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What is a no-deal Brexit?

The European Union has reportedly warned the UK that it may be in for a lengthy wait before the bloc grants London access to its markets, raising the prospect of a no-deal Brexit and leaving Britains financial sector in a “desperate” situation.

On Monday, Valdis Dombrovskis, an executive vice-president of the European Commission, said Brussels may not be ready to assess whether Britain qualifies for some pan-EU access rights, known as equivalence provisions, until next year, the Financial Times reports.

Dombrovskis claims that any UK-EU Brexit deal will meet a brick wall this year as the EU is currently undergoing significant regulatory changes of its own, the details of which he says are yet to be ironed out.

“In some areas we will not be in a position to adopt equivalence decisions … [because] not all EU parameters are in place in these areas,” Dombrovskis said. “Implementing rules are not yet in place.”

According to Politico, this may be a cynical ploy by the EU to push Britain into panic mode, forcing greater concessions from London as it seeks to agree a post-Brexit trade deal.

“The UK desperately needs this deal,” one EU official closely involved in the talks told the news site. “If the clock is ticking, reality will start to sink in in London. The UK might not always have behaved rationally in its negotiations with Brussels, but surely the pandemic and the lack of trade alternatives must lead to some reason in London.”

Time-pressure aside, the UKs chief negotiator David Frost said in late July that “considerable gaps” remain between Britain and the EUs position, increasing the chances of a no-deal Brexit. His EU counterpart, Michel Barnier, has also said concluding a trade deal by the end of the year appeared “unlikely”.

What has the UK said?

Ministers now believe that Britain and the EU will fail to sign a post-Brexit trade deal, with the governments working assumption that Britain will trade with Europe on World Trade Organisation (WTO) terms when the transition period ends on 31 December, says The Telegraph.

Senior sources have admitted the assumption is now that “there wont be a deal”, even though it is still technically possible to reach a “basic” agreement if the EU backs down in the autumn.

However, last week the Irish Prime Minister Micheal Martin said “Boris Johnson has a genuine desire to agree an EU trade deal to prevent worsening the economic shock of Covid-19”, The Times reports.

The UKs chief negotiator David Frost and his EU counterpart Michel Barnier began the latest round of negotiations in London on Monday, which are set to be wrapped up on Thursday.

Even so, neither side is yet willing to back down on fishing rights, so-called level playing field guarantees, governance of the deal and the role of the European Court of Justice.

And the UK government has previously responded bluntly to calls for a Brexit transition extension: “The transition period ends on 31 December 2020, as enshrined in UK law. The prime minister has made clear he has no intention of changing this. We remain fully committed to negotiations with the EU.”

What does the EU want?

Speaking to the Today programme on BBC Radio 4 earlier this summer, Nathalie Loiseau, the French MEP and former Europe minister to Emmanuel Macron, said that the EU is “ready either for an agreement or for a no-deal”.

She added that the bloc is “getting prepared more actively to a no-deal considering the circumstances”.

The EU wants the UK to agree to follow its rules on fair and open competition so British companies given tariff-free access to the EU market cant undercut their European competition.

It has warned that the UK wont be allowed a “high-quality” market unless it signs up to EU social and environmental standards. The bloc also wants the European Court of Justice to have legal powers to police any free trade agreement reached between the UK and EU.

But Frost criticised the suggestion, saying: “How would you feel if the UK demanded that, to protect ourselves, the EU dynamically harmonise with our national laws set in Westminster and the decisions of our own regulators and courts?

Tariffs and quotas

If a deal cant be agreed with the EU, then the UK will default to WTO terms from 1 January 2021. Every WTO member has a list of tariffs and quotas that they apply to other countries.

The UK would have to apply tariffs and quotas to goods coming into the country from the EU, and the EU would apply its “third-country” tariffs and quotas to the UK.

That means the UK would be hit by big taxes when it tried to sell products to the EU market. The blocs average WTO tariffs are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy.

British car makers would be hit with a 10% tariff on exports to the bloc, which could amount to €5.7bn per year. That would increase the average price of a British car sold in the EU by €3,000.

Currently, trade between the UK and EU is tariff-free. But the Confederation of British Industry (CBI) predicts that no-deal would mean that 90% of the UKs goods exports to the EU would be subjected to tariffs.

WTO “most favoured nation” (MFN) rules mean that the UK couldnt lower its tariffs for any specific country or bloc, such as the EU, without agreeing a trade deal.

Without a deal, it would have to trade with every WTO member in the world on the best terms it offered any member, including the EU.

The Johnson government set out its non-preferential tariff rates and quotas on imports in the event the UK left the EU with no deal at the end of last year. The guidance was officially withdrawn when the UK agreed a transition period with the EU, but it may become relevant again if the UK fails to secure a trade deal with the bloc.

Borders

In the event of no-deal, the EU would begin imposing border checks on UK products from 1 January 2021, even if the UK hadnt changed any of its rules and regulations.

The UK government has admitted it expects massive border queues and persistent delays for six months or longer in the UK if it leaves without securing a deal.

France has said it plans to immediately implement post-Brexit border controls at its ports in the event of no-deal. The UK government has estimated that 50% to 85% of lorry drivers would not have the necessary documentation to enter the EU via France, says The Washington Post.

HMRC has estimated that British businesses would spend £15bn extra a year on paperwork in the event of a “no deal” Brexit, reports the Financial Times.

British and EU companies would face “a significant new and ongoing administrative burden”, warns the government assessment.

Impact on economy

A small number of pro-Brexit economists say that most trade around the world is done on WTO terms, and the UK would still have access to the EU market, says Euro News.

But many other economists and academics say that crashing out and trading on WTO terms would be damaging for the British economy, hitting the service, manufacturing and agriculture industries hard.

The head of the WTO has warned Johnson that standard trade terms “would slow Britains recovery from coronavirus, saying that sticking closer to present arrangements would be better for jobs”, The Times reports.

Roberto Azevedo, director-general of the WTO, said that the car industry and agriculture would be hit hard by a failure to secure a deal as they would be subject to heavy tariffs.

Speaking to the BBCs Andrew Marr Show, Azevedo said that while WTO terms were “not a catastrophe”, they “will impose a number of adjustments and those can be painful, particularly for some sectors”.

The UK exports nearly half (46%) of its goods to the rest of the European Union, making it by far the largest UK export market. And over half (53%) of all UK imports came from the EU in 2018.

No deal would not “be the end of the world in the sense that trade is going to stop and that everything is going to fall down”, said WTOs director general, Roberto Azevedo. “But its not going to be a walk in the park either,” he added.

The UKs economy relies heavily on its service industry, with British service providers making up 79% of the UK economy and accounting for 45% of exports. Londons position as a global financial hub would be threatened.

However, some economists believe that UK negotiators plan to use the economic damage of coronavirus to strengthen its hand, given the City of Londons status as a finance centre.

“The City of London is going to be very important as a way for governments to raise money,” Tony Travers, a professor of politics at the London School of Economics, told The New York Times. “They may think the EU will be more concerned about upsetting things, given the scale of coronavirus, and may give them a better deal.”

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