A no-deal Brexit comes into view again

A NEW round of UK-EU Brexit negotiations begin on Tuesday with talks on a knife edge. While an agreement could be reached this month, or next, no-deal remains a significant possibility as no major progress has yet been made on two key issues: future 'level playing field' rules and fishing rights.

Take the example of future fishing rules. This is not a huge macroeconomic issue for either side, but it is very politically charged across coastal regions of the United Kingdom, plus those in certain key European Union states like France. Getting to a political compromise on this issue is therefore proving very tricky, and it remains plausible that this issue, alone, could sink the trade deal.

UK and EU preparations for no-deal scenarios have, of course, been underway now for several years. In the first instance, in 2018 and 2019, there was concern that the UK could leave the EU without a withdrawal agreement (this withdrawal or divorce settlement is technically separate to the trade agreement now being discussed which would help define the future relationship between the two powers).

The withdrawal deal was finally passed at the eleventh hour, in late 2019, allowing the UK to leave the Brussels-based club 'cleanly' on Jan 31 this year. The withdrawal agreement repealed the UK's 1972 European Communities Act and copied EU law into UK law to ensure continuity after Brexit.

With that political and legal hurdle out of the way, the first no-deal scenario was avoided.

The second scenario, which came into play since February, centres on potential failure to agree a trade deal which would be at the core of the EU-UK future relationship, if this can be brokered.

The EU is, collectively, the UK's biggest trade partner, and a no-deal would therefore be a shock to its polity and economy. In an already febrile political climate, it could upend Westminster politics again, causing headaches for the governing Conservatives given that some of their MPs - including Caroline Noakes, Steve Brine, Greg Clark, and Stephen Hammond - were steadfastly opposed to the UK leaving the EU without a withdrawal deal.

DIFFERENT IMPACT

In part, this is because they know this could tip the economy into recession as it recovers from the Covid-19 crisis. While the impact of no-deal would not be favourable for any part of the UK, it could have significant differential impacts for competing sectors of the economy, and countries. The UK government, for instance, asserts that it is Northern Ireland and the North East of England that could be worst hit, economically, by a no-deal.

As in 2018 and 2019, both the EU and UK are therefore ramping up preparations for this second no-deal scenario from Jan 1. This includes publishing a series of 'technical notices' on how public bodies, businesses and individuals need to prepare.

To be sure, there are some areas of future UK and EU life that do not depend on a trade deal being agreed. Take the example of rights of EU citizens in the UK, and conversely UK citizens in the EU, from 2021.

The withdrawal agreement means these rights of EU citizens in the UK at the time the transition period ends on Dec 31 (and vice versa) are protected under international law. That said, EU citizens arriving in the UK after the Dec 31 deadline will be subject to the UK's immigration rules, and vice versa.

However, in many other key areas, failure to agree to an EU-UK trade agreement would have a major impact. For instance, for UK goods traded with the EU after Dec 31, the impact of no trade deal would be the same as it would have been if no withdrawal agreement had been agreed last year.

That is, the EU would check imports from the UK as it would imports from any other non-member state, putting major burdens on UK businesses with a wide range of new checks, paperwork and tariffs. The one important caveat to this is for the island of Ireland, now covered by the Northern Ireland protocol, where checks would - from Jan 1 - take place not at the border, but in the Irish sea, on goods going from Great Britain (England, Scotland and Wales) to Northern Ireland.

Another example where no trade deal would be key, despite the withdrawal agreement, is transport.

Without an agreement in coming months, there will be increased border checks at EU ports which is likely to cause significant traffic delays in southern England, while UK hauliers and coach companies will no longer be able to serve the EU market.

FLIGHTS TO EUROPE

Flights to Europe, and many other countries outside the continent - including the United States, Canada and Brazil - are also governed by EU agreements and the UK is trying to renegotiate these for its citizens.

Previously, the EU had said that it would unilaterally allow some UK-EU flights to continue for 12 months after a no-deal outcome, subject to the UK reciprocating, but Brussels has not re-confirmed that it is still willing to definitely take that approach.

As the transport example highlights, it is not just UK-EU relations which would be impacted by no-deal. There is a wide swathe of international agreements, from trade to nuclear cooperation, which currently allow for UK access via the EU's agreements with countries around the world.

So the UK government has, for instance, 'rolled over' trade agreements with a number of countries - including Switzerland, Chile and Israel - and nuclear agreements with partners including Australia and Canada.

While the Boris Johnson team wants to continue this 'rollover' beyond Dec 31, it is still unclear in many cases what, if any, concessions it will have to make to these other states to secure such extensions.

Taken together, while much therefore remains uncertain about a 'no trade deal' outcome, the one sure thing is that it would result in a political and economic shock which neither the EU nor UK needs as they recover from the Covid-19 crisis.

Given the massive time and capital put in by London and Brussels into trying to reach a trade agreement, no-deal will generate significant acrimony and lead to a damaging breakdown in trust between the two former partners, intensifying the current global landscape of geopolitical flux.