Over the course of the summer, murmurings about a potential ‘no deal’ outcome to Brexit negotiations have resurfaced, with some saying the probability is akin to the flip of a coin.
With the UK government’s ‘red lines’ confirming its determination to leave the customs union and single market, it will adopt a ‘third country’ status, limiting its access to EU markets. However, it hopes to mitigate any negative impact by signing a trade deal. Without a deal, the UK’s trading relationship with the EU would be based on non-preferential rules established by the World Trade Organisation (WTO), either from the point that the transition period begins (29 March 2019) or when it ends (December 2020).
Roberto Azevedo, the director-general of the WTO, has said that there would be a negative impact from a ‘no deal’ Brexit, including possible trade barriers and tariffs being imposed, but that the implications would not be as severe as some were predicting – a view since echoed by Theresa May.
“Schedules” on tariffs must be agreed and, in the short term, the UK may follow existing EU schedules and accept EU tested and licensed products for convenience.
WTO rules state that each country must grant fellow WTO members “most favoured nation” access to markets. Under this regime, checks, barriers and tariffs on trade between the UK and the EU would match those currently in operation between the UK and other WTO countries.
The imposition of tariffs would result in increased costs for businesses which are likely to be passed on to consumers in the form of prices rises. These costs will vary by sector, depending on the applicable tariff rate for that industry. However, under WTO rules, it is possible for a country to unilaterally decide against imposing tariffs, provide that the action did not discriminate against any specific state or group of states.
Conversely, it would not be legally possible to remove the other checks and barriers that would stem from a ‘no deal’ outcome.
A report by the CBI’s employers’ group has found that a majority of industry sectors surveyed would prefer continued close alignment with EU rules rather than divergence from them. It suggested that only sectors such as agriculture, shipping and tourism would benefit from moving away from EU regulations. Carolyn Fairbairn, director-general of the CBI, has warned that a policy of divergence would make most businesses less competitive in the global market. A major concern is that, in the event of future regulatory divergence, UK businesses would be required to produce two separate product lines – one for the UK and another for the EU – potentially blunting competitiveness in the process.
Heightened speculation about a ‘no deal’ outcome has led to claims that it would result in more red tape entangling businesses. Although the UK government has played down the likelihood of ‘no deal’, it has suggested that British companies should consider hiring customs agents to cover customs declarations, export licences and paperwork related to safety issues, as part of their contingency planning. However, this may be unfeasible for some SMEs.
Leave campaigners in the UK have consistently argued that a significant benefit of Brexit for the UK will be reduced amounts of bureaucracy imposed on businesses. However, as talks on a future trade deal are set to begin, are there signs that the opposite will be true?
To a large extent, the answer to this question could hinge on the terms of any free trade agreement that may transpire.
Article published: 31 August 2018
