UK Politics

Brexit: What would 'no deal' look like?

British Prime Minister Theresa May (R) speaks to President of the European Council Donald Tusk (L) during their meeting at 10 Downing Street in London, Britain, 08 September 2016. Image copyright EPA
Image caption EU Council president Donald Tusk and Theresa May both say they are hopeful of reaching a Brexit deal

Negotiations to uncouple Britain from the European Union are about to begin, with Theresa May warning the UK will not accept a "punitive deal".

The prime minister says leaving the 28 nation organisation with no deal whatsoever would be better than signing the UK up to a bad one.

But the government has not done a thorough economic assessment of the "no deal" scenario, Brexit Secretary David Davis has admitted to MPs.

Ministers say this outcome is unlikely, but do we have any idea what it would look like?

The Brexit menu

There are three different kinds of deal being discussed at the moment in Westminster and Brussels.

First, a divorce agreement.

This is the exit agreement mentioned in Article 50 of the Lisbon Treaty, which must be concluded within two years and can be extended only if all member countries agree they want more time.

The talks are expected to cover technical issues like outstanding payments and the relocation of EU agencies based in the UK.

Second, a trade agreement.

It is not yet clear whether trade will feature in the Article 50 talks. The UK government wants this to be the case, but EU representatives have suggested separate talks may be necessary. So there could well be a separate trade agreement.

Third, a transition agreement.

The UK government wants everything to be sorted out by March 2019, when the two-year Article 50 process comes to an end and the UK leaves the EU.

But the government says phasing in new arrangements could take time. "People don't want a cliff-edge," Theresa May has said.

Therefore she has suggested the possibility of "a phased process of implementation".

Such a transition deal could be put into place in addition to, or as part of, any divorce deal and trade deal.

A new dawn?

If the UK walks away from the Article 50 negotiations, both a trade deal and transitional agreement would likely be off the table, at least in the short term.

If that happens, the UK would automatically exit the EU at the end of the two-year negotiating deadline set out in Article 50.

As the sun dawns on Brexit Britain in March 2019, major changes would immediately kick in.

So what would be the main areas affected?

Red tape

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At the moment the UK is part of the EU's single market, meaning goods and services are traded across the Channel without barriers or paperwork.

This arrangement will come to an end in March 2019 when the two year Article 50 window closes.

If the UK doesn't fix a new trade agreement with the EU, trade would fall back on World Trade Organisation (WTO) rules, the government says.

Under WTO rules, which were set up to facilitate global trade, a country must give the same degree of market access to all WTO members as it gives to its "most favoured nation". In other words there can be no special favours in the absence of a proper trade deal.

The UK trades with lots of countries under WTO rules. But the terms are far less favourable than trading within the single market, which is almost frictionless. The sudden imposition of WTO rules is likely to mean tariffs and customs checks, leading to increased financial and bureaucratic costs for British firms buying and selling goods from abroad.

Trucks could line up at the border, with customs agents making sure tariffs are imposed.

The government says trade would not have to fall back onto "pure" WTO rules in a no deal scenario, because other less substantive agreements could help simplify trade.

"There are always relationships between major economies. Even in a non-outcome, I would expect some arrangements to be made," said Brexit Secretary David Davis before a parliamentary committee, although he didn't elaborate on what they could be.

Whichever other arrangements would come into play supplementing WTO rules, some fear trade will take a hit in the immediate aftermath of the Article 50 window closing with no deal in place.

Others argue it will be fine because EU nations would not want to risk a trade war with the UK, which is a big market for their products.

Sorting passporting

Many existing international trade arrangements, including WTO rules, are mainly concerned with the trade in goods.

But services, especially finance, makes up a big chunk of the UK economy.

The City of London is the biggest financial hub in Europe and British companies operate extensively on the continent, thanks in part to the EU single market. A no deal scenario could have a serious impact on financial services.

A crucial issue is 'passporting': membership of the EU's single market allows businesses in one member state to sell their financial services across the single market, instead of having to obtain licences in each individual country.

These rights would cease to exist under a no deal scenario, according to a report by a committee of MPs.

If such an outcome looked likely in the run-up to the Article 50 deadline, financial firms might set up subsidiaries in the EU, getting around the passporting issue in advance.

Another option would be to agree on regulatory "equivalence" between the UK and the EU, but that too would have to be negotiated.

In a pure "no-deal" scenario the flow of trade in financial services seems likely to take a hit, at least in the short term.

Some Brexit supporters have argued that this threat has been overblown and it would not be in the interests of Germany and other financial centres to end arrangements that also work in their favour.

Even if the UK's financial services passport is revoked, they add, external countries with the same financial framework as the EU, which would include the UK, are free to sell services to it.

The Irish border

Image copyright PA
Image caption The only mark of the border between the Republic of Ireland and the UK is the "change in the road signs", Charlie Flanagan said

UK ministers say they want to maintain as "seamless and frictionless a border as possible" with Ireland, a wish shared by their counterparts in Dublin.

The UK and Ireland have a common travel area which pre-dates either country's EU membership.

Brexit Secretary David Davis has described the continuation of this as "non-negotiable".

Many people live in the north and work in the south and vice versa. Goods and services go back and forth with no customs barriers.

"No deal" would mean the UK, including Northern Ireland, leaving the EU's customs union.

There could perhaps be some bilateral agreement between the UK and Ireland but this would be difficult to do independent of the EU.

A pure no deal scenario would mean a border between EU and a non-EU state, and thus the sudden imposition of tariffs and customs checks.

Trade would likely slow down and there would be huge incentives for smuggling, according to a report by the House of Commons Foreign Affairs committee.

It poses a hypothetical example: a Northern Irish farmer who exports meat and dairy to Ireland and other EU countries, tariff and paperwork free.

In the event of an "unplanned Brexit", the farmer "would face tariffs of between 30% and 40% on meat and dairy produce," which would make the farmer's goods uncompetitive.

Checks at the border would be a huge bureaucratic exercise which would involve specialised computer systems and a lot of staff.

Neither the UK, Ireland nor the EU wants hard borders and customs checks between Northern Ireland and the Republic.

But it is difficult to see how this could be avoided if no deal was reached.

Former Prime Minister Sir John Major recently warned that a "special deal" would be needed to avoid jeopardising the peace process in Northern Ireland.

The UK and Irish governments are co-guarantors of the 1998 Good Friday Agreement, which refers to both countries as "partners in the European Union".

"We are not going to do anything which might jeopardise the peace process," said David Davis on Wednesday.

But Brexit, especially with no deal in place, may complicate an already intricate constitutional situation.

Expats and holidaymakers

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What about the fate of EU citizens already living in the UK, and of UK citizens resident in other EU countries?

According to ONS estimates, around 3.2 million EU citizens live in the UK, and about 900,000 Brits live in other EU countries.

Both UK and EU officials have said that their post-Brexit status will be discussed early in the negotiations.

According to the House of Lords EU committee, without a deal or other residency rights, their entitlement to reside as EU nationals would disappear overnight. UK citizens in the EU and EU citizens in the UK could become third-country nationals, subject to domestic immigration rules.

But the Commons committee report suggests in this area at least, the governments of the UK and individual EU countries could decide to guarantee citizens' rights in the absence of a Brexit deal.

Tourists may want to consider the likelihood of a no-deal breakup before booking a European holiday in March 2019.

Although it is unlikely that they would require visas for their trips, "some confusion at borders" could be expected, the Commons report says.

Emergency healthcare insurance for UK tourists in the EU could turn out to be a more tricky issue.

On the day after a no-deal Brexit, UK travellers to the EU would lose emergency health coverage that comes with the European Health Insurance Cards (EHIC).

Asked if British citizens would no longer have access to the EHIC health treatment in a no-deal scenario, Mr Davis said "this is probably right".

The cost of breaking up

Image copyright Reuters

Reports suggest the EU will hand the UK an exit bill of up to €60bn when it leaves.

This is to cover the UK's share of outstanding EU budget commitments. The actual amount of the divorce bill will be subject to negotiations, but it could well be a particularly tricky part of the Brexit talks.

Here, a no-deal Brexit might be good news for the UK government.

Earlier this month, a House of Lords report said that in the absence of an agreement, there would be no legal obligation for the UK to settle the Brexit bill.

Of course the EU could try to take the UK to court.

Exactly which court is unclear as the UK would no longer be under the jurisdiction of the European Court of Justice. A legal battle over tens of billions of euros might sour UK-EU relations even further.

How likely is no deal?

The government has said parliament will get a vote on the Article 50 deal, though opposition MPs did not succeed in enshrining this promise in law.

"The vote will be either to accept the deal, or there will be no deal," said Brexit minister David Jones last month.

This means a no deal scenario could arise in one of two ways: if the government does not negotiate one, or if it does but MPs vote it down.

The government says it wants to negotiate an orderly exit under Article 50 within two years and get a comprehensive trade deal with the EU.

In its Brexit White Paper, the government said it was confident "a positive deal" could be reached.

EU leaders also seem eager to avoid a cliff-edge break up.

European Council President Donald Tusk has said a 'no deal scenario' would be "bad for everyone, but above all for the UK, because it would leave a number of issues unresolved".

He said the EU wanted "a smooth divorce and a good framework for the future".

Business groups have also weighed into the debate - the head of the Confederation of British Industry said leaving the EU without a deal would be "irresponsible".

Ministers say it is unlikely, but Conservative MP Crispin Blunt, chairman of the Foreign Affairs Select committee, thinks there is "a real possibility" negotiations could break down over deeply contentious issues like the size of the divorce bill.

The prime minister and Mr Davis have both insisted it would not be the worst possible outcome.

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