What to expect from a no-deal Brexit


TO STAND ON the white cliffs of Dover is not merely to reflect on British isolation, splendid or otherwise, or on the remarkable Cretaceous geology beneath your feet, or even to wonder at the perennial lack of bluebirds. It is to look down at a marvel of frictionless trade in action. Dover is Britain’s ninth-busiest port in gross tonnage, but in terms of roll-on-roll-off traffic, the sort that keeps the country’s economy tightly coupled to its neighbours beyond the narrow sea, it is far and away the biggest (see chart). Ships like the Pride of Kent and the Calais Seaway pass through its seawalls ten times a day; as many as 10,000 lorries snake slowly but uninterruptedly in and out of the port. About £120bn ($150bn) of traded goods pass up and down Jubilee Way to and from the port each year, 17% of Britain’s total. A lot of it is needed urgently.

If no new actions intervene, the view will be quite different on March 30th next year. On March 29th, Britain’s withdrawal from the EU under Article 50 of the EU Treaty, set out two years previously, will become a fact of European law; in Britain the European Communities Act of 1972 will be automatically repealed under the terms of the European Union (Withdrawal) Act of 2018. If the current draft deal on Brexit is accepted by a majority in the House of Commons and by all the other EU governments, its terms will then come into force, and an orderly transition period will get under way. If the deal is not agreed, and if no action is taken to change the timing of withdrawal under Article 50, Britain will go its Brexit way with no deal.

Britons who favour Brexit come-what-may like to portray this as simply a change of trade rules from those of the EU to those of the World Trade Organisation (WTO). They say that with goodwill and astute bargaining most of the difficulties could be easily overcome, and that worries about food rationing or medicine shortages are the second coming of “Project Fear”—the term they used for the predictions of economic woe made by people arguing for Remain during the referendum campaign of 2016. They insist that no deal is greatly preferable to the deal now on the table, in which they perceive unacceptable constraints on British sovereignty.

This is triply disingenuous. Changing to WTO rules is about more than tariffs and will affect large swathes of the economy. A no-deal Brexit is about a lot more than trade—it would see many legal obligations and definitions lapse immediately, potentially putting at risk air travel, electricity interconnections and a raft of financial services, and throwing into doubt the status of EU citizens in Britain and British citizens in the EU. And goodwill may be in very short supply after a deal has foundered. Instead, expect acrimony—both within whatever rabble then runs Britain and between it and the EU.

According to the Confederation of British Industry, a lobbying group, EU exports to Britain would face a trade-weighted average tariff of around 5.7% the day after a no-deal Brexit. Goods going the other way would face tariffs of 4.3%. The WTO’s rules mean that the two parties could not simply lower tariffs on each other. To lower tariffs within the WTO you must either enter into a fully fledged trade deal or lower them for all-comers: no playing favourites. Trade beyond the EU would be affected, too, since all the trade deals Britain currently benefits from were negotiated through the EU and lapse on Brexit. Countries with such free-trade agreements currently account for 16% of British exports by value. Some countries are arguing over the terms of Britain’s membership of the WTO itself, since it joined as a member of the EU. This could lead to formal trade disputes in time. But in the short term trade on WTO terms should be able to carry on.

Some Brexiteers favour a radical response: get rid of all tariffs on imports, as Hong Kong, Macao and Singapore have done. Extravagant assumptions about the benefits of this explain why some pro-Brexit economists see no deal as much less damaging than most of their colleagues. But tariff abolition would have huge effects on agriculture and some types of manufacturing. The government has no plans for such an extirpation.

Come-what-may-ers who accept this say that even if tariffs remain they can all be dealt with frictionlessly on the internet. But a study by Britain’s National Audit Office recently found that 11 of the 12 IT projects critical for such streamlining are at risk of not being delivered by the end of March. And tariffs are not the only thing changing. There are also excise duties and health checks for food, plants and animal products—much harder to replace with a webpage. For EU goods these currently tend to affect just 2% of shipments; but for third parties they can cover up to 50%.

Even if the British were to relax some of these requirements—which would in some cases need changes to the law—the French show no indication of wanting to. They have contingency plans to recruit an extra 700 customs officers and impose checks on food, plants and livestock which will require new facilities at many ports (claims by no-deal minimisers that the WTO’s “trade-facilitation agreement” prohibits such new checks are incorrect).

Such cares taken by the French could be bad news for British farmers and fishermen, who export a lot. More than 50% of fish caught by British boats end up elsewhere in the EU. If the export mechanism grinds to a halt the newly exclusive access to British waters enjoyed by the country’s fisherfolk may bring them little joy.

The odd rotting fish on the quayside apart, what harm do a few more lets or hindrances at the border do? A lot. Small delays add up to large tailbacks. Researchers at Imperial College London have calculated that two minutes more transit time per lorry at Dover and the Channel Tunnel translates into a 47km traffic jam. The British government has contingency plans for turning a 20km stretch of the M20, the motorway which runs through Kent to Dover, into a multi-lane lorry park. France has published a draft law that would grant the government emergency powers to implement measures that could minimise the disruption in the event of no deal: it makes for sobering reading. British ports themselves seem to expect a permanent move away from roll-on-roll-off; those that deal with containerised shipping have been making plans for expansion.

Gas pipelines and electricity interconnectors are not subject to border checks or tariffs. But they are subject to law. “In a pure no deal,” says Alex Harrison of Hogan Lovells, a law firm, “the strict legal position is that there would be no legal basis for electricity to flow.” But stop-gap “alternative access rules” are likely. Britain provides most of the gas that keeps Irish homes warm; Northern Ireland, which has only one interconnector to mainland Britain, gets enough of its electricity from the Republic for the possibility of an interruption to be somewhat disconcerting. “Everyone has an incentive to be sensible,” Mr Harrison says.

Sensible—but not necessarily accommodating. Britain might well end up with no access to the EU’s “market coupling” mechanism, which enables countries to pre-plan electricity imports. This could push up prices, says Georgina Wright of Chatham House, a think-tank, who also notes that Britain’s zero-carbon-energy plans require four times its current interconnection capacity.

The WTO’s rules provide particularly threadbare cushioning for trade in services—31% of Britain’s trade with the EU and 35% of its trade with the world. Reducing trade barriers on services requires regulatory harmonisation, which the 164 WTO members find very hard. The lack of WTO rules means that the EU could easily block or hinder British firms offering services on the continent

Many banks and financial-services firms operating out of London have had to establish new bases in other EU countries because in a no-deal Brexit they will suddenly lose the “passports” that allow them to serve clients in any EU country from Britain. Barclays, a big British bank, is planning to consolidate all its EU27 branches in a subsidiary in Dublin, with £224bn in assets (around a quarter of the group’s balance-sheet). Other big banks have chosen Frankfurt or Paris—inconvenient, perhaps, but not a game-changer. One banker says that he is much more concerned about the broader economic effects of a no-deal Brexit on his clients than the direct effect on his industry.

The status of some financial contracts is a bigger source of worry. According to The CityUK, a trade body, the end of British passporting could call into question about £26trn in derivatives. London is easily Europe’s biggest centre for trading and clearing these contracts. As the rules stand, clearing in London would no longer be available for clients in the EU after a no-deal Brexit—bad for the City, worse for many EU investors. Clearers may apply for approved “third country” status, bringing them back within the pale—but only after Britain becomes a third country on March 29th. The European Commission has promised to treat British exchanges and clearers as equivalent to those in the EU on a “temporary and conditional” basis. But the future of clearing remains unclear.

Tariffs and restrictions on exports of goods and services will reduce British companies’ profits; imposed on imports they will increase prices. That is one of the reasons why a no-deal Britain would see inflation rise. The other is the unavoidable fall in the pound. This could be steady or vertiginous, depending on how markets see things; it could also start well before no-deal day, perhaps increasing Britain’s appetite for last minute stop-gaps. The pound currently hovers at around $1.30. Traders are banking on it falling to below $1.20 in the event of no deal. It could drop a lot further; some talk of it reaching parity with the euro, or even the dollar.

Britain borrows a lot more than it saves: it has a current-account deficit equal to 4% of GDP. Since the referendum Britain has largely financed this deficit with short-term financial flows, such as deposits to banks. That money can vanish in a trice, pushing the pound’s value down a long way. A rule-of-thumb among economists says that a 10% fall in sterling translates into an eventual 2% rise in the consumer-price index. Parity with the dollar would thus mean inflation above 5%.

Higher inflation and interest rates would cause pain for businesses borrowing money and for citizens in receipt of working-age welfare payments, most of which are frozen in cash terms from 2016 to 2020. It would also cut the purchasing power of salaries.

Such purchasing power matters most when there are things to purchase. In the days and weeks after a no-deal Brexit that will sometimes not be the case. Lorries gridlocked across Kent and the Pas-de-Calais will not be the only logistical problem. British lorries can currently carry goods between any two points in the EU. After a no-deal Brexit haulage would instead be subject to the Vienna Convention on Road Traffic of 1968. (It was for this express reason that Britain bestirred itself to ratify the convention last March.) This will allow Britain to issue up to 1,224 of the country’s 75,000 lorries with permits for travel between Britain and the EU every year. To avoid a spectacular failure of the transport infrastructure Britain will need unilaterally to allow EU lorries into Britain, which will not please its native hauliers. Even so, prices will go up and capacity will shrink.

Britain’s big supermarket chains hold as little as one-and-a-half days’ worth of fresh food in their supply chain at any given time, and say they have no capacity to hold more. With the country in a logistical seizure that suggests a dearth of at least some things in some areas. A few in the industry are speculating that the government might take control, as the Labour government did in the face of blockades at oil refineries in 2000, working with the industry to allocate petrol to stations in areas with large populations. Industry leaders could conceivably work with the government to determine which areas should be given priority for food deliveries and distribute the food accordingly. In those circumstances, some form of rationing would be almost inevitable, reckons one big supermarket.

A no-deal Brexit would also disrupt the supply of medicines and medical devices. Mike Thompson, head of the Association of the British Pharmaceutical Industry, says the industry has been on notice since July to accelerate its preparation for no deal. Stocks of medicines have been increased; Novo Nordisk, a Danish firm, is doubling the insulin it has on hand to guarantee a 16-week supply. But in October MPs were told there were simply not enough cold-chain warehouses to ensure supplies of drugs that need a constant temperature from manufacture to injections. Drug companies working with the government have recently been prevented from talking about the planning needed by strict gagging clauses. That may make it easier for commercially sensitive information to be shared between government and industry, but it limits the scope for scrutiny or reassurance. What is clear is that the various factors at play will drive up costs for the NHS. The Nuffield Trust, a think-tank, has estimated that no deal would cost the NHS an additional £2.3bn by 2020.

Another business which will be thrown off-kilter is the car industry (see map), on which more than a million jobs depend. The lean manufacturing that Toyota, Nissan and Honda introduced when they made Britain a manufacturing base requires supply chains which criss-cross the country and the EU—and now make the industry vulnerable.

Consider the plant in Oxford where BMW churns out 1,000 Minis a day. Each is made up of 4,000-5,000 parts. Bringing 4m parts to the factory on 200 lorries every day is a “significant logistical challenge”, says Graham Biggs, the firm’s communications director. Three-fifths of them come through Dover or the Channel Tunnel; their contents are unloaded directly onto the apposite part of the production line. Reconfiguring its supply chains to circumvent hold-ups and tariffs would take years if it were possible at all. Many of its suppliers have no facilities in Britain, and the industry’s worsening prospects—cars exported to the EU27, as 54% of the 1.3m exports made in 2017 were, will face 10% tariffs—would hardly encourage them to relocate. Thus the short-term effects of no deal would build into a chronic and perhaps terminal problem.

Some proponents of Brexit come-what-may say that such businesses need to stop moaning and start stockpiling. For the car industry this is pretty much a non-starter, given the complexity of the challenge. And even for simpler trades there is a problem: no room at the warehouse. Britain had precious little spare warehousing capacity even before the new demands of Brexit. According to Savills, a property company, vacancy rates for warehousing have been falling steadily since 2011, and are now as low as 6% nationally and 4.6% in London and some parts of the south-east. There is some speculative warehouse building—but nowhere near enough. (Disclosure: The Economist is stockpiling around 30 tonnes of the paper on which the covers of our British edition are printed, which comes from the Netherlands.)

With ships and trains there is at least good reason to believe that goods would still get through, even if the pace is glacial. In theory, that is not necessarily the case with aircraft. If Britain left the EU with no deal, airlines would no longer be able to fly between the two without some new agreement. This prospect is so dire that most EU diplomats believe an agreement on air travel would be made either before the fact or very quickly afterwards.

Such an agreement, though, might easily see British carriers forbidden from flying between destinations within the EU27, and EU airlines refused access to internal routes in Britain. And neither British airlines nor European ones would necessarily be able to fly from Britain to America: the open-skies agreement between America and the EU would cover neither post-Brexit British companies nor European airlines flying to America from a non-Eu country.

And what of the people who come into Britain by plane, or ship, or tunnel? One of the strengths of the proposed deal is that it gives clear rights to British citizens in the EU27 and their continental and Irish counterparts in Britain. The 3.7m EU27 citizens in Britain would have the right to remain, to work, to leave and return, and to bring some family members to live with them. Britons in EU countries get similar rights, so long as they arrive before 2021.

Without a deal, free movement would end as soon as new immigration systems were in place—what would happen before that is anybody’s guess. The greatest worry in the medium term is that the rights that ex-pats in Britain and the rest of the EU would enjoy under the deal would be whittled away. France says that, legally speaking, all Britons living there after a no-deal Brexit would need work permits, and that employers with Britons lacking such permits on the payroll would be criminally liable. Its draft law covering a no-deal Brexit recalls the legal requirement for retirees and others to apply for long-stay visas. Different countries would probably take different approaches, making it monumentally confusing for multinational employers.

If EU governments introduce obstacles for Britons wanting to visit, live or work there, the British government would face pressure to trim further the rights of EU nationals in Britain. If this cut Britain off from trained workers, the country would run into trouble. From road haulage to universities, many British enterprises depend on foreign nationals. Ian Cumming, who is in charge of medical training in England, estimates that it would take 10 to 12 years to become self-sufficient in training medical staff. And what staff there are may face a larger caseload. There are 190,000 Britons living in the EU who get the same access to health care as locals thanks to agreements a no-deal Brexit could end. Some, poor and elderly, would move back to Britain rather than pay for new insurance.

Goodwill could forestall some of those issues; but there are some areas where it is helpless without legal instruments. Co-operation on policing and security in Europe depends on a legal framework that will not apply in a no-deal world. Britain would fall out of the EU’s crime-fighting agencies, be denied access to databases containing criminal records, fingerprints and DNA data, and lose the right to use the European Arrest Warrant.

Britain’s police forces searched for criminal records on the Schengen Information System 539m times last year. Britain requested 278 arrests in other EU countries, while receiving 16,837 requests coming the other way. Falling out of the warrant system would not only make it harder for Britain to seek criminals overseas—it would make it harder for Europe to get its hands on those in Britain. In the 1960s criminals from Europe seeking to evade extradition often settled safely in Franco’s Spain; a no-deal Brexit could see them descend in their masses on Britain.

Obviously, not all the damage of a no-deal Brexit would be done to Britain. The IMF estimates that though Britain would lose about 5% of GDP by the end of the five subsequent years the Dutch, Danes and Belgians would also see losses of 1% or more—and the Irish would stand to lose 4%. If Britain leaves the EU without any deal, both EU and WTO rules would require the enforcement of a hard border between the Republic of Ireland and the six counties of Northern Ireland, with associated checks and controls. The British Northern Ireland secretary said as much this week, as have Philip Hammond, the chancellor, and Leo Varadkar, the Irish taoiseach.

Devotees of Brexit come-what-may note that the British and Irish governments have made commitments not to enforce the border. They suggest seeking a waiver from WTO rules in the matter. Given the open border’s importance to the peace process, they suggest, a national-security exemption might be in order. But this is not convincing other than in the very short term. After a no-deal Brexit, Ireland and Northern Ireland would be in different customs, regulatory and food-safety regimes. The European Commission has said that health and food-safety checks would have to be applied to all farm trade. There may be scope for operating some of these controls away from the border itself, but the risk of smuggling and organised crime in a place with a long history of both would be great. Brussels is clear that it could not allow a long-term hole in its external border to be created by a failure to apply physical customs and regulatory controls.

The practical implications worry businesses in Northern Ireland. Giving evidence to the House of Commons last month, the Northern Irish Freight Transport Association noted that 4.6m commercial vehicles cross the border every year. The Northern Ireland Food and Drink Association pointed out that 30% of the province’s milk and 40% of its sheep go south for processing. Both Guinness and Bailey’s Irish Cream cross the border for canning, bottling and export.

And this only begins to touch on the longer-term problems. British scientific research is intimately tied up with that of its European counterparts; without ways to continue those ties, both will suffer. Military co-operation, too, will become far harder after a no deal—if, for example, Britain finds itself excluded from the EU’s Galileo satellite-navigation system.

What will markets make of such woes? The big short-term effect would be the fall in the pound—bond markets and stockmarkets may at first do fine. Government bonds are a safe-haven asset for traders, and are in constant demand from pension funds. More than 70% of the earnings of firms in the FTSE 100 index come from overseas, and the weakened pound would increase the value of these foreign earnings, and thus of the companies. It is also possible that cheap sterling might spur on exporters. But the big fall in the pound’s value after the referendum has had no such effect. British exporters compete on quality and customer service not only price.

But shrinking real wages, a bitter pill for Britons already paid less in real terms than they were a decade ago, are likely to damage overall economic growth pretty quickly. If recession loomed, as it is easy to imagine it would if five percentage points of growth are sacrificed in just a few years, the Bank of England might cut interest rates, as it did to steady nerves after the referendum. But rates are already near an all-time low of 0.75%, and the inflation rate is above the bank’s 2% target.

The government might have a nice nest-egg with which to boost public spending. The deal on the table sees Britain paying £39bn to the EU—a sum often called the “divorce settlement” in Britain, while seen as “the money you committed yourself to spending on stuff we all wanted back then” in the EU. It is inconceivable that Britain would pay all of that out in the case of a no-deal Brexit. It is at the same time likely that the EU would pursue some of what is not paid through an international court.

None of this stills the come-what-may-ers. But worries about the consequence of a no-deal Brexit are rising in the cabinet, especially among ministers in charge of departments that will be at the sharp end. It is notable that Michael Gove, a leader of the Leavers, is in his current role as farming and environment secretary sticking with the prime minister, Theresa May, and the deal that his erstwhile comrades excoriate. His department has been given extensive briefings on the cost of no deal in terms of supermarket prices and food shortages.

The public, though, has not benefited from such briefings, which are said to have included the national nightmare of a Mars Bar shortage. Polls show a majority currently favours remaining; but among the hefty number still in favour of Leave, a no-deal Brexit is more popular than the draft deal on the table. And the mood in Brussels is apparently closer to acrimony than fellow feeling; if there is no deal, extra efforts to help Britain are unlikely, say diplomats, even if small moves by the EU would confer large benefits on Britain. At this stage, you might think, they would say that, wouldn’t they. But when you are on the edge of a cliff, even one as picturesque as those above Dover, it is well to take threats seriously.