no deal’

Under ‘no deal’, the UK would have applied the ‘UK Global Tariff’ (UKGT) to EU imports and the EU’s Common External Tariff would apply to UK exports to the EU. Under WTO rules, all imports are subject to identical WTO tariffs unless a preferential trade agreement applies. For more details on the UKGT, please see the Trade section.

While tariffs on UK exports to the EU would on average have been low at around 2%, in some sectors they would have been high enough to inflict serious damage. For example:

exports of finished cars would have 10% tariffs, causing serious harm to the UK industry in a highly competitive international market;
tariffs on exports of agricultural products like lamb and beef would have been about 45% and 50% respectively, making them uncompetitive in the EU;
tariffs would also have applied to those GB goods moving into NI that are considered ‘at risk’ of subsequently moving into the EU.
- The UK Trade Policy Observatory estimated that if there was no deal, up to 75% of Northern Ireland imports from GB could have been subject to tariffs.

There are 15 goods importing sectors where the EU share is over 60%. Despite the UKGT making some components and raw materials tariff-free, sectors at risk would have included:

rubber and plastic products;
printing and reproduction of recorded media;
chemicals;
motor vehicles;
food products.

Sources:
World Bank, Deep integration and UK-EU trade relations, January 2017
Dr Andrew Black for The Federal Trust for Education & Research, Hard Brexit, International Trade and the WTO Scenario, May 2017
Oliver Wyman, The Red Tape Cost of Brexit, March 2018
Centre for European Reform, Brexit and services, How deep can the UK-EU relationship go?, December 2018

Non-tariff barriers under ‘no deal’

Non-tariff trade barriers (NTBs) would have applied instantly on UK exports to the EU and should have applied to imports to the UK, if the UK had been adequately prepared to apply them.

NTBs are generally much more expensive than tariffs, as you can see from Figure 15.3. The average tariff-cost equivalents of NTBs were about 10% for goods and 11% for services compared to average tariffs of around 2% without an FTA.

New customs formalities for British businesses trading with the EU were expected to cost firms £7 billion per year. They also require an estimated 50,000 private sector customs agents and an extra 215 million customs import and export declarations per year.
The Chemical Industries Association said that, unless there was a deal to share data held in the EU’s REACH database, the chemicals industry would face more than £1 billion in costs to duplicate existing EU registrations in a new UK system.

Figure 15.3: UK-EU NTB tariff-cost equivalents and tariff rates

Sources for Figure 14.3:
The chart uses government sources: principally initial estimates by sector from Cross-Whitehall briefing, January 2018.
Those with a * from HMG, EU Exit Long-term economic analysis November 2018.
The ‘all goods’ and ‘all services’ figures are from the House of Commons, Trade in services and Brexit, June 2019.

Some key consequences of no-deal and TCA NTBs for UK-EU trade:

small and medium-sized businesses suffer more than larger companies which are better able to handle extra-EU trade;
finely-tuned, just-in-time modern logistics mean that delays of a few minutes for border checks lead to queues and need for large buffer stocks;
long tail-backs and hold-ups at airports and ports (and reluctance of EU hauliers to come to the UK);
major bottlenecks at Dover and Immingham, the main transfer points for goods in and out of the UK with the EU;
perishable products like fish and fresh vegetables are particularly vulnerable.

Examples of NTBs applying to UK-EU trade under no deal and the TCA

NTBs that affect goods include:

Import licences and quotas
Technical standards and norms
Evidence of meeting environmental standards
New requirements for labelling and packaging
Evidence of compliance with health and safety requirements etc.
- For example, the EU’s Vehicle Certification Agency allows automotive companies to sell their vehicles across the EU. In the event of no deal, simultaneous licensing would have disappeared.
Sanitary and phytosanitary rules for agricultural, livestock, meat and food products
Certificates of origin (mandatory requirement under the TCA to to determine whether tariffs apply)

NTBs that affect services include:

No mutual recognition of certain professional qualifications, making it mored difficult for lawyers, architects, medical staff etc to work across borders. Individual member states would decide their own positions on professional qualifications.
Visa-free travel only for short-term business visits of certain types between the UK and the EU. For longer duration trips and UK business has to navigate the range of visa requirements and associated fees required by each member state. This will affect services such as management consultancy, and project-based industries such as IT and engineering.
UK citizens are only allowed to spend 90 days in any 180-day period within the Schengen area.
It is now more difficult for UK services firms to establish operations in the EU, due to increased regulatory clearances and associated costs.
- Restrictions include regulations on the nationality or residency of directors and/or limits on the amount of equity held in the UK (or another third country).
- Rules vary from country to country, which requires country-specific plans, not a single EU approach.

Two examples of sectors that would be hard hit under ‘no deal’ or the TCA, for example:

For financial services, the loss of passporting rights, means that UK-based businesses can no longer serve customers through EU branches. Instead, new subsidiaries have to be set up in the EU with the costs of additional, capital, liquidity and regulatory compliance.
In aviation services, the UK would be outside of EU agreements which support aviation services between the UK and the EU27, and other countries.

For more details, please see the section that describes expected Brexit impacts on sectors.