If You’re Wondering How Hard a ‘Hard Brexit’ Could Be: QuickTake

LONDON (Capital Marketds in Africa) – British Prime Minister Boris Johnson’s “do or die” pledge to exit the European Union by Oct. 31 has increased the likelihood for the hardest form of Brexit, one with no deal in place at all. Without a formal withdrawal accord at the time of the divorce, the U.K. will lose frictionless, duty-free access to the EU, the world’s largest trading bloc. The U.K.-EU trade relationship would immediately revert to commercial rules negotiated in 1995 by members of the World Trade Organization, meaning new tariffs on U.K. exports to the EU, traffic-snarling customs controls at ferry terminals, in addition to a multitude of other free-trade restrictions. In short, a no-deal Brexit would provide an economic shock to the U.K. economy. It’s been compared to “downshifting a car at full speed from fifth gear to first.”

What is the WTO’s role?
The Geneva-based WTO oversees a set of baseline terms for trade in goods and services. All 164 member states agree to deal with each other equally, according to a principle known as most-favored nation treatment. The WTO monitors how countries implement trade accords and helps settle international trade disputes. The U.K. is already part of the WTO, and will remain so after its departure from the EU. So if Britain leaves the bloc without an agreement and loses its preferred access to the EU, trade will be subject to WTO terms. Some U.K. lawmakers paint this as a disaster for the British economy, while others see an opportunity for an unshackled Britain to pursue better trade terms with other nations.

How would Britain export to the EU after a no-deal Brexit?
Trade in goods and services would no longer be frictionless and tariff-free between the U.K. and the 27 remaining countries of the EU. Instead, U.K. goods and services would be subject to the WTO-negotiated tariffs — which act like a tax on goods — that the EU places on third parties. The bloc accounts for 48%of U.K. goods exports, and the shift could bring costs, paperwork and controls that haven’t existed for decades. Tariffs would differ for various products, but the EU’s average tariff rate is 3%. Here are some examples:

• Food: The EU’s average most-favored nation tariff rates are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy.
• Finance: U.K.-based financial companies plan to shift some of their operations to Europe and adopt a patchwork of licensing agreements in order to account for the loss of their current EU “passporting” rights, which allow them to market products and services in Europe.
• Automobiles: British carmakers would face a 10% tariff on all car exports to the EU. Those levies could exceed 5.7 billion euros ($6.3 billion) per year and increase the average price of a British car sold in the EU by 3,000 euros per car.

What would happen to imports from the EU?
U.K. consumer prices would probably increase for certain European imports, including food, cars and textiles. The U.K. government has sought to avoid sudden price hikes. In March it proposed a temporary 12-month plan to cut tariffs on 87% of goods imports from the EU and all other trading partners except those already covered by bilateral trade accords. Nevertheless, some European goods would face U.K. quotas and tariffs to protect sensitive British industries from foreign competition. According to the draft proposal, U.K. tariffs on EU imports on certain goods would increase from zero. They include:

• Cars: A 10% tariff.
• Clothes and linen: A 12% tariff.
• Porcelain and china: A 12% tariff.
• In addition, Britain would impose import quotas on beef, lamb, fish, poultry and swine.

What about the impact on U.K. services?
Service industries, from finance, pensions and accounting to legal and medical advice, make up 79% of the British economy and 45% of U.K. exports. Without an exit deal, U.K. service providers would lose their preferential access to European markets and could be subject to new and disruptive compliance requirements. The shift might persuade some U.K.-based companies to relocate to the European continent. It all could lead to a drastic drop in exports of some services to the EU.

How else could a no-deal Brexit disrupt the U.K. economy?
Absent any transitional agreements, Brexit could disrupt supplies of medication, impact U.K. house prices, and make it more difficult to travel or study abroad. The severity of the disruption at the EU border could even spark a yearlong recession, according to Dan Hanson of Bloomberg Economics. A hard Brexit will depress business investments by as much as 2% in 2019, according to the Bank of England, with a further drop expected in 2020. Britain’s central bank also said a no-deal Brexit could, in the worst case, shrink the U.K.’s gross domestic product by 8% within a year. Some U.K. lawmakers dismiss the warning as part of anti-Brexit campaigns they’ve dubbed “project fear.”

How are British businesses preparing?
They are stockpiling goods, from medicine and car parts to printing ink and booze. Businesses from engine-maker Rolls Royce Holdings Plc to brewer Heineken NV have outlined plans to hoard in case a tumultuous Brexit chokes just-in-time supply chains and creates backlogs at ports.

What is the U.K. government doing to prepare?
The British Treasury in July unveiled a 2.1 billion-pound ($2.5 billion) war chest to help government agencies prepare for an Oct. 31 exit. The funding is focused on border and customs operations, critical medical supplies, support for U.K. nationals abroad, and a public awareness campaign. In February, the U.K. government pledged to wave through EU goods landing at British ports for a temporary period. Still, the threat of delays has triggered a U.K. plan to turn a major highway near the Port of Dover into a holding zone for trucks.

Could Britain benefit from the EU’s other trade deals?
The U.K. may lose continuity of trade relations with many of the 71 nations that have forged preferential trade agreements with the EU — including Canada, Japan and Turkey. The U.K. is in talks to roll over its participation in those agreements. So far, the British government has secured continuity agreements with about a dozen countries, including Israel, South Korea and Switzerland. WTO tariffs would likely apply to British goods and services exported to nations where the U.K. fails to roll over EU agreements. For example:

• Japan may introduce a 12% tariff on British tea and a 19% levy on malt.
• Canada may impose a 6.1% tariff on British cars and a 25% charge on dredging vessels.

Could Britain strike new trade deals?
Yes. Once free from the EU’s single market and customs union, Britain can independently forge new trade deals with non-EU nations. U.S. President Donald Trump has talked up prospects for a “very big trade deal” between the two nations. Last year U.S. Trade Representative Robert Lighthizer unveiled plans to negotiate an “ambitious” U.S.-U.K. free trade agreement. Any final deal, however, would be subject to congressional approval and House Speaker Nancy Pelosi has threatened to block any deal if Brexit jeopardizes the 1998 Good Friday Agreement — the accord that brought an end to the conflict in Northern Ireland.

What would happen at the Northern Irish border?
In the absence of a withdrawal agreement, it may be necessary to establish new customs borders and inspection checkpoints across the 310-mile border between Ireland (which would still be part of the EU) and Northern Ireland (part of the U.K.). This would be problematic as it could endanger the 1998 Good Friday peace agreement. The government’s 12-month transition proposal calls for no tariff on goods crossing the Northern Irish border. Johnson has pledged not to erect new border posts at the Northern Irish border, and he’s suggested alternative technology-based solutions. He’s also touted the prospect of an Article 24 arrangement to avoid trade chaos.

What is Article 24?
It’s a provision of the General Agreement on Tariffs and Trade — the precursor to the WTO — that allows members engaged in trade negotiations to discriminate in favor of each other without passing along those benefits to all members as required. Johnson said Article 24 offers a way to avoid tariffs and border restrictions if the U.K. leaves the EU without a deal, but then acknowledged he didn’t fully understand the details. EU and WTO officials poured cold water on the prospect. In order for the U.K. to invoke Article 24, it would need the EU’s backing as well as a clear timetable for the negotiation of a trade agreement. And that’s something that may prove elusive.

Source: Bloomberg Business News