No-deal Brexit would have a chaotic and severe short-term impact on UK, think tank warns
Failure to reach a deal at talks with the other EU nations could result in the overnight disappearance of rules underpinning Britain’s economic and regulatory structure, without any replacements
The short-term impact of a no-deal Brexit on Britain’s economy would be “chaotic and severe”, jeopardising jobs and disrupting trade links, warn experts from the think tank UK in a Changing Europe.
The Brexit secretary, Dominic Raab, has said he believes 80 per cent of the work on completing an exit deal with the other 27 EU members is already done, as negotiations enter their final phase.
But his cabinet colleague Liam Fox recently suggested a no-deal scenario – which would occur if negotiations broke down, or both sides agreed to disagree – was the most likely outcome.
In a 30-page updated assessment of the impact of no deal, the think tank said on Monday it would mean “the disappearance without replacement of many of the rules underpinning the UK’s economic and regulatory structure”.
Its analysis claimed that in the short term:
Food supplies could be temporarily disrupted – the beef trade could collapse, for example, as Britain is heavily reliant on EU imports, and would be forced to apply tariffs, in accordance with World Trade Organisation (WTO) rules. European health insurance cards, which allow British tourists free health care in the EU, would be invalid from Brexit day. There would almost certainly have to be a “hardening of the border” between Northern Ireland and the Irish Republic, including some “physical manifestation”. The status of legal contracts and commercial arrangements with EU companies would be unclear, as the UK would become a “third country” overnight. Increased and uncertain processing times for goods at the border would be “nearly certain”, risking queues at Dover and forcing firms to rethink their supply chains.
In the longer term, UK in a Changing Europe’s experts say, the UK would have time to normalise its trading status, and agreements could be struck with the EU27 to tackle many other practical challenges.
“It should not be assumed that the damage, while real, will necessarily be long-lasting,” the report says.
The study plays down the risk of a full-blown financial crisis, saying that while sterling would be likely to decline sharply, and the UK could see its credit rating downgraded, recent experience suggests that would not necessarily prevent the government from borrowing cheaply.
But in the short term, and particularly if talks broke down acrimoniously, making it politically difficult to negotiate measures to mitigate the risks, the disruption would be significant.
Brexiters often suggest the UK could quickly revert to trading under WTO rules, but the report says formalising that status would take time, and meanwhile disruption would be significant.
“The focus on the WTO as a backstop for our ultimate trading arrangements tells us little or nothing about the short-term disruption, both economic and social, from a chaotic no deal,” it says.
The authors also dismiss the hope that EU27 countries could be persuaded to keep their own borders free of customs checks – or, as Brexiters sometimes claim, that WTO rules would oblige them to do so.
“The key provisions of the WTO’s trade facilitation agreement are only exhortatory, not legally binding,” they write. “So there would be absolutely no compulsion on the EU to accommodate the UK in this way, and no reason why they would be likely to do so in the context of an acrimonious, chaotic no deal.”
Whitehall departments last month published the first 24 of more than 80 technical notices, aimed at reassuring firms and consumers about the consequences of no deal.
But the report’s authors say the government appears to be putting too much weight on the idea that the EU27 will leave existing arrangements in place for fear of disrupting their own markets.
“The implicit hope on the part of the UK government – much in evidence in the technical notices – that in practice both sides would agree to allow most things to continue much as now is almost certainly too optimistic,” it says.
Facing customs and other border checks would be severely disruptive, the analysis says, particularly for firms whose supply chains operate across the EU.
“Manufacturing, retail and logistic sectors currently operating pan-European ‘just-in-time’ production, operations and logistics systems are most exposed. The most obvious cases here are aerospace firms such as Airbus, major automobile manufacturing firms such as Nissan, Toyota, Jaguar Land Rover, BMW, Ford and Vauxhall, and automotive supply firms such as GKN.”
With the UK currently unable to supply many of the imported components, and stockpiling imported parts too wasteful, the authors argue that in some cases, “relocations could be very swift”, if these intricate arrangements are disrupted – putting thousands of jobs at risk.
“In the automotive industry in particular, there is still plenty of spare capacity available in countries such as Spain, Slovakia, Poland and Romania, and spare capacity in the European aerospace sector also exists in Spain and Germany,” the report adds.
Firms in EU27 countries would also be affected, the authors say – but the impact is likely to be more than four times greater in the UK: “In 19 of the EU countries, the level of trade-related exposure to Brexit is less than 2 per cent of national GDP, and in 12 EU countries it is less than 1 per cent.”
The report acknowledges that neither side is aiming at a no-deal outcome, but adds: “Politics can, as we know, sometimes produce profoundly suboptimal outcomes.”