What ‘No-Deal Brexit’ Means and How It May Be Averted

(Bloomberg) -- Follow @Brexit on Twitter, join our Facebook group and sign up to our daily Brexit Bulletin.

With the U.K. set to leave the European Union next March, and more than 40 years’ worth of complex integration to unravel, the chances of a messy breakup are rising. After two years of intense domestic debate, the country is more divided than ever on just how distant a relationship it wants to have with its biggest trading partner. While both sides want to avoid a "no-deal Brexit," they are stepping up preparations just in case.

1. What does a no-deal Brexit mean?

It means a U.K.-EU divorce with no agreement in place on how to continue doing business with each other. Absent a deal, various rules, permits and accords fall into limbo. Free trade between Britain and the EU will give way to basic World Trade Organization tariffs and become subject to border checks where now there are none. Delays would be so bad that the British government has plans to turn a major highway near the port of Dover into a holding zone for trucks. Bottlenecks could bring shortages of everything from imported food to manufacturing components. Regulations on vehicle safety, medicines and food standards, now coordinated at the EU level, would need a new U.K. home. EU citizens living in the U.K. and Britons living on the continent could be stranded without permission to remain.

2. Wasn’t there talk of a smooth transition?

A transition, or grace period, that would keep all rules and tariffs the same until December 2020 has been agreed, but only provisionally. If there is no broader divorce deal there will be no transition. In any case, it’s a bit of a misnomer: The transition period will be used to thrash out the details of the future trading relationship. Remember that Brexit is being negotiated in two phases: the divorce settlement, which focuses on the withdrawal itself, and only after that the future trading relationship, which won’t be finalized until long after the U.K. has left.

3. Why is a no-deal Brexit even possible?

In her first major address on Brexit, in January 2017, Prime Minister Theresa May declared that "no deal for Britain is better than a bad deal for Britain." Though she might not believe that anymore, it’s an established part of her negotiating position. Plus, there’s no real majority in Parliament for any particular kind of Brexit, and some lawmakers actively want the U.K. to walk away. Put all of that together and you get a chance -- slim but growing -- that the U.K. could stumble into a no-deal departure.

4. What are the obstacles to a deal?

The one most likely to derail an agreement is what to do about the border between Northern Ireland, part of the U.K., and the Republic of Ireland, will remains part of the EU. Nobody wants to erect a formal barrier where none now exists, but each side has rejected the other’s proposed fix as unacceptable, and there’s not much room for compromise. The cleanest solution -- for the whole U.K. to remain in the EU’s single market, averting the need for customs checks at the Irish border -- would be unacceptable to a large chunk of the U.K.’s ruling Conservative Party and parts of the opposition Labour Party too. And what happens to the border if there is no deal? Irish Prime Minister Leo Varadkar has said he won’t build a border in any circumstance, and May has also been cagey about whether a border would necessarily go up. The EU would probably insist on some kind of checks to protect its single market from products coming in from the U.K. that don’t meet its standards.

5. How are the two sides preparing for a no-deal Brexit?

The EU has told governments and companies to prepare for the worst. Belgium and the Netherlands, which have ports facing Britain, are hiring border officials and boosting resources in preparation. Other countries are more laid back, convinced that a deal will be done somehow. The U.K. government has been criticized for not doing enough to prepare -- particularly by Brexit supporters who want May to be able to walk away from an unacceptable deal. May’s government says its no-deal preparations will be stepped up over the summer, with 3 billion pounds ($3.9 billion) set aside for contingencies.

6. What can be done?

The U.K. government has repeatedly said Britain is leaving the EU on March 29, 2019. An extension, if requested, could be granted if all 27 other EU nations agree. EU officials have informally discussed a possible extension and think its member governments would agree to one if just for a couple of months. The two sides could even try to reach a deal on what happens in the event of no-deal, a so-called no-deal deal.

7. What would a ‘no-deal deal’ do?

It could seek to protect consumers and citizens from the most damaging fallout from a no-deal Brexit. It could, for example, spell out how airplanes can continue taking off, or how crucial data can continue to be shared so business doesn’t grind to a halt.

The Reference Shelf

©2018 Bloomberg L.P.