Implications for Business and Trade of a No Deal Exit on 29 March 2019

March 6, 2019

The Government’s primary aim is to ensure that the UK leaves the EU on 29 March with a negotiated deal which will honour the result of the referendum. However, as a responsible government, it continues to plan for all eventualities, including one in which the UK leaves the EU without a deal.

Over recent months, the Government has undertaken significant action to prepare for a potential no deal scenario.

This summary explains that leaving the European Union without a deal on 29 March would have a variety of effects on business, trade and the economy.

  • Economic

The UK economy would be 6.3-9% smaller in the long term in a no deal scenario (after around 15 years) than it otherwise would have been when compared with today’s arrangements, assuming no action is taken. There would also be significant variation across the UK (Wales -8.1%, Scotland -8.0%, Northern Ireland -9.1% and the North East of England -10.5%).

  • Border issues

In a no deal scenario, both the UK and EU would need to apply customs and excise rules and VAT to goods moving between the UK and EU, as they are currently applied to goods traded in the rest of the world. Every consignment would require a customs declaration, and so around 240,000 UK businesses that currently only trade with the EU would need to interact with customs processes for the first time, should they continue to trade with the EU. HMRC has estimated that the administrative burden on businesses from customs declarations alone, on current (2016) UK-EU trade in goods could be around £13bn.

  • Tariffs

In a no deal scenario there would be wider macroeconomic effects, in particular an increase to the price of imports. Such factors would include the resurrection of non-tariff barriers with the EU, and countries covered by EU free trade agreements but not yet new UK ones, and any restrictions at the border which could delay imports and exports.

  • Northern Ireland

The impact from a ‘no deal’ scenario is expected to be more severe in Northern Ireland than in Great Britain, and to last for longer, due to their geographical position.

In a no deal scenario there is an expectation of disruption to closely interwoven supply chains and increasing costs that would affect the viability of many businesses across Northern Ireland.

Northern Ireland is particularly vulnerable given its high proportion of, and reliance upon SMEs (75% of all private sector employment) and the number of businesses who trade directly with Ireland (Northern Ireland’s largest international export market). It is particularly vulnerable given its reliance on cross-border supply chains in the production stage and in finished products.

  • Service Sectors

The service sector (which makes up around 80% of UK GDP) is supported by free movement of people. In a no deal scenario, UK businesses would be treated as third-country service providers by the EU. The UK would risk a loss of market access and increase in non-tariff barriers.

The Financial Policy Committee also said in its Financial Stability Report from November 2018 that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly exit.

  • Data flows

Uninterrupted personal data flows are critical for many UK businesses’ processes and all trading activity. The UK would need to seek adequacy decisions from the EU, which the EU has said they will not start until the UK is a third country. Therefore, in the event of a no deal exit, there would be a gap in the lawful free flow of personal data while the assessment takes place. To prepare for a no deal scenario, many UK businesses need to work with their EU partners to secure a legal basis for the continued transfer of personal data from the EEA to the UK.

 

However…

 

Government preparedness activity

In May 2018, the Government agreed to apply a short-term ‘continuity approach’ to no deal plans, meaning that it would take unilateral action to maintain as much continuity as possible in the short term, irrespective of whether the EU reciprocated. For example, EU hauliers would be able to use their licences in the UK to minimise disruption to businesses that rely on these hauliers to transport goods.

The Treasury has made in excess of £4bn available for EU Exit planning since 2016, £2bn of which was allocated in December 2018 to support core EU exit preparations for the 19-20 financial year. This funding will apply regardless of whether a deal is agreed, and is ring-fenced to specifically support EU exit.

The Government has also been working where possible to adopt agreements made between the EU and third countries transitionally, which would otherwise fall away once the UK leaves the EU. A number of the most critical international agreements have been signed and are on track to come into force on exit day.

 

Conclusion

The Government has been accelerating its preparations for a no deal scenario since September, with a particular emphasis since December 2018. However, the short time remaining before 29 March 2019 does not allow Government to unilaterally mitigate the effects of no deal. The lack of preparation by businesses and individuals is likely to add to the disruption experienced in a no deal scenario.

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