A No-Deal Brexit Is Still on the Table—And Businesses Have Every Right to be Scared
It’s not every day that employers and trade unions issue a joint statement calling for the exact same thing, but the Brexit crisis gripping the United Kingdom is no ordinary affair.
“Our country is facing a national emergency,” read a joint letter the heads of the Confederation of British Industry (CBI) and Trades Union Council (TUC) sent Thursday afternoon to Prime Minister Theresa May. “Decisions of recent days have caused the risk of no deal to soar. Firms and communities across the U.K. are not ready for this outcome. The shock to our economy would be felt by generations to come.”
When they wrote that, there was just over a week to go until, on March 29, the U.K. was scheduled to leave the European Union, probably on a no-deal basis. During Thursday night talks, the EU granted May only a two-week extension to April 12.
May’s plan has long been to have a Brexit deal that would allow a two-year transition period, during which time the U.K. and EU could negotiate their future trading and regulatory arrangements. Due to complex political divisions, her deal remains unapproved by the British Parliament, so by default the U.K. will crash out immediately when the new deadline hits.
“Avoiding no deal is paramount,” wrote TUC general secretary Frances O’Grady and CBI director general Carolyn Fairbairn in their open letter. “Businesses and employees alike need to see their Government clearly acknowledge the reckless damage no deal would cause and recommit itself to avoiding this outcome.”
A lot can happen in three weeks—indeed, as the last period of Brexit machination has demonstrated, a lot can happen in a day. There’s a small chance May will get her deal approved next week. If not, there are still politically toxic options such as canceling Brexit or seeking a long extension in order to call a general election—in which every member of Parliament would need to defend his or her seat—or hold a second referendum. But, while the likelihood of a no-deal Brexit was quite recently seen as fading, it’s still very possible, making now a good time to examine how it would affect businesses.
Without a deal and finding itself outside the EU club, the U.K. would suddenly fall back on World Trade Organization (WTO) rules. This means it would have to give every other country the same terms, unless it has a trade deal with them.
Thus far, the U.K. has managed to secure agreements with Norway, Iceland, Liechtenstein and Switzerland, guaranteeing continued trade with those countries on largely unchanged terms, in the event of a no-deal Brexit.
As for everyone else, May’s government earlier this month published a plan that would see all tariffs temporarily eliminated for 87% of imports, not including key automotive and agricultural sectors.
The purpose of this drastic move would be to suppress inflation—consumer prices would otherwise shoot up—and stop U.K. businesses’ international supply chains from breaking down. However, apart from the protected sectors, British businesses that sell locally would also suddenly find themselves exposed to cheaper competition from outside the country, at least for the year-long duration of the scheme.
At the moment, there are no tariffs involved in the U.K.-EU trade because the country is within the bloc. That would immediately change under a no-deal Brexit, and the tariffs that would suddenly spring up in the EU for British imports have already prompted mass stockpiling in the U.K., not just of consumer products (such as toilet paper) but also of parts and materials for industry.
And then there’s the Northern Ireland issue.
The border between Northern Ireland, a U.K. province, and the Republic of Ireland, a member of the EU, to its south and west has been the biggest sticking point in the whole Brexit mess. Everyone is desperate to avoid a hard border there, because imposing a hard border would split communities and risk a return to “The Troubles”—the sectarian clashes and terrorism that plagued Northern Ireland before the Good Friday Agreement of 1998.
To achieve this, May’s negotiated Brexit deal included a “backstop” that would apply if, after the two-year transitional period runs out, there is still no new customs deal between the U.K. and EU. Under the backstop, Northern Ireland would retain “regulatory alignment” with the EU until a customs deal is finalized. This would mean only a partial Brexit for an indefinite period, making it the main reason why May has been unable to get approval for her Brexit deal. However, the EU is unwilling to drop this insurance policy, because without it they might have to erect a hard border or face serious smuggling issues—this is, after all, the only land border between the EU and the U.K.
In the event of a no-deal Brexit, the risk of a hard border also shoots up. So, to avoid that painful outcome, the U.K.’s no-deal-Brexit tariffs would not apply to goods crossing into Northern Ireland from the Republic.
Problem solved? Not quite—many argue the plan would increase the risk of the border becoming a major smuggling route. It could also wipe out some Northern Irish businesses because Ireland, as an EU country, would suddenly place tariffs on goods coming in from the British province, but goods crossing the border the other way would be much cheaper.
Northern Ireland aside, the biggest impact of new border checks would be felt on the shores of the English Channel, in particular the busy port of Dover on the English side and Calais on the French. Many businesses are not prepared for the paperwork this would involve, and the delay times would be a major problem for those transporting perishable goods in and out of the U.K.
The U.K. has already been testing possibilities for handling enormous queues of trucks that have to submit to customs checks, with the disused Manston airfield being pegged as a giant parking lot. (In a beyond-satire episode last week, an unexploded World War II bomb was found at the airport, apparently having been left there by the British themselves in order to destroy the airfield if the Germans invaded.)
Services and Data
Even where physical goods are not involved, a no-deal Brexit would cause major problems due to sudden regulatory barriers. A Brexit with a deal would already prove complicated for services sectors such as finance, but it would be much worse without a deal.
British professional qualifications would immediately become unrecognized across the Channel. The EU would allow Brits to make short stays in EU countries without visas—for three months out of every six-month period—but that may not be enough for some consultants working on long-term projects, for example.
Then there’s the data issue. Once outside of the EU, the U.K. will need to seek “adequacy” status allowing its companies to import Europeans’ personal data without a hitch—a lengthy and potentially painful process, as South Korea will testify. Until then, it’s up to each business to make complex, vetted changes to their contracts and governance rules in order to maintain the ability to handle EU customers and workers’ data. This is not something that can be organized from one week to the next.
Brexit Plan B
Back to the CBI and TUC’s plea to the prime minister. “‘The current deal or no deal’ must not be the only choice,” they wrote. “A Plan B must be found—one that protects workers, the economy and an open Irish border, commands a parliamentary majority, and is negotiable with the EU. A new approach is needed to secure this.”
If that new approach is going to appear, it needs to show up pretty much now.