The Cost of Failure: What’s at Stake If Brexit Talks Founder

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Negotiations between the U.K. and European Union over a post-Brexit trade deal are reaching a tense climax ahead of Sunday’s deadline. As a deal hangs in the balance, here’s a summary of what’s at stake if the talks fail.

Decades of free movement of goods, services, people and capital will come to an abrupt end when Britain leaves the EU’s single market and customs union on Dec. 31.

If no trade agreement is reached, businesses and consumers on both sides would face a hammer blow. Companies would have to grapple with tariffs, quotas and potential chaos as they move goods across the border. London financial firms’ efforts to secure EU approval to go on serving clients across the bloc would be dealt a setback; and consumers would see their rights to live and stay on the other side of the English Channel curtailed. Even taking a pet dog to the continent could become more difficult.

The Economic Hit

Without a trade deal, the U.K. economy would suffer a near-term shock of around 1.5% of GDP, according to Bloomberg Economics. The Office for Budget Responsibility, Britain’s independent spending watchdog, forecasts a 2% GDP decline.

An economic forecast by the International Monetary Fund estimates a no-deal Brexit would reduce the EU’s long-term potential output by almost 0.5%, but it would knock almost 3% off the U.K.’s.

Tariffs

Instead of frictionless trade with a market of more than 400 million consumers, British firms would revert to trading with the EU under rules established by the World Trade Organization in 1995. That means imports and exports to the EU would be subject to WTO-negotiated tariffs -- essentially a tax on goods.

The EU’s average tariff rate is 3%, but some products would attract much higher levies: British automakers would face a 10% tariff on all auto exports to the EU, while farmers exporting dairy products would see a 35.4% charge.

The car industry alone would face a 55 billion-pound hit due to a collapse in demand and local production due to tariffs, according to the Society of Motor Manufacturers and Traders.

Tariffs could also lead to increased prices for companies and consumers. For supermarkets, the cost would be 3.1 billion pounds ($4 billion) a year, according to the British Retail Consortium. Some 85% of foods imported from the EU would attract tariffs of 5% or more.

About 43% of the U.K.’s exports, valued at about 300 billion pounds, go to the EU each year, and the bloc is the source of 51% of its imports.

Customs

Businesses exporting to the EU will have to file customs declarations with or without a trade deal. To move goods from Dover to Calais -- the U.K.’s busiest crossing point with the EU -- trucks will need a government-issued permit indicating they have the correct paperwork and won’t be held up by French officials.

Delays at the border would threaten to throw manufacturers relying on parts arriving just-in-time into chaos, including companies in car-making and aerospace, while fresh food produce might rot in queuing trucks.

Animal products will need to move through designated border inspection posts accompanied by export health certificates issued by a veterinary professional.

While goods moving out of the U.K. will face checks from the year-end, Britain is deferring full import controls on those arriving from the EU until July 2021. However, companies will still need to keep records of their transactions and file the customs declarations in July.

Standards

Companies may have to comply with two separate regimes for product standards and regulations, needing approvals from U.K. and EU bodies to have the right to sell in both markets. For example, some goods will need to bear a new U.K. Conformity Assessed (UKCA) mark from Jan. 1, instead of the EU’s CE mark, in order to be sold in Britain.

City of London

Finance firms will lose their passport to offer services across the EU, whether there’s a trade deal or not, and have already been forced to shift staff and beef-up their operations in the bloc. Their access to customers would depend on the EU judging U.K. rules to be equivalent to its own in 40 areas. Failure to reach a trade accord would set back that process. Even if permission is granted, the EU would still be able to withdraw it with little notice.

Services

The services sector -- which make up 80% of Britain’s economy -- would face new restrictions. British architects and consultants would be among professionals who would lose their automatic right to offer their services across Europe. Firms may need to establish an office in the EU to continue trading, and may have to seek local approval for their professional qualifications.

Northern Ireland

Goods crossing from the rest of the U.K. into Northern Ireland that are deemed at risk of moving into the Republic of Ireland -- and therefore the EU -- would have to pay tariffs when crossing the Irish Sea, the solution that was included in the Brexit divorce agreement to avoid a hard border on the island of Ireland.

The U.K. government had previously said it planned to renege on this part of the agreement and break international law, but it has since backed down. EU officials will be present in Northern Ireland to monitor whether those rules are respected.

Fishing

EU boats would lose the automatic right to fish in U.K. waters, and vice versa, risking the prospect of maritime clashes between fishermen. Seafood exports would be particularly vulnerable to border delays, meaning fish could rot at ports.

Passports

Even with a trade deal, British visitors to the EU will need more than six months left on their passport in order to travel. Those staying in the EU for longer than 90 days may require a visa.

Motorists may need an international driving permit. Traveling with pets to the EU will become more difficult, too. Animal owners will face a four-month process involving blood tests, vaccinations and health certificates.

Immigration

The free movement of people between Britain and the EU will end. The U.K. is planning to use a so-called points-based immigration system, where overseas workers must prove they meet certain criteria before being allowed to come to Britain for a job. The criteria include speaking English, having an existing employment offer and earning more than 20,480 pounds a year.

Wine and Cigarettes

British travelers to the EU will be able to benefit from duty-free shopping in ports and airports. However, it will no longer be possible to return with unlimited quantities of products such as alcohol and tobacco from the bloc without paying the appropriate taxes. Instead, shoppers will have more limited, tax-free allowances -- 200 cigarettes, 18 liters of wine, and four liters of spirits.

©2020 Bloomberg L.P.

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