The UK has recently indicated that, unless there is a "fundamental change in approach" from the EU, it is prepared to exit the transition period without a trade deal. In this briefing, we highlight the key areas where "no deal" is likely to make a difference.
Brexit: what difference does no deal make?
In broad terms, no deal is likely to have two main impacts as compared with the position if the EU and the UK had managed to agree a free trade deal of the type which has been under discussion:
- Tariffs: no deal is likely to mean that tariffs will be applied to UK-EU goods trade.
- Lack of cooperation/facilitation measures: equally, if not more importantly, no deal may well lead to a lack of cooperation/facilitation measures, exacerbating difficulties in the areas identified in the textbox below.
- Data transfers
- Business travel
- Goods supply chains
More detail on all the issues mentioned above is set out in the remainder of this article.
Could there be mini-deals?
It has been suggested that in a no deal scenario, "mini-deals" could be put in place covering certain areas. In our view, it is more likely that certain easements/facilitations will be made available on a unilateral basis, as both the EU and the UK were proposing to do in 2019 (in case the Article 50 deadline expired without a withdrawal agreement in place). However, these may well be very limited in their scope and businesses should not plan on the basis that they will be available.
Exiting the transition without a trade deal with the EU is sometimes described as an "Australian-style deal". This is meaningful only in so far as Australia has no free trade deal with the EU (although it is at a reasonably advanced stage of negotiating one). However, the characterisation is misleading in the following respects:
- Australia has been able to trade on this basis with the EU for many years because it is thousands of miles away and its trade "profile" is very different from that of the UK, as it is a major global supplier of commodities such as iron ore, coal and gold.
- Historically, trade with the EU has only accounted for 11% of Australian goods trade and 19% of its services trade; the equivalent percentages for UK-EU trade are 52% and 44% respectively. Whilst the UK is effectively downgrading its trading relationship with the EU as regards about half its trade, Australia is looking to upgrade its relationship (despite being far less dependent on that trade).
- Although much of EU-Australia trade is on WTO terms, Australia benefits from a mutual recognition agreement on product conformity (which UK businesses will not have the benefit of in a no deal scenario). There is also a wider framework agreement (from 2008, updated in 2017) providing for cooperation on a wide range of issues of common interest. Such a framework is significant in the sense that it promotes trust and goodwill, which – as noted above - are also important in practice when it comes to the trading relationship.
In a no deal scenario, both exports and imports of goods will be subject to tariffs. For certain categories of goods (such as food or vehicles), the level of tariff will be significant and may undermine the viability some businesses. In other cases, it will merely add to the extra costs that businesses involved in goods trade were already facing because of the additional red tape arising out of the UK's exit from the EU Single Market and Customs Union. Both the UK and the EU have set out the tariffs they expect to apply from the end of the transition period – so you can estimate the level of additional costs that you or your customers would face. We can help you with this analysis.
It is possible that in a no deal scenario, the UK could introduce an interim tariff, as it proposed to do in 2019, in case it was not possible to reach a Withdrawal Agreement with the EU. Had this interim measure come into effect, it would have removed tariffs altogether from 87% of goods by value. Such a move would cushion the impact of a no-deal Brexit on UK businesses which are reliant on imports (including imports from non-EU countries). However, in our view, the EU is unlikely to reciprocate, so it will not help exporters. It remains unclear whether the UK would be prepared to introduce an interim tariff at all – and even if it did, it may not be as generous as its previous proposal. In view of this uncertainty, businesses should plan on the basis of the new global tariff which the UK says it plans to bring into effect from the end of the transition.
Intensified disruption to supply chains
No deal is also likely to exacerbate disruption to supply chains arising out of the introduction of new border processes for goods (because of the UK's exit from the EU Single Market and Customs Union). Although some disruption is expected because of the introduction of new border processes on EU-UK goods trade, much depends on the approach adopted by border officials to enforcement. If they are prepared to tolerate a certain level of non-compliance, this would help to limit the level of disruption. However, in a no deal scenario, officials may feel unable to adopt a such a comparatively relaxed approach; this in turn is likely to lead to more consignments being held up at the border.
What you can do to prepare
Businesses reliant on imports from the EU may wish to consider the following:
Lack of data protection adequacy ruling
In a no deal scenario, it is unlikely that the UK will receive an "adequacy ruling" from the EU in time for 1 January 2021. As a result, EU firms which transfer personal data to businesses in the UK will need to take additional measures in order to continue to comply with the requirements of EU data protection legislation.
The key takeaway point is that UK services businesses should be talking to their EU trading partners now to ensure that, if necessary, those measures can be put in place by 1 January 2021 with a view to ensuring that data flows can continue. For more detail, see: Brexit, your business and data: personal data transfers.
Certain UK businesses which handle personal data from the EEA may also need to take additional steps ahead of the end of the transition (although these steps would probably be necessary even with a deal). See this briefing for more detail: Brexit, your business and data: processing European personal data.
What is the purpose of your visit?
As explained in this briefing, the difference between a deal and no deal when it comes to movement of people is unlikely to be substantial. Either way, there will be additional red tape for business travellers.
However, in practice, much will depend on how restrictions which could be imposed on UK citizens travelling to the EU for work purposes are enforced. In a no deal scenario, UK business travellers could find themselves being challenged more frequently about the purpose of their visit and subjected to a higher level of scrutiny by border officials. For more detail, see this briefing: Should employers be worried about business travel post-Brexit transition?
The difference between a deal and no deal so far as most services are concerned is likely to be relatively narrow. However, as in the case of other areas where businesses will face additional restrictions/red tape, such as goods trade, data transfers and business travel, service providers may find that in a no deal scenario, regulatory authorities in the EU will be less likely to take a relatively relaxed approach to compliance. In practice, this may exacerbate some of the additional barriers that UK service providers could face after 31 December this year.
For more detail and to find out what service providers need to do to prepare, see this briefing: Service providers: getting ready for Brexit.