Consequences of ‘no deal’

While all Brexit scenarios are likely to have a negative impact on the UK, the most extreme, and the most damaging of these scenarios is a ‘no deal’ and by default trading on WTO terms.

The government’s own long-term economic analysis backs this up, suggesting that over the course of 15 years, the negative impact on UK Gross Domestic Product (GDP) could be between 5 and 10 per cent (7.6 per cent average) which would vary across the regions and nations of the UK[1].

The OECD has stated that in the shorter term, no deal could reduce UK GDP by as much as 2 per cent over 2 years[2].

The House of Commons Exiting the European Union Committee, in its latest report published in July of this year concluded that, even by the governments own standards, ‘a “managed no deal” cannot constitute the policy of any responsible government.’[3]

What trading on WTO terms means is unclear, the assumptions are based on an assessment of average Non-Tariff Barrier (NTBs) costs between countries trading on non-preferential World Trade Organization (WTO) terms and applying EU Most Favoured Nation (MFN) tariffs[4]. The impact of ‘no deal ’ also varies depending on whether there is transition period before we leave both the single market and Customs Union or whether we crash out with no transition period, no agreements and immediately move to trading on WTO terms – though neither scenario is ultimately good for the UK.

In its own economic analysis, the government notes that the modelled no deal scenario could over- or under-state the impact of a no deal in some areas. If the UK and EU were to start from a position of regulatory alignment, then differences in regulation would be smaller than in typical WTO trading relationships.

Conversely, many countries trading on WTO terms also have a range of side agreements for different products and sectors, so are themselves not trading on WTO rules alone[5]. Switzerland, a member of the European Free Trade Area, has over 100 bilateral agreements with the EU[6]. Trading on purely WTO terms could leave the UK far worse off than many of the modelled scenarios suggest.

The scenario assumed in ‘Operation Yellowhammer’ is that upon exit, all rights and reciprocal arrangements with the EU end and the UK reverts to ‘third-country’ status. Apart from a reciprocal agreement on social security with the Republic of Ireland – no other bilateral agreements with member states will have been concluded by exit day[7].

The ‘Operation Yellowhammer’ document in its base scenario and planning assumptions expects that a few member states may be more understanding and in a small number of instances, where the impact of Brexit will be felt negatively in the EU as well as the UK, member states could act in a way to benefit the UK. However, it also concludes that in general it is likely that member states will be unwilling to engage bilaterally[8].

On ‘day one’, in the absence of an agreement with the EU, and without side arrangements with other countries in place or a clear transition period, the UK could find itself in an unprecedented and unique position amongst developed economies of trading on purely WTO terms.

If the UK, in order to mitigate the worst effects of a no deal, immediately offered low or zero tariffs on key sectors (as it has outlined it will do in its temporary tariff regime) there is little evidence that the EU would reciprocate, and it would leave the UK with very little leverage in future trade negotiations[9].

Much of the literature also points out it is hard to model for potential wider impacts, such as impact on the UKs standing/ soft power or on cooperation within sectors such as science and innovation.