What does no-deal Brexit mean?

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Channel fishermen on August 10, 2020 in Hastings, England.
Dan Kitwood | Getty Images News | Getty Images
LONDON – Negotiations between the UK and the EU to try to reach a post-Brexit trade deal are on the razor’s edge, and even officials have admitted talks could go both ways – towards a deal , a free trade agreement between the two parties, or no agreement.
Britain’s post-Brexit transition period ends on December 31, so the race is on to reach an agreement before that date; The EU and UK parliament are set to ratify a deal and there are expectations that this can be done quickly, given the need to mitigate a “cliffside” scenario for businesses on both sides of the Channel on January 1.

There are glimmers of hope that a deal can still be reached. British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen have agreed to continue discussions beyond last Sunday. Then on Monday Von der Leyen noted that there had been some “movement” in the talks and on Wednesday said that while she could not say whether or not there would be an agreement, “there is a path to an agreement now ”.

“I am happy to report that the governance issues have now been largely resolved. The next few days are going to be decisive, ”von der Leyen noted, but, she added, competition rules (to maintain what the EU calls a“ level playing field ”) and fishing rights remain unresolved.

What happens in a no-deal scenario?

If no trade deal is reached in the coming days and there is no extension of the transition period (the EU has not ruled out extending the negotiations beyond December 31, but the UK has repeatedly rejected the notion), then UK and EU will have to trade on World Trade Organization (WTO) terms.

At the basic level, this means that import duties will be applied to each other and trade will become more expensive and complex. The prices of goods to consumers are most likely to increase as a result, and UK supermarkets are already stocking some long-lasting products in the event of shortages or delays in ports.

In 2019, UK exports to the EU were worth £ 294 billion or $ 393.5 billion (43% of all UK exports), while UK imports from the EU were worth £ 374 billion (and accounted for 52% of all UK imports), according to government data. .

Experts note that trade on WTO terms would be more difficult for some sectors than for others.

“Without an agreement on their future trade relations – in particular some sort of free trade agreement – trade between the UK and the EU will be based solely on WTO terms”, Catherine Barnard and Anand Menon , respectively senior fellow and director of ‘The UK in the Changing Europe Think Tank, noted in a detailed report on the matter.

‘This means that import duties and various controls will be imposed on trade between the UK and the EU, with impacts concentrated in agriculture and industries that depend on products that repeatedly cross the UK. United and the rest of the EU, such as components for making cars. or ingredients for food processing. ”

Sheep at Carrick T and Son at High Crossgill Farm in Alston Moor, Cumbria, UK. Agriculture is a sector likely to be affected by a post-Brexit trade deal.

Owen Humphreys – Images PA | Images PA | Getty Images

Services, travel … and fishing

A no-deal scenario would also see other areas of former cooperation collapse overnight. Access to UK waters for EU fishing fleets (and vice versa) could disappear overnight, travel to the EU from the UK may have to stop (at least temporarily due to the coronavirus pandemic) and the service sector could all be severely affected in a non-ideal scenario. All of this remains unknown as negotiations continue.

Trade on WTO terms would mean that the UK’s services sector, a large part of its economy which previously could ‘relatively freely access the entire EU single market, would only be allowed’ much more restricted access to EU and UK WTO commitments. According to the UK in Barnard and Menon in Europe.

The financial services sector remains an area of ​​uncertainty. The EU has yet to decide whether or not to grant market access to UK banks and other financial firms after December 31 and may not take a decision until January. The lack of clarity has already prompted some banks to relocate offices and staff to continental Europe.

Anglers from the Channel in August 2020.

Dan Kitwood | Getty Images News | Getty Images

Fishing has also been a continuing sticking point in negotiations with the EU anxious to maintain access for UK fishing fleets and to greatly reduce fishing rights. A no-deal scenario could see EU access to UK waters abruptly terminated, and vice versa, and the UK has already threatened to deploy gunboats to protect UK waters. There are concerns that some fishing fleets may ignore the restrictions, which could lead to clashes. These are not unknown; there have been physical skirmishes, dubbed the “scallop wars”, between the British and French fishing fleets in recent years amid fishing disputes.

Travel is an area of ​​concern to many in the UK when it comes to dealing or not making a deal; The Covid-19 pandemic has cast more uncertainty on possible travel disruptions after the end of the transition period, with the UK becoming a ‘third country’ and out of the EU, meaning that British travelers might not be allowed into the area given the high infection. rate in the country, except specific exemption.

Planes, trains and automobiles

The EU has already published emergency measures covering the aviation and road transport sector in case there is no deal.

The measures aim to ensure “basic air connectivity … to ensure the provision of certain air services between the UK and the EU for 6 months, provided the UK provides the same”, as well as measures aimed at ensuring that aviation safety is maintained. It also proposes a regulation covering basic connectivity with regard to both road freight and road passenger transport for 6 months, again on condition that the UK reciprocates it.

Freight trucks line up as they wait to enter the port of Dover on England’s south coast on December 10, 2020, before boarding a ferry to Europe.

JUSTIN TALLIS | AFP | Getty Images

Finally, and controversial for the UK, which wants to “regain control” of its territorial waters, the EU has proposed an emergency measure on fishing “for continued reciprocal access for vessels from the EU and the UK. United to each other’s waters after December 31, 2020. In order to ensure the sustainability of fisheries and taking into account the importance of fishing for the economic livelihood of many communities. ”

Impact on the market

Economists, analysts and strategists on both sides of the Channel have spent months, if not the last four years since the Brexit referendum in June 2016 (and most likely, before that) debating the economic impact of Brexit (deal or not). could have on the pound, gross domestic product (GDP), foreign direct investment, real estate prices and the price of goods, among others.

Peter Oppenheimer, Chief Global Equities Strategist at Goldman Sachs, weighed the possible impact of a chord and no-chord in a note this week. He and his team concluded that “if there was no deal in the end, national (UK) companies would be affected in several ways”.

An image of the London skyline, taken during the evening.

Prisma by Dukas | Universal Images Group | Getty Images

These would be: “1) Lower GDP growth because frictions affect production and trade; 2) Higher costs in pounds sterling (sterling) when the pound sterling falls against other currencies, and 3) Lower real incomes for consumers as the basket of goods they buy becomes more expensive in terms sterling. ”

Goldman reiterated its no-deal Brexit target for EUR / GBP at 0.96 (one euro is currently trading at around 90 pence) “but would expect markets to only partially assess this even if negotiations fail over the next few weeks ”.

Would the no-deal be so bad?

British Chief Economist at Capital Economics, Paul Dales, argued in a note this week that a ‘no deal’ scenario would be ‘very different from the’ no deal ‘people have been talking about since the EU referendum in June 2016 ”.

“At this point, ‘no deal’ meant the UK was leaving the EU without any agreement on anything. But now a ‘no deal’ would most likely involve all of these deals in the Withdrawal Agreement (Financial Regulation, Citizens’ Rights, Northern Ireland), the substantial progress made in financial services equivalency and the renewal of most of the trade agreements with third parties with the EU, ”he noted.

“A no deal at this stage would therefore be a“ less disruptive ”cooperative“ no deal ”than a more disruptive non-cooperative“ no deal ”. As a result, the economic consequences would probably be less than what most people fear, ”he said. Although he conceded that “the economy would not come out without a hitch.”

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