This briefing paper sets out the implications for UK trade with EU and non-EU countries of a no deal Brexit.Jump to full report >>
The Government’s stated position is that it wants a deal with the EU. Nevertheless, it wants to keep a no deal Brexit as an option. This paper examines the effect of no deal on the UK’s trade with both EU and non-EU countries.
Trade with the EU
Leaving the EU with no deal would mean the UK leaving the EU single market and customs union. Trade with the EU would be on World Trade Organization (WTO) rules. No deal would increase barriers to trade between the UK and EU in both goods and services. Trade in goods would be subject to tariffs. Goods and services trade would face more non-tariff barriers. This would have an adverse effect on the UK economy which, at the moment, is highly integrated with the EU through cross-border supply chains. Operation Yellowhammer documents reveal the problems which might arise. A no deal Brexit has been described as a “cliff-edge”.
No transition period
No deal would also mean there would be no transition period. Businesses would therefore have much less time to prepare for Brexit. The UK, the EU and some other EU Member States have announced measures to help businesses prepare for Brexit. There have been concerns about the take-up of some of these schemes in the UK and the preparedness of business for no deal (especially small businesses).
Independent trade policy
A no deal Brexit would allow the UK to take control of its trade policy. Supporters of Brexit view this as one of the main advantages of leaving the EU. UK trade policy can be focussed solely on UK interests and on faster-growing parts of the global economy. The new Government has prioritised a trade agreement with the US. The UK will however lose the “clout” which comes with being part of a major trade bloc. Many doubt whether more trade outside the EU can fully compensate for higher trade barriers with the EU.
No deal tariffs
Leaving the EU means that the UK will have the freedom to set its own tariffs on imports. The UK announced its initial tariffs in March. These will be applied equally to imports from EU and non-EU countries (except where the UK has a free trade agreement). Tariffs are reduced to zero on many products under these proposals. Imports of some agricultural products will still be subject to tariffs. UK tariffs will also remain on certain non-agricultural products, such as cars and some ceramics. While the UK is in the EU, there are no tariffs on imports from other Member States. Under no deal, tariffs would be payable on some imports from the EU. The same set of tariffs would be applied to imports from non-EU countries. More goods imported from non-EU countries would be tariff free: 92% of imports from non-EU countries would be tariff-free (compared with 56% now). The Government has said that the tariffs announced in March are not the final word and any changes are likely to be published before 14 October 2019. The Government implied that large changes were unlikely.
UK tariffs would not apply to goods imported into Northern Ireland from Ireland as part of the Government’s policy of doing all it can to keep the Irish border open. Concerns have been raised about the impact of this on business in Northern Ireland, whether it is compliant with WTO rules and whether it risks encouraging smuggling.
UK exports to the EU would face tariffs. This would make UK products less competitive in the EU compared with imports from other EU Member States (or countries with which the EU has a trade agreement) as these would not face tariffs.
Trade in services
Barriers to trade in services between the UK and the EU would also be raised. The mutual recognition of regulatory regimes between the UK and the EU would come to an end. UK businesses would no longer be treated as if they were local businesses in the Member State where they offer their services but as businesses of any third country. To be compliant they would have to follow the so-called host state rules set by each EU Member State in which they have a branch or sell a service. Trade would be governed by WTO rules and commitments which offer less liberal terms than the EU single market.
In practice it would mean that UK citizens wishing to set up a business in an EU Member State may face additional restrictions, such as limits on foreign ownership of real estate or additional requirements concerning management or directorship of a company.
In the absence of mutual recognition, services sold from the UK and compliant with UK regulations would not be regarded as automatically compliant in the EU. Depending on Member States’ laws, UK firms might need to acquire authorisations, licences or observe certain quotas. In some sectors individuals may have to get their professional qualifications recognised because the existing regime of mutual recognition of professional qualifications between the EU and the UK would end. Changes to the free flow of data which currently supports a large proportion of services could create an additional challenge.
Also, the end of free movement of persons between the UK and the EU could affect UK service providers. On the one hand, their access to qualified professionals from the EU would become less straightforward. On the other hand, EU27 national rules on business travel, residency and work permits would then apply to UK nationals and would affect both UK businesses and self-employed professionals.
Rolling over EU trade agreements
In a no deal Brexit, the UK will no longer be party to the EU’s trade agreements with other countries. The UK has succeeded in rolling over a number of these agreements. But EU agreements with some important trading partners, such as Canada, Japan and Turkey, have not been rolled over. The UK agreements do not fully replicate the EU agreements in all cases.
Future trade deal with the EU
It is unlikely that no deal would mean the end of Brexit. The UK will probably want to reach an agreement with the EU on future trade relations at some point in the future, given the importance of trade with the EU. After a no deal Brexit, this would be on a different legal basis from Article 50. This could well make negotiations more difficult as Member State governments and parliaments would have a greater role.
Commons Briefing papers CBP-8636
Authors: Dominic Webb; Ilze Jozepa; Chris Rhodes
Topic: International trade