Factsheet: No deal – a ‘chaotic’ Brexit

Background

Prior to the general election, the prime minister asserted on several occasions that ‘no deal’ would be better than a ‘bad deal’ in the forthcoming Brexit negotiations. The phrase even found its way into the Conservative Party manifesto before the June 2017 general election. By no deal, we understand a situation in which the United Kingdom secures neither an Article 50 (or ‘divorce’) agreement, nor a deal to regulate future relations with the EU.

What is the current situation?

The UK government is currently negotiating the Article 50 (‘divorce’) deal with the EU (see factsheet on the Article 50 process). Assuming the EU feels ‘sufficient progress’ has been made in these talks, it will open talks on a deal regulating relations with the EU after Brexit. There is no guarantee that either set of talks will be successful, or that either deal will be ratified. With regard to the latter, the UK Parliament, the European Council (by qualified majority) and the European Parliament (by simply majority) must approve the Article 50 deal.

What has the British government indicated it wants?

Since the general election, the government has not used the rhetoric about no deal being better than a bad deal. There has also been a growing recognition that the 2 year Article 50 deadline might imply the need for a transitional period, to allow time to negotiate a trade deal. This being said, some figures in government still seem unwilling to see the UK accede to the EU’s terms on the Article 50 deal; the foreign secretary has said that the EU can ‘go whistle’ if it wants the UK to pay any kind of ‘Brexit bill’.

What are the possible outcomes?

As things stand, all outcomes are still technically possible. It is conceivable that the government may fail to negotiate an Article 50 deal with the EU, in which case there will be no trade deal. All three issues under discussion in the Article 50 talks – the Irish border, the rights of UK citizens in the EU and EU citizens in the UK, and the ‘Brexit bill’ – are contentious, and solving each of them will require a willingness to compromise and row back on earlier hardline rhetoric. Should no deal, which we have termed a ‘chaotic Brexit’ occur, it could do so in one of two ways. A ‘premature Brexit’ would see talks break down acrimoniously and the UK decide unilaterally to stop paying its EU contribution; ending the supremacy of EU law in the UK with immediate effect. While unlikely, it is possible to see political dynamics conspiring to bring about this kind of outcome. The alternative would be a ‘timed out Brexit’, where the talks don’t completely break down, but no agreement is reached within the two year period, and there is no extension.

What are the potential consequences of these outcomes?

The implications of ‘no deal’ would be far reaching and would impact on political, legal, and economic relations between the UK and the EU. Politically, it seems likely that a chaotic Brexit would provoke much ill will and mutual recriminations between the two sides, as each sought to blame the other for the outcome. This would impact on cooperation across a range of issues, including on security where the UK has worked closely with its partners, and would make future cooperation far more difficult.

Legally, If the UK gets to the end of the two year period with no deal, Article 50 stipulates that the treaties will cease to apply: the UK will no longer be a member state. This scenario will give rise to huge uncertainty, particularly for UK firms exporting to other EU countries or trading elsewhere in the EU. Consider, for example, contracts for the long-term supply of goods between the UK and an EU country. The EU has already made suggestions for transitional rules to govern this situation. But if there is no deal, then these transitional rules will not apply. For example, UK producers exporting into Europe will be subject to whatever tariffs EU law provides. Currently, no duty is paid on those goods crossing an EU border. Following a timed out Brexit, if goods are shipped from Kent to Hamburg in Germany, duty will be payable. The question of who bears the risk of this increase in cost depends on the terms of the contract. The legal enforcement of all forms of contractual and commercial arrangements will also become significantly more complex.

Economically, all sectors of the economy – from agriculture, to airlines, to the pharmaceutical industry – will be affected, albeit in different ways. Imported food will probably cost more in the UK and trade across borders will become more difficult – a particular problem for Northern Ireland and the Republic of Ireland. It may be that, outside the framework of EU rules, airlines are unable to fly immediately after Brexit. In the area of pharmaceuticals, the UK would fall outside the EU systems recognising new drugs. The estimated economic costs of any plausible scenario are large. For example, the Centre for Economic Performance estimates that a move to WTO rules, with the UK applying the same external tariff as the EU, would lead to a large reduction of about 40% in trade with the EU over the next ten years.

Without any agreement, EU citizens in the UK would be in a form of legal and political limbo; not illegal, but with their status at best anomalous. This would particularly be the case for those who have no documentation certifying their permanent residency – the vast majority – and for the very large minority who could not, as of Brexit Day, qualify for permanent residency under the current rules, since they lack five years of residence. The status of UK nationals elsewhere in the EU would be considerably more complex and potentially much more problematic. It is up to individual member states to decide how they are to implement EU legislation in domestic law. There is much variation in how EU27 countries treat UK nationals now, and this divergence would be likely to widen considerably after Brexit.

What is the potential timeline for this?

The talks could break down at any time or over any issue. It seems probable that this is most likely to happen – should it do so – in the autumn, as the EU decides whether ‘sufficient progress’ has been made, and attempts are made to settle some of the outstanding Article 50 issues. Alternatively, breakdown could occur at the end of the negotiations in autumn 2018, when the final details of the deal in all areas will be put in place.

Further reading
• UK in A Changing Europe, ‘Cost of No Deal

To download a PDF of this factsheet click here.

By Director Anand Menon, Professors Catherine Barnard and Jonathan Portes, senior fellows at The UK in a Changing Europe.

Disclaimer:
The views expressed in this explainer are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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