Angus Shaw breaks down the ominous prospect of no-deal with the EU.
It has been painted like the harbinger of death in the media: NO-DEAL, the Grim Reaper of Brexit. Would it really be the worst thing to happen to the European continent since the outbreak of the Black Death? Far from it. But it would be painful, that is for sure.
If the EU’s hardball refusal to take talks further last year unless the government played precisely by its rules was mere demonstration of power, or if the UK’s lack of solid commitment to an Irish border resolution was just a kiss of blissful ignorance to strengthen its hand, it matters not: The truth of whether a grand strategy is in play will mean very little to economic sufferers if no deal is achieved at all. You do not need me to tell you that no-deal is almost completely undesirable by most politicians entrenched in the negotiating frontlines of the EU and UK, so why is progress being made so seemingly gridlocked by those involved while so much is at stake?
“The truth of whether a grand strategy is in play will mean very little to economic sufferers if no deal is achieved at all.”
As often argued by Brexit Secretary David Davis, this is the sheer nature of negotiations: Just like haggling, the first few minutes are full of splashing the water to see how much you can scare the other into the prospect of walking away. But in this case, it seems the UK and EU are willing to starve themselves for the best price, in an increasingly hungry negotiating table.
Simply leaving the EU, deal or not, means the UK would become free to strike trade agreements with every nation outside of it, including the incredibly desirable titans of the United States and China often sought after by Brexiteers. This is because EU member states are forbidden to a reach trade deals on their own behalf unless all 28 countries also unanimously sign up to one. As you can imagine, trying to whip 28 vastly different cultures with different needs to agree to a binding contract can be an incredibly arduous task. Negotiations for an EU trade deal with Canada for example kicked off in 2009, and took a grand total of eight years to finally come to fruition in 2017. This labyrinthian process puts into perspective the sheer amount of braking power which is undoubtedly being put into a UK-EU trade deal.
Ringing one of few positive notes, the UK could easily remove this shackle with no deal in motion and simply leave tomorrow. However, a ball-and-chain would be slapped on its wrists in place, for a whopping 53% of the UK’s total global imports derives from the EU’s remaining 27 countries, as well as 44% of its exports. These are absolutely catastrophic margins to have spike in tax overnight, which is why of course they never would: the government has undoubtedly already designed measures and kept safe the phone numbers of friendly nations for the possibility of no-deal, which would take some time to occur to allow business to adjust to new blockades of tariffs.
Specifically the UK and EU’s economic relationship would become placed under World Trade Organisation (WTO) terms. The WTO outlines the maximum amount of tax which one country is allowed to place on another’s trade, if no specific deal is present between them. Almost every nation is a member of the WTO, and for the EU maximum tariffs include a 9.8% tax on car imports, 12.8% on wheat products, 32% on wine and 4.1% on liquefied natural gas, to name a few, which would replace the UK’s current 0% to and from the EU as a member of the single market. This would call for some serious desperation in Theresa May to replace such lost free trade quickly, potentially leaving the UK susceptible to agree to anything politically in return for similar deals with other countries.
However do not think this situation would be perfect for the EU either: the UK remains a massive contributor to the EU budget as the fourth highest for the past decade, just above Spain and below France. This includes being the 8th largest net contributor, by paying more in than it receives by around €7.1 billion. With only ten countries putting in more than they take out, this would be a large chunk of capital to have suddenly disappear for the EU, and when throwing such an economic gap into the equation of trade, things start to look even more bleak:
Around 8% of the EU’s exports currently go towards the UK, making it the fourth top country it sells to. However, when excluding EU member states, the UK would suddenly jump up to becoming the second highest non-EU nation for exports, constituting 16% of sales for products and services on the global stage – just 1% below the United States and 8% above China. And of course, you can expect the UK would be putting up a wall of tariffs right back. With various EU economies relying on exports to the UK to different extents, such as Norway’s 23% and Germany’s £2.5 billion through car manufacturing alone, this serves as tremendous pressure for the EU to also find replacement tactics for one of their top buyers placing tariffs on them, as it would be for the UK’s top seller.
“…in this case, it seems the UK and EU are willing to starve themselves for the best price, in an increasingly hungry negotiating table.”
It is gravely clear that a good deal would benefit everyone involved economically, as well as alleviate political tension from the EU and UK needing to seek new partners to fill their once important marriage. However with tough talk and conflicted understandings of progress coming out of recent press conferences, concessions may be harder to come by than originally thought.