Negotiations between the UK Government and the EU continue with rumours of progress often being countered hours later by suggestions of new setbacks. The same sticking points which have presented a barrier to agreement during the talks for the last 11 months continue to hold up the negotiations. The political interventions of Prime Minister Boris Johnson and Commission President Ursula von der Leyen have ensured the negotiations continue to work towards finding an agreement.
However, as the clock ticks down (there are just nine days until the end of the transition period), whilst a deal is still possible, all eyes are now on preparing for a no-deal outcome when the transition period ends at 11pm on 31 December 2020.
It would mean a no deal on trade, no agreement on aviation or other transport links, no agreement on fishing nor on security and judicial cooperation. It might also mean that the UK is not given the go-ahead on data adequacy or on equivalence for financial services – both decisions that are down to the EU to make alone, and that it has linked to the overall negotiations over the future relationship.
A no-deal outcome would have many consequences from a change in the trading relationship to the future security relationship and of course the UK and EU fisheries relationship. Over the next two days, SPICe will publish four blogs examining some of the impacts of a no-deal Brexit. This first blog examines what no-deal would mean from a trade perspective.
What does no-deal mean?
The Prime Minister described leaving the transition period without finalising a future relationship as being a solution that’s much more like an Australian relationship with the EU. The nature of Australia’s relationship with the EU was discussed in this recent UK in a Changing Europe explainer. In essence whilst Australia does have some limited agreement with the EU on trade, it doesn’t have an overarching free trade agreement and much of the trade between the two is done under World Trade Organisation (WTO) rules.
So, unless a deal can be agreed and crucially ratified in the next nine days, the UK will begin trading with the EU under WTO rules. This is a far cry from membership of the Single Market and Customs Union which the UK participated in as an EU member state and during the transition period.
What does trade under WTO rules look like?
Perhaps the most identifiable descriptions of trading under WTO rules would be the imposition of tariffs (customs duties) on goods imported from the EU and on goods exported from the UK to the EU. In addition to tariffs, for some goods there may be quota restrictions limiting the volume of a product which can be exported or imported, along with customs checks. As the UK in a Changing Europe have explained, the new rules which will apply to the UK in its trade with the EU, will be the rules that the EU currently applies to other countries it doesn’t have an overarching trade deal with, such as the United States of America.:
“Under WTO rules, each member must grant the same ‘most favoured nation’ (MFN) market access, to all other WTO members. This means that exports to the EU would be subject to the same customs checks, tariffs and regulatory barriers that the UK and EU currently charge on trade with countries such as the US. The UK’s exports to the EU and other WTO members would also be subject to the importing countries’ most favoured nation tariffs.”
Tariffs and higher costs for consumers
A no-deal outcome and WTO rules for trade would mean the end (perhaps only for a short time) of free trade between the UK and the EU. The UK Government has announced a new global tariff that would apply to all countries it does not have a trade agreement with. This would include the EU in a no-deal outcome. The global tariff eliminates a number of low tariffs but leaves others in place, including on many agricultural goods. Some examples of tariffs that would apply to imports from the EU in a no-deal scenario include motor vehicles at 10% and haddock and cod at 6%.
The imposition of tariffs on goods coming into the UK from the EU would need to be paid by the business or person importing the goods. It is probable that businesses will then pass the increased costs on to consumers.
However, it is also possible that some UK businesses might seek to source their products, or similar products, from UK manufacturers so avoiding the tariffs and the need to pass on higher costs to consumers. In addition, customers might seek to buy British made goods instead of goods from overseas, particularly if there was a significant price differential. Both these scenarios were suggested by Tesco last week.
Border checks – bureaucracy and procedures for UK exporters
Alongside tariffs, trading under WTO rules without any sort of trade agreement in place will leave UK exporters to the EU facing new Non-Tariff Barriers. This is a result of the UK’s departure from the EU’s regulatory framework and no agreement on mutual recognition of standards. This change in regulatory environment means UK exports to the EU will also be subject to regulatory and other checks at the EU border, to ensure they continue to comply with EU rules. As the UK in a Changing Europe outlines:
“Non-tariff barriers (NTBs) can also make trading difficult. For example, countries want to be confident that imported food is safe, that animals and plants are free from disease or pests, and that other goods meet safety or labelling requirements. Exporters must produce goods that satisfy the requirements of importing countries and provide paperwork to show that those requirements are met. Even after Brexit, UK manufacturers wanting to sell into the EU market will have to produce their goods in accordance with EU standards.”
Whilst WTO rules do provide basic provisions in relation to Non-Tariff Barriers, the most effective way to overcome these obstacles is through an agreement to align standards or accept each other’s standards. This has obviously been a key sticking point in the future relationship negotiations. Another option would be to agree a mutual recognition agreement which would provide equivalent health and safety protection or recognise laboratory inspections and certificates issued in the exporting country. Without any of these arrangements, in a no-deal scenario, UK exporters to the EU will face new Non-Tariff Barriers from 1 January 2021.
Access to market
For Scotland’s exporters, a key challenge presented by a no-deal outcome (and to a large extent a deal outcome) will be getting goods to the EU market. This situation will be particularly exacerbated for producers of perishable goods for example fisheries and food.
Food and Drink is Scotland’s largest export sector, and nearly 40% of Scottish food and drink exports are traded with the EU. This is particularly important in certain sectors: 87.7% of UK beef exports went to EU countries in 2018; likewise 95.1% of UK sheep meat exports went to EU countries in 2018, with France being the largest importer.
The Food and Drink Federation, which represents food and drink manufacturers across the UK, highlighted to the House of Lords EU Committee inquiry on Brexit and agriculture that over 70 percent of food and drink exports go to EU countries, and that 94 percent of the UK’s imports and 97 percent of the UK’s exports are traded with countries that have a free trade agreement with the EU, from which the UK currently benefits.
In addition, in the absence of a free trade agreement, Scottish goods may be subject to EU tariffs which would make them more expensive on the EU market than they currently are.
A further consideration for exporters to the EU is that goods must comply with EU standards to be placed on the market. This means that whether the UK chooses to continue to align standards with the EU or not (or even go beyond them), UK producers will need to demonstrate that their goods meet EU standards.
In the Single Market, providers and consumers are free to travel and establish their business abroad: the freedom to provide and consume services and the freedom of movement of EU citizens and firms support each other. This will be lost to UK service providers at the end of the transition period.
Whilst free trade agreements generally provide less advantages for the trade in services, a no-deal outcome would be particularly difficult for the UK’s services industry and in particular financial services which could in effect loss access to the EU market if no agreement on equivalence is reached.
Is business ready for no-deal?
In October 2020, the Institute of Directors published details of a survey of its members on Brexit preparedness. The survey indicated that just over a fifth of company directors said their organisation was fully prepared for the end of the transition period, with almost a quarter not expecting to be ready by the end of the year. In addition, most respondents said that COVID-19 would exacerbate the impact of a no deal outcome.
Throughout its inquiry on the future relationship negotiations, the Parliament’s Culture, Tourism, Europe and External Affairs Committee heard evidence to suggest that the uncertainty about the nature of the future UK-EU relationship, alongside the impact of COVID-19, has left businesses unable to prepare.
In the Committee’s final report, it concluded that:
“The Committee notes that with less than a month until the end of the transition period, the business community still does not know what trading environment or trading relationship with the EU it will be transitioning to. As a consequence, the necessary systems and processes to deal with customs requirements are not in place. Even when that position becomes clearer, the impact of the pandemic has significantly eroded the capacity of business to respond and adapt to the UK’s post-transition trading environment.”
The Committee also noted evidence suggesting that the impact of no-deal could be particularly challenging for Scotland’s small and medium sized enterprises who may struggle to adapt, especially in the short term.
The House of Commons Committee on the Future Relationship with the European Union cited the UK Government’s own Reasonable Worst Case Scenario for borders at the end of transition published in September 2020 which suggested that:
“40–70 percent of trucks travelling to the EU would not be ready for new border controls, including 30–50 percent of trucks crossings via Dover or the Eurotunnel. This could reduce flow rate to 60–80 percent of normal levels and lead to “queues of ~7,000 port bound trucks in Kent and associated maximum delays of up to two days”
Recognising that UK business may not be prepared for the end of transition, the UK Government has highlighted that checks on goods will be introduced in stages from January 2021 to July 2021. However, this related to goods imported from the EU and does not help UK exporters to the EU where full checks are expected to take place from when the transition period ends.
The Committee of the Future Relationship with the European Union concluded that in terms of business preparedness:
“While we welcome the Government’s attempts to communicate to businesses the changes that will take place on 1 January, results appear patchy at best. Little time now remains and, in making their preparations, businesses continue to be held back by restrictions imposed to control the spread of Covid-19, a lack of detailed guidance and continued uncertainty over the final terms of the UK-EU future relationship.”
Many of the impacts of no-deal will also be felt in the event of a deal, particularly at this late stage in the transition period. For example, it is likely that regulatory checks and access to market obstacles including non-tariff barriers will be present irrespective of whether there is a deal or no-deal outcome to the UK-EU negotiations.
However, with little time to prepare for either outcome, UK business will face a challenging January adapting to the new environment, particularly if it is a no-deal outcome.
Iain McIver, SPICe Research