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What does a “no deal” Brexit mean?

Introduction

Since the Government agreed its negotiating position in July 2018 on the future relationship with the EU after Brexit (the “Chequers” proposals), there has been much speculation about whether the UK might in fact either deliberately or almost inadvertently leave the EU without an agreement.  The term “no deal Brexit” has been used repeatedly by commentators but without any agreed definition as to what “no deal” is likely to entail in practical terms.

Some Brexit supporters and UKIP advocate leaving without a deal, a position often expressed in the phrase “no deal is better than a bad deal”.  Since the Cabinet’s Chequers agreement on the UK position this approach has gained support.  This paper looks at what a “no deal” Brexit could look like.

There are a number of possible variants of a “no deal” Brexit.  They include the possibility that the UK and the EU would agree on a Withdrawal Treaty but reach no agreement on a future partnership.  This scenario has, however, been repeatedly rejected by the British Government and seems unlikely to be pursued.  This paper therefore focuses on a scenario in which the UK and the EU fail to reach agreement on both a Withdrawal Treaty and the framework for a future partnership.  It takes into account the “no deal” technical notes published by the Government.

 

Leaving the EU: the Treaty provisions

The UK and the EU have been negotiating since June 2017 under Article 50 of the Treaty on European Union, which was triggered by the UK on 29 March 2017.  Article 50 provides for a Member State to notify the European Council that it wishes to leave the EU; it leaves automatically two years after the date of notification, unless the remaining Member States and the withdrawing State agree to extend the time period.

Article 50 states that negotiations will take place for “an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union”.  The negotiations are conducted under another Treaty Article, 218(3), which requires the Council to draw up a negotiating mandate and the Commission to conduct the negotiations.1 Negotiations for the framework for the future partnership are conducted under a separate negotiating mandate from that for the withdrawal negotiations.2

The key points of Article 50 are therefore:

  • Member State can leave the EU;
  • once it has notified its intention to do so, it will leave after two years unless the time period is extended by mutual agreement;
  • there will be negotiations for a withdrawal agreement;
  • these negotiations will take into account “the framework for its future relationship with the Union”.

This means that:

  • two agreements (at least) are needed between the withdrawing State and the EU – one on the withdrawal issues and one or more on the future relationship between the two parties;
  • the Article does not stop a State leaving without reaching agreement, whether on the terms of its withdrawal or on any future relationship;
  • it can be reasonably assumed that a State that failed to agree a withdrawal agreement with the EU would not in the short term be able to negotiate one on a future relationship because the EU would not agree to that while (for example) issues concerning the rights of its citizens or the financial claims on the withdrawing State were unresolved.

The UK-EU negotiations so far

The negotiations have been in three phases.  During the first phase the parties negotiated the terms of a Withdrawal Treaty, the outline of which was agreed between them in December 2017 and published.  It included the principles of a crucially important “backstop agreement” on the Irish border (see below) and an agreement that the UK will pay its outstanding liabilities to the EU after Brexit.

In the second phase, the outline agreed in the first phase was turned into a legal text and the parties agreed that there should be a transitional period between the expected date of the UK leaving the EU on 29 March 2019 and the date on which a new relationship would begin, anticipated as 1 January 2021.  (This transitional phase provides effectively for a standstill, with the UK leaving the EU but still continuing to apply all its treaty obligations.)

The negotiations are now in the third phase, trying to agree the legally binding terms of the Irish backstop and the framework for a future partnership between the UK and the EU (the Government wants the latter to make the Irish backstop unnecessary).  The Government hopes the framework will not only cover trade but also other issues, including security (both internal and international), civil justice, environment, research and innovation and foreign policy.

It is not expected that the parties will reach detailed, legally binding agreements on the future partnership in the third phase before 29 March 2019.  Instead, a jointly agreed political declaration would set out the basis on which negotiations on such a partnership would be conducted after the UK leaves the EU.  But it is vital that they reach agreement on the Irish backstop, as without such agreement the EU has said it cannot agree to a Withdrawal Treaty.

In addition, as is usual in these kind of negotiations, they are being conducted by both sides on the basis that nothing is agreed until everything is agreed.

 

Leaving without a Withdrawal Treaty or a framework for a future partnership

This is the most serious of the scenarios for a “no deal” Brexit postulated by commentators.  It means that the UK would leave the EU on 29 March 2019 without signing a Withdrawal Treaty or an agreement on the framework for a future partnership.

Without a Withdrawal Treaty there would be no transitional phase so the impact of leaving and its consequences would be felt immediately after 29 March 2019.

The reason why leaving the EU without agreement would be so serious is because the UK’s EU membership provides the legal and judicial underpinning for frictionless trade between the UK and other EU Member States, cross-border contracts and provision of services, citizens’ rights, the verification of safety and quality of products and police and judicial co-operation.  A no deal outcome would remove this legal framework.

The main impacts, both short-term and long-term, are set out in more detail below (the particular issues concerning Northern Ireland are dealt with in a separate section later).

Citizens’ rights

Impact on everyone in the UK, including EU citizens, and UK citizens in the EU:

  • All rights that derive from EU Treaties, such as the right to travel, live, work, study or retire in EU countries, would lapse immediately for UK citizens;
  • UK citizens living or travelling in the EU at that moment would lose all their rights under EU law;
  • UK citizens travelling in the Schengen area (all EU Member States except Bulgaria, Croatia, Cyprus, Ireland and Romania) would need to have a passport issued in the last 10 years and have at least six months validity left;3
  • UK citizens travelling in or to the Irish Republic would not be affected as it is part of the British Isles Common Travel Area;
  • The rules for travel to non-Schengen area EU countries would be determined by those countries;
  • EU citizens travelling in the UK after Brexit day would similarly lose their travel rights in the UK unless Parliament legislated to the contrary;
  • UK driving licences, whether for personal or business use, would no longer be recognised in the EU and UK citizens wishing to drive in the EU would need to obtain an International Driving Permit;4
  • The right to equal treatment (in EU law, the principle of non-discrimination) would lapse for UK citizens living in the EU (and vice versa), meaning that they could be discriminated against on grounds of nationality at work, in terms of public services such as health care and in other ways;
  • Workplace rights in the UK derived from EU law would remain protected under the EU (Withdrawal) Act 2018 (unless Parliament decides otherwise).5

General economic impact

The most important and immediate difficulties would be:

  • Difficulties at the ports could mean restrictions in the supply of some goods, particularly fresh food and medicines; 600 lorries a day come friction-free through the Port of Dover carrying fresh produce (see goods trade below);
  • The likely impact on consumer prices and inflation resulting from the need under WTO rules to impose duties on imports from the EU, and the likely further fall in the value of sterling, which would also increase interest rates;
  • The bureaucratic burden on goods exports to the EU, which would be subject to customs, product safety and other procedures; for the 145,000 UK businesses that export only to the EU, this will be a particularly large change from the current position but all businesses exporting to the EU would face additional costs;6
  • Contracts between UK and EU citizens and between UK companies and organisations and similar entities within the EU would be of uncertain status and litigation would be likely as companies on either side of the Channel sought to resolve the confusion;
  • The right of UK businesses to establish themselves in an EU Member State or to offer services anywhere in the EU would lapse immediately creating legal uncertainties about the status of those businesses or their services in the EU;
  • All flights between the UK and EU would be affected and the UK would be outside the European Aviation Safety Agency;7
  • Disruption to supply chains in UK manufacturing caused by delays in imports of components, for example Honda requires 350 truckloads a day of components from the EU to keep its production lines running;8
  • Consumer rights deriving from EU law, for example those covering package holidays and cross-border shopping, would be at risk;
  • Contractual and other operating difficulties could cause some businesses to collapse.

Impact on goods trade

  • Lorries seeking to leave or to enter the UK at the channel ports would have to go through customs and other checks on both sides of the Channel and tariffs would be payable on goods entering the EU and on goods entering the UK from the EU; the Port of Dover has estimated that two minutes’ delay in the processing of lorries leaving the UK would create a 17 mile tailback;9 the same problems could occur the other side of the Channel, meaning delays to imports as well as exports;10
  • Ninety per cent of UK goods exports would face tariffs when entering the EU and, although the average tariff is around four per cent, in some cases it is higher at around 10 per cent in the automotive sector and commonly over 20% in relation to agri-food;11
  • Exporting would be complicated by the fact that the UK would no longer be a participant in the EU’s regulatory agencies that are responsible for certifying products sold in the Single Market; for example, medicines, chemicals, vehicles and aircraft (and their component parts) must be certified before they can be used or sold;12
  • The UK would lose its privileged trading relationships with over 60 countries with which the EU has a trade agreement or agreements, so it would not be just the UK’s trade with the EU that would be affected but also that with many other countries including Canada, Japan, South Africa, South Korea, and also that with much of South America, Turkey, most countries in the Balkans and the Middle East;
  • In terms of imports, under WTO rules the UK would be obliged to impose the same duties it charged on imports from all other WTO member countries; it is sometimes suggested that the UK would charge no duties but that is unrealistic;
  • Both the British Retail Consortium and the British Food importers and distributors organisation have warned of significant price increases as a result of the combination of tariffs being levied on EU imports and disruption at the ports;13
  • See the next section for services but note that the line between trade in goods and that in services is increasingly blurred and difficult to determine; a service contract is often embedded in the supply of goods.

Impact on trade in services

  • UK businesses without a subsidiary in the EU would lose the right to offer services in the EU leading to uncertainty as to whether they would be able to continue to operate in the EU and in those countries with which the EU has trading agreements that cover services (e.g. Switzerland);
  • UK-based financial services providers would no longer be able to operate in the EU/EEA unless they have a subsidiary in an EU Member State; the contractual problems mentioned above are especially serious for financial services;14
  • Professional qualifications in many fields, including law, accountancy, medicine, and teaching, would no longer automatically be recognised for UK citizens working in the EU or providing services to customers in the EU;
  • At present a broadcasting licence issued by Ofcom is valid throughout the EU; that would cease to be the case and British broadcasters might need to meet both national and EU legal requirements to continue to operate in EU countries;15
  • The movement of data between the EU and the UK could become unlawful as the European Commission will not decide whether the UK meets EU data protection standards until after Brexit;16
  • The movement of funds between the UK and the EU could be affected, causing potential cash-flow problems for businesses and individuals;
  • Cross-border energy supplies, such as through the electricity interconnectors with EU Member States (France, the Netherlands and Ireland) might be disrupted;
  • UK airlines would have no right to fly to many destinations outside the EU because those rights currently derive from EU agreements with third countries, such as those with the USA and with Canada.

Other impacts on wider society

  • Potential shortages of medicines and other materials needed for NHS treatment, such as radioisotopes, because of delays at the border and/or doubts about regulatory approval following the UK’s departure from the European Medicines Agency and Euratom;17
  • Although NHS managers are taking steps to reassure them, there would be uncertainty for EU citizens working in the health and social care sectors, both about their residency and employment rights in the UK and the validity of their professional qualifications; this might lead those on short term contracts, for example, to choose to return home rather than seek further work in the UK, exacerbating staff shortages in the NHS and social care;18
  • Difficulties for British and Irish citizens needing medical treatment on the island of Ireland (there is regular movement across the border in both directions to seek medical care);
  • Difficulties for UK students at institutions in the EU as to their residency rights and access to education finance in those countries;
  • Civil justice co-operation under the EU treaties would cease, causing difficulties for families as well as companies; alternative arrangements are being made to enable at least some co-operation but they will not be as comprehensive as those under EU law.19

Impact on crime, justice and security

  • The UK would lose use of the European Arrest Warrant to extradite suspects from the EU and to return suspects to another EU country, and would have to rely on the less effective and no longer comprehensive 1957 Council of Europe Convention;
  • It would lose the right to use other key EU crime and justice instruments such as joint investigations and would be excluded from EU co-operation mechanisms such as those working against terrorism;
  • The police and UK Border Force staff would lose access to EU databases, including the Schengen II database which is essential to border control and the criminal records database (ECRIS); and also the Prüm arrangements for DNA records and number plate recognition.

Impact on the Crown Dependencies and the overseas territories

  • The Crown dependencies, that is the Channel Islands and the Isle of Man, and Britain’s Overseas Territories (including Gibraltar, Bermuda and the Falkland Islands) have a special status within the EU which would lapse;
  • This would be particularly serious for Gibraltar because its border with Spain would become an external border of the EU, control over which would be in the hands of Spain; the current border crossing point is extensively used by both Gibraltarians and Spanish people, many of the latter work in the territory but do not live there.

Disputes with the EU

The recent indications by the Government that they would not be bound by the December 2017 agreement with the EU to pay £35-39 billion in the event of no deal and would only pay an unspecified lower amount would be likely to trigger serious legal disputes with the EU.

Longer-term economic consequences

  • The overall economic impact has been estimated as likely to mean an eight per cent reduction in GDP over 15 years;20
  • Tariffs on UK exports to the EU would mean higher prices for EU consumers and this lack of competitivity would be likely to trigger a fall in UK exports to the EU;
  • Higher prices for UK consumers as a result of tariffs having to be collected on imports of key products, such as foodstuffs and vehicles;
  • Loss of access to the EU financial services market, driving up the cost of finance in the UK, and reducing competition in other services;
  • Difficulties in making up for lost trade with the EU leading to a shrinkage in the overall size of the UK economy;
  • A reduction in inward investment from the EU and from third countries who have hitherto regarded the UK as an ideal location for accessing the EU;
  • Higher mortgage rates as a result of the fall in the value of sterling leading to inflation; in a worst-case scenario, the Bank of England has estimated that this could cause a 35 per cent fall in house prices over three years.21

Other longer-term consequences

  • Lower economic growth leading to a reduction in the tax revenue available to finance public services; Whitehall analysis has said this could result in £80 billion a year in higher public borrowing by 2033/34;22
  • Lower economic growth triggering rises in unemployment, and economic disadvantage; studies indicate the North East of England would be worst affected;
  • Political upheaval including the possibility of a new referendum on Scottish independence;
  • Loss of free movement rights leading to higher numbers of retired people staying in the UK rather than retiring abroad;
  • Pensioners who have lost their entitlement to health care in EU countries might start to return, generating additional costs of £500 million annually to the NHS and a requirement for an additional 1,000 beds.23

 

Impact on Northern Ireland

Northern Ireland is in a category of its own because of its land border with Ireland. Not only would the negative impacts set out above apply but, in the absence of any agreement with the EU, Brexit would mean new controls between the two parts of Ireland, in particular for the transit of goods.

The main consequences would be:

  • movement of people – the Common Travel Area, which allows British and Irish citizens to move freely between the two countries without passport checks, would allow free movement of people to continue for those citizens; if others were not checked at the border there would be a potential gap in the Government’s control over immigration;
  • economic – the effects could be significant if customs controls were re-introduced because of the high degree of movement between the two jurisdictions, for example in food processing; the requirement under WTO rules to impose duties on imports from the Republic of Ireland, and the parallel requirement for Ireland to impose duties on imports from the UK, would also have economic consequences;
  • political – the implications of re-imposing borders controls between the two parts of Ireland, which would conflict with the 1998 Good Friday/Belfast Agreement, are likely to be negative and unpredictable.

The agreement reached by the parties in December 2017 made provision for a “back stop” arrangement (as it has since become known) if the two parties were unable to agree other arrangements to ensure the continuance of the Good Friday/Belfast Agreement and to maintain an open border within the island of Ireland.24

The European Commission published in March 2018 a detailed seven page protocol to the draft Withdrawal Treaty, with nine annexes, which proposed arrangements to protect the peace process. These would mean that Northern Ireland would remain in the EU’s customs union and in regulatory alignment with the EU; large parts of the Single Market would in practice continue to operate there. This would have the practical effect of establishing a customs border between Great Britain and Northern Ireland – something the Prime Minister has said would be unacceptable. Leaving without agreement would mean the restoration of border controls under EU rules because the border of Ireland would become the external border of the EU. The UK would need such controls too because of the need to collect import duties referred to above and because crime and smuggling across the border, which is already a significant issue, would be likely to worsen.

 

Conclusion

It is difficult to predict the circumstances in which a no deal Brexit might come about. It is possible that, given the statutory requirement on the Government to report to Parliament by or on 21 January 2019 if they have not reached agreement with the EU, there would be time for some emergency measures to be adopted. These are likely to be focused on seeking to prevent chaos – such as flights being grounded and food and medicine supplies running out – and would not be an adequate substitute either for a Withdrawal Treaty or for a framework on a longer-term partnership between the UK and the EU covering trade and other matters.

No detailed analysis of the consequences of a “no deal” Brexit have been published by the Government or the EU but such information as has appeared (for example in the UK Government’s technical notes and in parliamentary reports) points to very considerable damage on both sides of the Channel, with a major negative impact on the UK (and also on Ireland).

  1. See Consolidated Version of the Treaty on the Functioning of the European Union, 2012 OJ C 326/47, pp. 144-145, art. 218; for the mandate, see European Council, Annex to Council decision (EU, Euratom) 2017/… authorising the opening of negotiations with the United Kingdom of Great Britain and Northern Ireland for an agreement setting out the arrangements for its withdrawal from the European Union – Directives for the negotiation of an agreement with the United Kingdom of Great Britain and Northern Ireland setting out the arrangements for its withdrawal from the European Union, 21009/17 BXT 16 ADD 1, 22 May 2017
  2. See European Council, European Council (Art. 50) (23 March 2018) – Guidelines, XT 20001 2018 INIT, 23 March 2018
  3. See HM Government, ‘Travelling to the EU with a UK passport if there’s no Brexit deal’, 13 September 2018
  4. For further details, see HM Government, ‘Driving in the EU if there’s no Brexit deal’, 13 September 2018
  5. See HM Government, ‘Workplace rights if there’s no Brexit deal’, 23 August 2018
  6. HM Government has a number of technical notices in respect of imports and exports, including ‘Trading with the EU if there’s no Brexit deal’, 23 August 2018
  7. See ‘Brexit: what would ‘no deal’ mean for aviation?’, Chris Morris, BBC News, 31 July 2018
  8. See DHL Resilience360 Special Report, Understanding Post-Brexit scenarios & minimising impact to intracontinental supply chains, 24 July 2018, p. 6
  9. John Foster, Director of Campaigns, CBI, citing statements by the Port of Dover, in evidence to the House of Lords European Union Committee: see 7th Report of Session 2017–19: Brexit: deal or no deal, HL 46, 7 December 2017, pp. 9-10, para. 23
  10. See HM Government, ‘Trading with the EU if there’s no Brexit deal’, 23 August 2018
  11. Ruth Lea and others in evidence to the House of Lords European Union Committee, op cit., p. 9, para. 20
  12. Supra n. 9; see also HM Government, ‘How to prepare if the UK leaves the EU with no deal’, 23 August 2018
  13. House of Lords European Union Committee, 7th Report of Session 2017–19: Brexit: deal or no deal, HL 46, 7 December 2017, p. 12
  14. See the warning by the Bank of England in ‘Brexit: bank contracts worth trillions at risk, says finance watchdog’, Phillip Inman, The Guardian, 27 June 2018
  15. See HM Government, ‘Broadcasting and video on demand if there’s no Brexit deal’, 13 September 2018
  16. See HM Government, ‘Data protection if there’s no Brexit deal’, 13 September 2018
  17. Mark Dayan, How will our future relationship with the EU shape the NHS?, Nuffield Trust, 7 November 2017, p. 6 et seq. and p. 20 et seq.
  18. ‘NHS plan in case of 1 July 2018 a no-deal Brexit, Simon Stevens says’, BBC News, 1 July 2018
  19. See HM Government, ‘Handling civil legal cases that involve EU countries if there’s no Brexit deal’, 13 September 2018
  20. This is a Government forecast but similar to those published by the OECD and others; discussed in UK in a Changing Europe, Cost of No Deal Revisited, 3 September 2018, p. 12
  21. Reported to the Cabinet by the Governor: ‘Brexit: Carney warns no-deal could see house prices plunge’, BBC News, 13 September 2018
  22. Letter from the Chancellor of the Exchequer to the Chair of the Treasury Select Committee, House of Commons, 23 August 2018
  23. Mark Dayan, supra n. 17, p. 24
  24. European Commission, Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, TF50 (2018) 35, 19 March 2018