The UK has finally reached a settlement with the EU regarding Brexit. This provisional deal, allowing both parties to move to the next stage of talks on trade, perhaps the most important issue, enshrined special rights for 4m citizens, and saw Britain paying €40bn to €60bn to the EU, covering the transition period. Now the goal will be for Brussels and London to agree on a deal by next autumn. Brexiteers might not be happy about this but this hard-fought divorce settlement reminds us how important issues at stake here are. The UK still has a long road left to travel, even if the negotiations with the EU are set on to a firmer footing.
It is crucial that Brexit talks lead to an orderly exit of Britain from the EU, otherwise almost all segments of the UK economy will suffer. The House of Lords’ European Union Committee released a report last month entitled “Brexit: deal or no deal”, outlining the deeply damaging potential consequences of a failed deal.
For starters, a likely disruption of trade would significantly impact many industries, for which a halt of tariff-free trade will undeniably hurt profitability (for example automotive and aviation industries, given their complex cross-border supply chains). Indeed, CBI, the UK’s premier business organisation, calculated that no deal would imply an increase in costs for businesses and consumers alike: “The UK would face tariffs on 90% of EU goods exports by value.” It also estimated that trading on WTO most-favoured nation terms would equate to “an average tariff of 4%, which is about £4.5bn to £6bn-worth of increased costs per year on exports”.
With regards to services, one of the best performing sector of the UK, making up more than 80 percent of its economy, there is no WTO fall back. For some of the most successful exporting industries and services such as financial services or professional and legal services, the most pressing problem would be the serious legal implications impacting their ability to conduct business in the event of a no deal scenario. In the financial sector, TheCityUK, an industry advocacy group which promotes the financial and related professional services industry of the UK, warned that 40 to 50% of EU-related financial services activity and up to 31–35,000 jobs in the sector could be at risk, as well as £3–5 billion of tax revenues per year.
Failure to reach a deal would not just be disruptive to the economy, but it would also bring UK-EU cooperation on issues such as counter-terrorism, nuclear safeguards, data exchange and aviation to a sudden stop. It would also require an overhaul of the bureaucracy from contracts to chemicals regulation. As noted by the Lords, “the EU withdrawal Bill seeks to enshrine EU regulations into UK law, but what it does not do is provide for reciprocal recognition”.
Overall, the key factor adding to the risk of ‘no deal’ is time: the clock is ticking. The closer the UK and the EU get to the deadline set out in Article 50, the more damaging a breakdown of negotiations, and a no-deal scenario, would be. What’s more, the internal political dynamics of the UK government remain a big question mark, as there is still no agreement within the cabinet on how the future relationship with the EU should look. A positive development is that the government no longer believes that Britain is evenly matched against the EU, and adjusted its bargaining position accordingly. In the next round of talks, Britain will probably have to choose between a limited trade deal (the “Canadian” option), doing 10% of its trade with the EU or something close to single-market membership, with all the concomitant duties.