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EU-UK: What if there really is no deal?

The EU and the UK are negotiating the final details of their future partnership agreement – they are now concretely talking about a compromise over fisheries.

Whereas all deadlines to make the deal match the requirements of UK and especially EU parliamentary scrutiny, it is clear the two sides will try to get to a deal before 31 December, hopefully a few days earlier.

But what if they do fail? Or for a short period of time there is a no-deal situation? A sector-by-sector review of what would happen.

The UK’s trading status

Outside of the EU, and with no trade deal in place, the UK will trade with the EU on terms which will be among the least preferential of any developed country.

The EU currently has preferential trade agreements with around 70 countries – and many other developing countries have reduced- or zero-tariff access to the EU market via the GSP or EBA schemes.

Even countries like the United States, Australia and New Zealand, which currently have no FTA with the EU, are benefiting from side-agreements such as mutual recognition agreements for industrial products, or, in the case of New Zealand, an agreement which substantially reduces veterinary checks on livestock product imports.

Unless side-deals are done very rapidly in these areas, which is unlikely, these facilitations will not be available to the UK.

The UK will however have preferential trade agreements in place with 58 other countries as of 1 January, via rolled-over versions of existing EU trade deals with these countries.

This means that in many cases, British businesses will be able to trade with partners in South Korea or Chile on more preferential terms than with France or Spain.

Trade in goods

The seamless trade with EU member states which UK exporters and importers have enjoyed for many decades is set to end in any case, with or without a deal. This does not apply to Northern Ireland, which will de facto remain within the EU single market.

The UK’s exit from the single market and customs union will impose various kinds of bureaucratic requirements such as customs declarations. In some cases, such as chemicals, there will be a requirement for new authorisation certificates, while UK exporters of livestock products, for example, must pre-notify their consignments and export through designated EU ports of entry.

But no-deal will mean that, in addition, tariffs will be payable, as set out in each side’s WTO schedules.

For imports, these will be set according to the new UK Global Tariff, while exports to the EU will be subject to the EU’s Common External Tariff.  The former, announced in May of this year, is modelled on the latter, with only a few comparatively minor variations.

The average duty across all sectors is 3.2%. Tariffs at this sort of level may not in themselves represent a massive economic barrier – but any kind of new trade barrier is likely to have trade diversionary effects.

UK importers are likely to have to absorb the cost of whatever tariffs are payable, given that EU exporters have 26 other countries to sell to within the single market, and are hence unlikely to be willing to drop their prices for the UK’s benefit.

The problem is more acute in the area of agriculture and food.

About one-tenth of all agri-food goods face tariffs of 25% or more, and these will represent a major barrier to trade. Tariffs of this size will push up prices in the UK for goods which are mostly imported from the EU, such as pigmeat, and creating probable price-depressing surpluses within Britain for export-focused products like lamb and barley.

On cars, the EU tariff is 10%, which would put the UK’s export-driven car manufacturing industry under considerable strain. The Society of Motor Manufacturers and Traders has said that a 10% tariff on exports would virtually wipe out profits, and it has forecast that UK automobile production could fall by 50% in 2021 under a no-deal scenario.

The UK will also impose a 10% tariff on car imports from the EU.

Even if a tariff-free agreement is reached, car manufacturers may not be able to access the preferences on offer if the EU-UK FTA includes strict rules of origin clauses. The EU typically requires about 50% of the value of any car to originate within the FTA partner country – something which the UK, with its long and complex supply chains, may find it hard to comply with.

But in a no-deal scenario, rules of origin will no longer be relevant. All cars, wherever their component parts originated from, would then have to pay the tariff.

Non-tariff barriers to trade

Departure from the EU single market means that, in the vast majority of cases, the UK will also be leaving behind the common regulatory ‘ecosystem’ which permits intra-EU free trade to thrive.

The UK will gain the freedom to set its own rules in areas like product standards, but any UK producer wanting to export to the EU will have to have to comply with EU market requirements, and register as a ‘third country supplier’ to the EU market. This is likely to be the case even if there is a trade deal, unless special facilitations are included within that agreement.

Sanitary and phytosanitary barriers for UK agri-food exports will be significant, and are likely to constitute a major trade disruptor, at least until traders and officials have become accustomed to the processes (and costs) involved.

An agreement by the EU to recognise UK organic food on a provisional basis for the coming year  represents, so far, a rare instance of a bilateral facilitation which will apply even in a no-deal scenario.

Services

Even if the UK succeeds in negotiating a deal on access to EU services markets, it is shaping up to be a rather unambitious one. This is despite the UK’s strengths in this sector – exports of services to the EU were worth £95.2 billion in 2018, up by 17.6% on the previous year.

But in the absence of such an agreement, the UK will be wholly dependent on the market access commitments made by the EU to the WTO’s GATS.

A no-deal outcome would mean that highly-regulated service providers like lawyers and architects may not be able to operate in EU member states without re-training or re-registering first.

The financial services industry is dependent on the EU granting ‘equivalence’ decisions to allow UK businesses to continue operating in the EU next year. So far, only very limited authorisation has been granted, on a temporary six-month basis. The UK, which has a political incentive to minimise Brexit disruption to the extent possible, has granted much more extensive continuity rights to EU financial services providers.

According to the UK Law Society, meanwhile, a no-deal scenario could cost the UK’s legal services sector as much as £3.5 billion a year.

The EU has agreed emergency legislation which will permit essential transport services between the UK and EU to continue. But these agreements are either temporary, such as a six-month extension in the rights of UK hauliers to operate on EU roads, or very limited – for example, UK airlines may fly direct to the EU and back, but may not operate flights within the EU.

A no deal situation will also jeopardise an ongoing process of regulatory review that would lead to the UK’s data protection regime to benefit from an ‘adequacy decision’.

Public procurement

The UK and EU member states are all members of the WTO’s Government Procurement Agreement, so access to each other’s public service contracts will continue – but at slightly less preferential levels.

The main difference would involve the e-communication channels by which public tenders are communicated.

Intellectual property

Existing patents and copyrights are set to be maintained on both the UK and EU side. However, pending applications for protection on either side will have to be registered with the relevant EU or UK authority.

Existing EU geographical indications will be protected within the UK, and vice-versa, under the terms of the already-ratified EU-UK Withdrawal Agreement. New GIs will have to be registered separately  under both the existing GI scheme and the new UK GI scheme.

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