What happens if there’s no Brexit trade deal?

October 5, 2020 Off By EveAim

Brexit talks grind on as the clock counts down to the end of the transition.

The last formal round of talks between the U.K. and the European Union on their future relationship ended Friday and the following day Prime Minister Boris Johnson and European Commission President Ursula von der Leyen ordered their teams to keep talking. While both sides have consistently said they are keen to strike a deal, several areas of disagreement remain.

Added to that, the relationship between the two has been further poisoned in recent weeks by the U.K.’s decision to put forward domestic legislation that would give ministers powers to change aspects of the Withdrawal Agreement — the divorce deal agreed by Brussels and London last year — that the government concedes would breach international law. The EU on Thursday announced it was beginning the process of legal action against the U.K. and gave London until the end of October to respond.

Even if a deal is struck, it then has to be ratified by parliaments on both sides. Chief EU negotiator Michel Barnier and a number of others on the EU side have indicated this might not be straightforward if the U.K.’s Internal Market Bill is still in play.

While neither side has walked away from talks yet, both say they are simultaneously preparing for the possibility that no agreement is struck in time. But what would that mean in practice?

POLITICO walks you through implications for key policy areas and explains how the resulting problems could be resolved.

Tariffs

How bad could it be? 💥💥💥💥💥

What happens immediately?

Free trade between the EU and U.K. ends on January 1, 2021 — and both sides fall back on World Trade Organization terms. The U.K. has set out its Global Tariff Schedule for imports from the EU (as well as all other nations it has no trade deal with) and would be subject to the EU Common External Tariff for exports to the EU.
The administrative burden of tariffs, in addition to new customs checks, risks having an impact on food supplies — in particular those heading to the EU, because firms importing goods to Britain will be able to defer tariff payments and some customs administration for the first six months.
The additional costs of tariffs and delays will likely create problems for companies, supply chains and retailers in almost every sector of the economy.
Prices in shops will inevitably rise as a result, and some businesses could go bust.

What can they do about it?

The two sides would have to negotiate a trade deal to avoid the new tariffs. How quickly that might happen would likely depend on the political context and how trade talks broke down during the transition period. Once Britain is fully out of the European Union, the two sides could, of course, start new trade discussions at any time — provided they agree.

— Emilio Casalicchio

Customs checks

How bad could it be? 💥

What happens immediately?

U.K. goods entering the EU will face full customs controls, including customs declarations, animal product health paperwork and some border checks. Most of that paperwork will be required whether or not there is a deal.
EU goods entering the U.K. will not face full customs administration for the first six months under a phased-in approach, but the requirements will ramp up between January and July 2021.
Port infrastructure and staff in Britain could be overwhelmed with the mass of new processing, leading to disruption.
Trucks will be expected to complete paperwork before heading to the border, but there are fears that firms will not adequately prepare, leading to queues of 7,000 trucks in Kent that could last for two days, by the U.K. government’s own admission.

What can they do about it?

The two sides could continue to negotiate a free-trade agreement, which could reduce the need for some paperwork, but is unlikely to make a lot of difference given the U.K. has decided to leave the EU’s customs union.

Businesses are expected to prepare to avoid disruption by registering for overseas trading numbers, checking what they will need to pay and familiarizing themselves with new electronic platforms (which the U.K. government is yet to unveil).

New facilities are being built around ports to manage disruption.

— Emilio Casalicchio

State aid

How bad could it be? 💥💥

What happens immediately?

Great Britain is on the whole no longer bound by EU state aid rules, meaning it no longer needs sign-off from the European Commission to make interventions to support companies. However, Northern Ireland remains tied to EU rules under the Withdrawal Agreement, and subsidies to firms in the rest of the U.K. that could benefit firms in Northern Ireland could come under the scope of EU rules.
However, if the U.K. government passes the Internal Market Bill, it will have written into domestic law the unilateral ability to interpret how U.K. firms could be subject to EU state aid rules, provided parliament agrees.
Any investigations or proceedings launched by the EU against the U.K. before the end of the transition can continue, and the EU can launch new probes or proceedings for up to four years after the end of the transition, about any support granted before the end of the transition.
The U.K. will follow the World Trade Organization Agreement on Subsidies and Countervailing Measures, which are looser than EU state aid rules and apply only to goods. The government has said it will follow any other state aid agreements within its free-trade deals. It plans to publish details of its own state aid regime in the future.
EU state aid rules also protect U.K. nations from undercutting their own internal market. Without a domestic equivalent, U.K. firms could be unprotected from unfair subsidies from within the U.K.
On the EU side, Brussels is set to expand its toolbox with a mechanism aimed at tackling illegal foreign subsidies in any case and that would catch any unfair subsidies from the U.K. So no deal wouldn’t make a difference.

What can they do about it?

The two sides could continue to negotiate for a deal that would satisfy the EU demand for a level playing field on state aid and satisfy the U.K. demand for sovereignty over state aid.

The EU has begun the process of legal action against the U.K. over the Internal Market Bill. The EU might also bring legal challenges if the U.K. parliament passes the bill and the government later uses the powers contained within the legislation.

— Emilio Casalicchio

Dispute settlement

How bad could it be? 💥💥💥

What happens immediately?

Disputes between the two sides will fall under World Trade Organization rules and the Withdrawal Agreement.
If the issue is one of trade that does not fall under the Withdrawal Agreement and the two sides cannot negotiate bilaterally or through the political bodies of the WTO, they can use the WTO dispute settlement process.
If the issue relates to the Withdrawal Agreement, the main forum for resolution is the EU-U.K. Joint Committee. On matters of the interpretation of EU law, the Court of Justice of the European Union can be consulted. For other matters, the parties can go to arbitration if they do not agree.

What can they do about it?

The two sides should attempt to resolve differences bilaterally where possible.

— Emilio Casalicchio

Health

How bad could it be? 💥💥💥💥💥

What happens immediately?

Medicines could be caught up in delays at borders. While medicines are not subject to tariffs under the WTO rules, non-tariff barriers could hold up the movement of everything from the chemicals making up a drug to the finished product.
Without a mutual recognition agreement on good manufacturing practice and batch testing, additional checks would be needed on medicines moving across the borders, possibly causing a delay of four to six weeks as medicines are re-tested.
The Medicines and Healthcare products Regulatory Agency will become responsible for all medicines regulation in the U.K. from January 1, 2021. The MHRA has recently published guidance on what happens post-transition but the industry has said that they need more detail to help them navigate the practicalities of implementing the guidance due to the complexity of medicines’ regulation.
There is considerable uncertainty over what will happen to medicines moving into and out of Northern Ireland. From January, new medicines approvals granted by the EU will be applicable in Northern Ireland, while the MHRA will also be responsible for regulating medicines there. Industry fears that medicines may not be able to be legally dispensed in Northern Ireland.
The U.K. government has yet to provide comprehensive details on how the Northern Ireland protocol will work in practice for medicines.

What can they do about it?

Companies are beginning to prepare stockpiles of medicines in the event of delays. The U.K. could also agree to recognize assessments from the European Medicines Agency. A mutual recognition agreement on good manufacturing practice could be agreed separately from a trade deal and the Northern Ireland protocol could be phased in over a year for medicines, allowing industry more time to implement the necessary changes.

— Ashleigh Furlong

Air travel

How bad could it be? 💥💥💥💥

What happens immediately?

Without an EU-U.K. partnership in aviation, and in absence of unilateral contingency measures, no flights would take place between the U.K. and the EU as the WTO does not offer any fallback for air services.
British airlines will no longer be under the jurisdiction of the Court of Justice of the EU or under the supervision of the European Union Aviation Safety Agency (EASA).
If no deal is reached, U.K. operating licenses will no longer be valid in the EU. Britain-based air operators will have to move their principal place of business to an EU country and be majority EU-owned to continue operating in the EU.
Certificates, licenses and registrations that were issued by the U.K.’s Civil Aviation Authority on behalf of EASA for pilots, aircraft and aircraft parts will become invalid and would have to be validated again by an EU member country.

What can they do about it?

Before last year’s Withdrawal Agreement was struck, both the U.K. and EU confirmed plans to allow flights to continue in a no-deal scenario, which gave passengers and cargo operators certainty and confidence at the time.

Airlines say they expect — and need — a similar form of connectivity mechanism, that could ensure that operations can continue under any outcome.

The EU’s mandate for negotiations is clear that a comprehensive agreement on aviation (which airlines want) would require the U.K. to meet certain level playing field provisions, on state aid, labor laws, the environment and competition.

— Mari Eccles

Road transport

How bad could it be? 💥💥💥

What happens immediately?

When the Brexit transition period lapses at the end of the year, so do EU Community Licenses U.K. hauliers have been using for operations to the Continent. In the absence of another arrangement, hauliers will have to rely on the multilateral quota system of the European Conference of Ministers of Transport (ECMT), which distributes a fixed number of permits. However, it’s widely acknowledged that those wouldn’t come close to encompassing the number of trucks currently traveling back and forth across the Channel.
ECMT permits allow for cross-trade operations — meaning deliveries between countries — but not so-called cabotage operations by foreign providers within another country.

What can they do about it?

The International Transport Forum (ITF) is currently in talks to temporarily increase the number of permits. But the Road Transport Group hasn’t reached a compromise yet and, even if it did, the system wouldn’t be enough to secure post-Brexit transport.

London previously floated reviving former bilateral agreements with EU countries and putting into place new ones. But the result would be complex; needless to say, it wouldn’t be industry’s first choice.

The road transport industry, which last week stressed that ending the transition period without a deal “is not an option for our industry,” expects both sides to put contingency measures in place that would ensure some market access.

— Hanne Cokelaere

Security/intelligence

How bad could it be? 💥💥

What happens immediately?

U.K. police will be slower to detain criminal suspects from the EU without a deal on security. This is because the U.K. would no longer have access to the Schengen Information System and the EU’s law enforcement agency Europol, the EU-wide law enforcement databases on criminals and criminal activity.
Extradition of criminal suspects will also be more difficult, because the U.K. won’t part of the European Arrest Warrant and no replacement has been agreed yet. London wanted an agreement similar to that between the EU and Norway, which would allow the U.K. to bring extra safeguards and conditions into the process. Without a deal, the U.K. would rely on the 1957 European Convention on Extradition, which places more importance on diplomacy than judicial procedures and gives signatory countries more grounds to refuse to extradite their citizens.

What can they do about it?

Accepting the jurisdiction of the Court of Justice of the EU is a prerequisite for access to many of the EU’s systems for law enforcement and judicial cooperation. Therefore, U.K. opposition to the court limits how much can be achieved in this area.

The EU and the U.K. could strike a separate security pact, but it is expected to be quite thin. London is putting in place contingency measures for aspects of this cooperation that are normally restricted to EU countries. The U.K. will rely on Interpol, the international crime agency, rather than Europol.

— Cristina Gallardo

Environment/climate

How bad could it be? 💥

What happens immediately?

The U.K. will be released from the EU regime governing environmental protection. That has raised concerns about a British government watering down rules that protect nature, though the U.K. government has insisted it won’t.
A no-deal outcome could disrupt the export of millions of tons of waste to facilities in the EU, so this will have to go to landfill. That would harm the environment and pile millions of pounds of extra costs onto local councils in the U.K.
The U.K. will find itself outside the EU’s Emissions Trading System. It is unclear if the U.K. Emissions Trading System will operate as a standalone scheme, or if a carbon emissions tax will be implemented. Downing Street has said that it remains committed to having a scheme in place that is “at least as ambitious as the existing” one, but it is not clear when it will be operational.

What can they do about it?

Under the so-called level playing field clause in the Withdrawal Agreement, both sides agreed they would uphold environmental standards.

The EU is also likely to demand that goods and services traded across the border comply with its standards. The U.K. is in the process of establishing a new Office of Environmental Protection to take over the regulatory functions once performed by the EU.

— Aitor Hernández-Morales, Eline Schaart and Karl Mathiesen

Energy

How bad could it be? 💥

What happens immediately?

While cross-border power will continue to flow across electricity interconnectors, it will no longer be governed by EU legislation. Transmission System Operators (TSOs) will use alternate trading arrangements, but these are expected to be less efficient than those guaranteed within the current system.
Since 2013 the Republic of Ireland and Northern Ireland have been joined in the Single Electricity Market (SEM). The Northern Ireland protocol establishes that, in the case of a no-deal Brexit, the SEM will be preserved and that Northern Ireland will follow EU rules in order to maintain electricity trading with the rest of the island.
At the end of the transition period, the U.K. will be fully out of Euratom, the European Atomic Energy Community. That means reduced access to nuclear fuel, interruptions to the supply of medical isotopes used in nuclear medicine, and reduced participation in nuclear research schemes like ITER, the world’s most important nuclear fusion project.

What can they do about it?

Not much. Energy was one of the few areas where EU and U.K. negotiators largely agreed, but without a broader Brexit agreement and no mini-deals on the table, the British energy sector has no choice but to try to reach arrangements on their own.

— Aitor Hernández-Morales

Fish

How bad could it be? 💥💥💥💥

What happens immediately?

The U.K. can cut off access to its exclusive economic zone, which would mean that EU fishermen would no longer be allowed to fish in U.K. waters. That would be a major blow to them, as 42 percent of all fish caught by EU fishing crews are plucked out of British waters. That figure is even higher for fishermen from nearby coastal countries like Belgium and the Netherlands. According to the European Fisheries Alliance, this could slash the net profits for European fleets in half and lead to job losses for at least 6,000 people.
U.K. fishermen, fish processors and retailers would have reduced access to the EU market and would have to pay tariffs on their fish exports imposed by the EU. This would hurt the U.K. fishing industry severely, as about 75 percent of its exported seafood is destined for the European market.
EU countries that export fish or fish products to the U.K. would also be hit by tariffs imposed by the U.K.
A no-deal also significantly increases the risk of overfishing because of a lack of agreement on quotas.

What can they do about it?

The U.K.’s waters will exclusively become its own again under the U.N. Convention on the Law of the Sea. Under that convention, countries that share borders are supposed to jointly manage shared fish stocks. So even in the case of a no deal, the U.K. would need to negotiate with its former EU partners over how to accomplish that.

To reduce its dependency on the EU market, the U.K. could also try to develop new markets for its fish through trade deals with other countries. For EU coastal countries, it will be hard to start fishing in other waters.

— Barbara Moens

Digital

How bad could it be? 💥💥💥💥

What happens immediately?

Free mobile phone roaming across the 27-country bloc will no longer be a legal right for U.K. residents, though most of the major carriers have pledged to not hike fees when people use their devices in the European Union. London would have to agree to a new arrangement with Brussels to remove these roaming charges.
New restrictions would be placed upon data that can be moved between both sides, potentially harming billions of euros/pounds worth of commerce (related to tech companies, banks and broad parts of the economy). London has pledged to continue to allow U.K.-based digital information to move to the EU, though no reciprocal arrangement has yet been reached. Legal challenges are expected, associated with how EU data is handled by British national security agencies — something that has already happened with how U.S. spies collect and use EU data.
With fewer EU-wide restrictions, the U.K. could go it alone on a number of digital briefs, with the country’s antitrust agency already laying out a claim for being the Western world’s most aggressive enforcer on digital competition and the role of Big Tech in people’s lives.

What can they do about it?

On roaming, the U.K. must sign a one-off agreement with Brussels, though that looks unlikely given the political poisoning of relations in the event of a no-deal Brexit. Expect angry headlines from Brits traveling overseas who are stung by eye-watering bills.

On data, without an agreement in place, such digital transfers become fraught with legal uncertainty for the entire economy, and both sides will be under pressure to reach a deal as quickly as possible.

On new regulation, the U.K. does have a chance to become a global trendsetter, particularly as it would have more freedom to go its own way on rules and enforcement. So far, the U.K. government has said it does not intend to diverge significantly on digital regulation and it is also unclear whether other countries would be willing to follow where London leads if it did.

— Mark Scott

Finance

How bad could it be? 💥💥

What happens immediately?

The financial services sector is not part of the trade discussions, so in many ways January 1, 2021 will put the industry in a no-deal situation regardless of whether Brussels and London strike a trade agreement.
Many contingency measures have been put in place on either side to mitigate a possible shock to markets. British clearinghouses have been given until at least 2022 to continue working with EU clients, and other contracts that depended on EU membership have been redrafted or moved by the firms under a newly licensed subsidiary in the single market.
“Passporting” for the banking sector will end, and that means EU residents who use British banks will likely see their accounts closed, unless the bank expands its operations to the member country in question.
Personal data transfers, essential for the conduct of finance operations, will become illegal without mutual adequacy assessments, which have yet to be made to date (see Digital, above).
Trade in other financial areas could be smoothed over with “equivalence” rulings, which generally don’t grant market access on their own, but allow a lighter regulatory regime for areas ranging from auditing to insurance to financial conglomerates.

What can they do about it?

Striking a free-trade deal will have an indirect positive impact on financial services because it would set the mood to solve the other issues — such as data flows, share and derivative trading, and investment banking equivalence findings — constructively.

Without a trade deal it is likely that negotiations would end in acrimony and neither side would be inclined to keep negotiating administrative pacts regarding financial services.

— Matei Rosca

Citizens’ rights/immigration

How bad could it be? 💥💥

What happens immediately?

The rights of U.K. citizens in the EU and vice-versa will be protected for as long as the Withdrawal Agreement stays in place. But an abrupt end to trade talks could make it harder to solve outstanding immigration issues — most importantly what’s going to happen to EU nationals who miss the application deadline in June 2021 for the U.K.’s EU Settlement Scheme. Campaigners and lawyers in the U.K. have lobbied the Home Office to extend the application period to minimize the number of EU nationals who could be left unprotected.
The future relationship negotiations also cover a range of sensitive social security matters, which would be up in the air if talks fall apart, including the mutual recognition of professional qualifications, the export of benefits and pensions and the rights of people who live in one member country but work in a another.
Until the end of the transition, British parents have legal powers to challenge the abduction of their child by a spouse from another EU country under a regulation known as the Brussels II system. But these legal powers will go unless the U.K. and the EU reach an agreement on cross-border civil justice cooperation. This would make abduction cases much slower and bureaucratic for U.K. parents.
Under the EU’s Dublin Regulation, participating countries can send asylum seekers back to another member country if there is proof the claimant previously claimed asylum there or lived there for five months or more. This will no longer apply to the U.K. after the Brexit transition ends and no replacement rule has been agreed.

What can they do about it?

Both sides could commit to shielding citizens’ rights from any fallout from the trade talks and agree to work constructively to solve outstanding problems.

Individual EU countries could also negotiate separate social security rules with the U.K. But this could lead to a very complex situation for those who work in many different jurisdictions, and could also increase their social security contributions if they have to pay taxes in more than one country.

On asylum, the U.K. could seek bilateral agreements with individual EU countries to send back asylum claimants. France, Ireland and Greece would be probably high on the list — but a no-deal end to the transition could limit the appetite for such deals.

— Cristina Gallardo

Science and education

How bad could it get? 💥💥💥

What happens immediately?

U.K.-based researchers funded by the EU’s Horizon 2020 program will continue to receive cash for the duration of their projects, provided the Withdrawal Agreement remains in place.
A collapse of trade talks would likely affect negotiations for the U.K.’s association to the next EU R&D program, Horizon Europe, which starts on January 1, 2021. The EU could make it harder for the U.K. to join the scheme; or Britain could snub the EU and reject participation altogether. Missing the start of the scheme could lead to a brain drain, as researchers try to preserve their ability to apply for EU grants. The U.K. has said it would launch domestic schemes as close to January 1, 2021 as possible to compensate for the loss of EU cash.
Talks for continued U.K. participation in the student exchange program Erasmus would also likely be impacted by a breakdown in trade talks. An alternative scheme, involving the U.K. and non-EU countries, could be launched as a replacement.
The U.K. will lose access to Galileo, the EU’s navigation satellite scheme, and will most likely rely on the U.S. Global Positioning System (GPS) for position, navigation and timing services until it can put in place an alternative. London is trying to negotiate third-country membership of Copernicus, the EU’s other big satellite scheme, in its trade talks with Brussels. If this fails, the British space industry would only be allowed to participate in the procurement of the R&D elements of the Sentinels satellites, but they would be banned from taking part in the recurring manufacturing stages, a very lucrative part of the procurement process.

What can they do about it?

Mini-deals on U.K. participation in EU schemes could be struck later provided there’s still willingness from both sides. It is not completely clear yet which EU programs the U.K. wants to take part in. The European Defence Fund for defense R&D and the cultural scheme Creative Europe appear to have been ruled out.

When it comes to Horizon Europe, it could be easier for the U.K. to join as a third country rather than as an associate member. But this would likely exclude it from some parts of the scheme and prevent U.K. researchers from leading consortiums.

— Cristina Gallardo

Pet travel

How bad could it get? 💥

What happens immediately?

The U.K. government has submitted its application to the European Commission to join a system that allows dogs, cats and ferrets with valid EU pet passports to travel with their owners between EU countries without undergoing quarantine.
If this is rejected, holidays with pets will be much more complicated because they will need to be microchipped, vaccinated against rabies, and have their blood tested for rabies. Blood samples would be sent to an EU-approved blood testing laboratory and owners in the U.K. would have to wait for up to three months for approval to travel.

What can they do about it?

The two sides could continue to negotiate after the end of the transition period — this process is technically separate to trade talks.

— Cristina Gallardo

Gibraltar

How bad could it get? 💥💥💥

What happens immediately?

Failure of the future relationship talks could lead to Spain shutting down its border with Gibraltar.
Without a bilateral deal or an alternative such as Gibraltar’s association to the Schengen passport-free area, the circulation of citizens would be seriously restricted, since the EU’s freedom of movement would end.

What can they do about it?

Negotiations on Gibraltar’s post-Brexit status are taking place in parallel to the trade talks and involve the governments of the Rock, Spain and the U.K., which handles Gibraltar’s foreign policy. So any deal on Gibraltar should be included in any wider deal about the future relationship between the U.K. and the EU, which means a no-deal would derail these discussions too and Gibraltar would just have to hope for a restart.

— Cristina Gallardo

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