No-Deal Brexit

The ex-civil servant responsible for Brexit up until March, Philip Rycroft, came out at the weekend and told us all yet again that a ‘No Deal’ Brexit would be “fraught with risk”. Many commentators, politicians and business leaders have suggested that it is tantamount to a catastrophe that will cost the UK billions and set our economy back twenty years into recession.  Others claim that it is nothing to worry about and the freedom we will receive will liberate our opportunities allowing us to act quickly and decisively to generate new partnerships and more lucrative trade deals.  Yet again the Brexit debate appears to be polarised with little if any common ground between the two sides.

When I heard this comment I realised that the concept of a “No Deal” Brexit was actually as unclear to me as was the idea of what Brexit itself means (see previous Blog ‘Brexit, the power of a word’).  Yes, I understand that a ‘No Deal’ means we haven’t got a deal with the EU, but then many countries including the US and China don’t have an overriding deal with the EU, and they don’t appear to have Armageddon.  It also seems clear that if we don’t have a deal with the EU, then by default the EU don’t have a deal with us, surely that is not in their best interests either if a ‘No Deal’ is such an un-mitigating disaster?Yes, I understand that a ‘No Deal’ means we haven’t got a deal with the EU, but then many countries including the US and China don’t have an overriding deal with the EU, and they don’t appear to have Armageddon.  It also seems clear that if we don’t have a deal with the EU, then by default the EU don’t have a deal with us, surely that is not in their best interests either if a ‘No Deal’ is such an un-mitigating disaster?

Given such circumstances therefore is the worst case scenario ‘No Deal’ actually a red herring that would never in reality become the case?  If I analyse the ‘No Deal’ scenario in greater depth, then a number of the serious issues, especially from a UK perspective start to look less dangerous;

We will have no trade deals in place – it appears that we have already negotiated a number of independent deals with 3rd party countries such as Chile, South Korea and the Faroe Islands which means we are alright for wine, fish and mobile phones, but other major players such as the US and China appear keen to do a deal in a post-Brexit world. In fact over 30 trade deals have now been concluded between the UK and non EU countries for after Brexit.

A ‘No Deal’ scenario will dramatically impact on UK business. I believe there is no doubt that UK business will be impacted in a substantial way by a ‘No Deal’ scenario, and yet I struggle to see that this could be any worse than the massive impact the last twelve to eighteen months of uncertainty has already had on UK businesses. With further uncertainty anticipated over the next three months and who knows how much longer.  During this time, businesses have been told to prepare for an instant exit from the EU with plans only being changed in the final week before the 31st March deadline.  This planning for many has meant investing substantial time, effort and money in preparations with meetings, recruitment, staff training and maintenance.  Additionally, resources have been allocated to customer and supplier communication and process coordination to eventually end with no changes. 

The costs however did not abate at that point, as the event is still imminent, just postponed for six months, leaving businesses in further limbo with no idea about the final outcome, or time period or requirements.  During this time, they had to maintain the structure they implemented for a ‘No Deal’ in case it happens in October.  This feels like the wild west, the question beckons as to how a ‘No Deal’ could actually be worse!

We are unprepared for a ‘No Deal’ – even Mr Rycroft suggested that the civil service is now well prepared for a ‘No Deal’ and ‘Frankenstein’s Monster’ said that we were nearly prepared for a ‘No Deal’ in March, but we will be absolutely prepared for a ‘No Deal’ in October. Certainly there are copious amounts of guidelines and documents that clearly define the processes in the event of a ‘No Deal’ and whilst these may not be comprehensive, they answer a substantial amount of the initial questions.  Organisations themselves appear better prepared also, given the shock they suffered in March, it appears however that perhaps the larger the organisation the better prepared they are more likely to be.

Property prices will drop substantially – this surely goes hand in hand with the economy, and although perhaps some areas will suffer, the UK property market is still restricted by the same parameters such as planning restrictions, lack of new builds, limited sites and geographical boundaries.  Would these be impacted so dramatically by a short term economic downturn?  Maybe if the downturn was more than substantial and of a longer period then perhaps that is likely.

Loss of jobs – again the uncertainty over the last two years must already have had some impact on the job market and yet we keep hearing that we have more people in employment than ever before.  In fact surely the opposite might start to be the case, as migrants from the EU become less and less, maybe we will find it more difficult to find suitable employees, thus increasing incomes and keeping unemployment low.

Furthermore, there appear to be a number of areas that could actually be more problematic in a ‘No Deal’ scenario to the EU than they do to us in the UK;

The UK suggested that it will not initially propose any duty on 87% of products entering the UK in a post-Brexit world. This has the double advantage of immediately levelling the playing field for all non-EU traders whilst at the same time making it difficult for the EU to implement trade restrictions against the UK without impacting on their own future trade negotiations.

The Irish border has been an area of contention between the EU and the UK, with no one wanting, or suggesting a return to a hard border, but the EU has always claimed that this was a problem caused by the UK and therefore it should be solved by the UK.  In a ‘No Deal’ scenario whereby the UK has minimal trade tariffs for goods entering from the EU and especially Ireland, there would be no requirement for a hard border in Ireland from the UK’s perspective.  If, however the EU maintained high tariffs against the UK after Brexit, then the Irish border would represent a point of vulnerability for those wanting to transport goods into the UK with minimal controls.  The EU would then be faced with a serious dilemma as to whether to introduce a hard border or change their position on trade to the UK.

Both ‘Frankenstein’s Monster’ (Boris Johnson) and ‘The Fox’ (Jeremy Hunt) have suggested over the past week that they would be keen to introduce a number of ‘Freeports’ into the north east of the UK being proposed in places such as Aberdeen, Peterhead and Teesside.  These zones could potentially allow businesses to hold stock outside the EU with the suspension of the high EU tax payments but allowing for the lead time on final delivery to be cut from weeks to a few days, with the UK reaping all the rewards.  This would have the added impact of making non-EU products more competitive in an EU market due to dramatically reduced lead times.

World Trade organisation rules allow for you to maintain existing trade deals in place whilst negotiating new deals, which is an opportunity to allow the EU and the UK to maintain existing scenarios with each other which are different from deals across the rest of the world.

Finally, of course there is the bargaining position, if a ‘No Deal’ is a realistic proposition, then it is something that the EU must balance up against their decisions, given some of the points above, it may be that if the UK demonstrates a willingness to follow through on a ‘No Deal’ it may ask stronger questions of the EU with regards to their negotiating position.

I am still unclear exactly what a ‘No Deal’ means and there are still many areas that I see as a concern and a risk, but the concept of what has been called a ‘Managed No Deal’ starts to appear to be an option that would allow the whole process to move forward.  In theory the UK government is already preparing for this as shown by its unilateral proposal of an initial ‘no duty’ on most imports, with the intention to come to an agreed rational duty position over time.  A practical approach such as this may also allow for most elements to be introduced fairly rapidly leaving just the difficult areas of agreement remaining such as the Irish Border discussion. 

I will continue to watch the changes and developments both here in Westminster, in Brussels and across the rest of the UK, the EU and the world in order to gain a better understanding of the changes and implementations caused by Brexit.  It does however at the moment look like the most likely outcome is a ‘No Deal’ or something that looks like a ‘No Deal’ but in the guise of a deal to get it through parliament.  In the meantime, therefore I will continue to prepare as best I can for a ‘No Deal’ Brexit and I urge you all to do the same and then at least it will have the minimal impact upon me and I will be better prepared than those who did nothing or very little.  I will then keep my fingers crossed in the hope that the worst will not occur but if it does, I will at least be the best prepared I can be.

Justin

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