What does a no-deal Brexit mean?

The spectre of a no-deal Brexit, which has hung over the UK since the vote to leave the EU four and a half years ago, could become reality within a matter of days.

Unless Boris Johnson can seal a free trade agreement (FTA) with Brussels before the end of 2020, Britain is due to quit the EU’s single market and customs union at 11pm on 31 December with no bilateral arrangements to smooth commerce with its nearest neighbours.

The government’s official forecasters at the Office for Budget Responsibility calculate that a no-deal Brexit would knock around two percentage points off GDP growth in 2021, and the governor of the Bank of England has said that the long-term effect on the UK economy would be worse than the coronavirus pandemic.

The prime minister, of course, has been in denial about the threat of no-deal since the formal date of Brexit on 31 January, constantly referring instead to “Australian-style arrangements” as the alternative to an FTA.

This euphemism is accurate up to a point, as Australia has no trade deal with the EU.

Read more: What are the remaining issues blocking a Brexit deal?

But it overlooks the fact that Canberra regards the arrangement as economically disadvantageous and is actively trying to secure an FTA with Brussels – as well as the fact that it has a number of side-deals covering individual sectors which are not in place for the UK. 

The PM’s close lieutenant Michael Gove had no reply when asked whether the outcome might just as well be described as Mongolian- or Afghan-style.

In reality, no-deal Brexit means switching overnight onto World Trade Organisation terms for the UK’s commercial relationship with its largest and closest trading partner.

And what that means in practical terms is the imposition of tariffs on a whole range of imports and exports, as well as quotas on some products, increasing the cost of doing business and potentially meaning higher prices in the shops.

Under the WTO’s “most favoured nation” rules, countries imposing tariffs on goods – effectively a tax on imports – must apply the same rate to products from anywhere else in the world. A second rule requires that regulations on standards must be the same for domestic and foreign goods.

The only exception is for countries in customs unions or free trade areas, which for many years permitted the UK and EU to maintain a zero-tariff zero-quota regime.

Read more: Would a no-deal Brexit mean food shortages or price rises?

Without an FTA, imports from the EU will be subject to the schedule of tariffs drawn up by the UK government.

Many goods will be zero-rated, but planned tariffs include a 10 per cent charge on imported cars, 12 per cent plus £1.96 a kilo on frozen lamb and as much as £1.85 a kilo for cheese.

The charges are designed to protect home-grown producers from being undercut by cheap competition from abroad, but could add £1,500 to the cost of a typical EU-produced hatchback, like a VW Polo, if passed on to the consumer.

Meanwhile, the EU would impose its own tariffs on UK goods, making British companies less competitive in a market which accounted for 43 per cent of UK exports in 2019.

On top of this would come “non-tariff barriers” to trade, such as product standards rules, safety regulations and sanitary checks on food and animals.

Some of them will apply with or without a deal, but exporters fear that the red tape and delay involved will be worse in a no-deal scenario.

Advocates of no-deal argue that it would allow the UK to adopt its own standards in areas like workplace rights, animal welfare and environmental protection, potentially cutting red tape and giving British companies a competitive edge.

Read more: What Brexit means for your visits to the European Union

But it is likely that many exporting companies would opt to observe EU standards in order to be able to continue selling products into a market of half a billion customers on Britain’s doorstep.

No-deal would also mean an absence of formal ties with the EU in other crucial areas such as judicial and police cooperation, security, mutual recognition of professional qualifications, data exchange and financial market regulation. 

The only bilateral treaty in place would be Mr Johnson’s 2019 withdrawal agreement, which commits the UK to hand over around £30bn to Brussels and guarantee rights to EU-national residents, as well as drawing a customs border down the Irish Sea, but has nothing to say about future trade or security relations.

In general terms, it is feared that a crash-out Brexit would also exact a heavy price in lost goodwill and co-operation, increasing the potential for queues at the borders and disputes over infringements of regulations.

But ironically, one of the first consequences of a no-deal Brexit is likely to be a renewed clamour for a deal, as the financial impact becomes clear and UK businesses demand a better trading environment.

A no-deal Brexit may give Michel Barnier and David Frost a break from negotiations in the early months of 2021. But it would be rash to bet against them – or their successors – getting back around the table before too long for what are likely to be considerably more urgent efforts to find a new framework for the future.