The cost of a no-deal Brexit

After a tense weekend of endgame negotiations, a post-Brexit trade deal between the UK and the EU has once again stalled over final issues such as fishing laws. The UK is set to leave the EU single market and customs union on December 31. A no-deal agreement would spell tough times ahead for both sides.

No more special treatment

As an EU member, the UK is part of a seamless trading system comprising a single market of over 450 million European consumers. The EU is currently the UK's largest trading partner, accounting for 43% of all UK exports in 2019, according to government figures.

If a new agreement is not reached, starting on January 1, 2021, trade between the EU and UK will fall back on rules and tariffs established by the World Trade Organization in 1995. The UK will have to start paying tariffs on imports from the EU, and vice versa.

Increases in tariffs on food could push up grocery prices for British consumers. Supermarkets can expect an additional cost of 3.1 billion pounds ($4.1 billion, €2.4 billion) a year, according to the British Retail Consortium, with around 85% of food imported from the EU charging tariffs of at least 5%. Textiles, animals and animal products, and food and beverages are among the import categories where prices are expected to rise the most, with projected import price increases of at least 20%.

British carmakers would face tariffs of 10% on all auto exports to the bloc, as much as €5.7 billion ($6.92 billion) a year, while dairy exporters in the UK are looking at a 35.4% tax on goods.

Markets cut off

The UK's service sector, which accounts for some 80% of the country's GDP, will lose the right to cater to EU clients. In order to maintain access to this market, companies may be pushed to set up offices in the EU, as some already have. Many may be required to have their professional qualifications re-accredited by authorities within the EU should they wish to maintain operations there.

The UK would also be cut off from the EU's energy market.

Germany-based financial services provider Allianz predicts the UK will experience an overall increase in import prices of 15%, triggered by higher tariffs, a forecasted 10% depreciation in the value of the pound, as well as increased supply chain and administrative hurdles. Analysts have forecast a 5% drop in British gross domestic product (GDP) and a 15% drop in total exports.

A test for EU leadership

Difficulties will go both ways, of course. Cutting the EU off from a market of some 65 million British consumers, a no-deal Brexit could cost the bloc as much as €33 billion in annual exports. Germany would be hit the hardest (€8.2 billion), followed by the Netherlands (€4.8 billion) and France (€3.6 billion), representing over 10% of exports to the UK for each of the three countries.

A hard Brexit will also provide a negative answer to the question of whether the EU will be allowed continued access to British fishing waters. While the overall trade implications would be small, this would put at risk the livelihoods of European coastal communities that depend on fishing.

Eastern European economies like Poland that export heavily to the UK will also take a hard blow. These developments will raise questions about EU leaders' abilities to counteract the fallout. Economic relief for affected markets would require unanimous backing from the 27-member states, not an easy feat, as attempts to pass a coronavirus relief fund have proven.

The Irish border problem

For reasons of history, negotiators have sought to avoid re-establishing physical checkpoints along the border between Northern Ireland, which is part of the UK, and the Republic of Ireland, a member of the EU. As a workaround, the UK government had previously agreed to apply tariffs to goods that crossed the Irish Sea from Britain, an agreement it has since said it would go back on. The EU would then have to decide between establishing a physical border or leaving the route vulnerable to use by smugglers sneaking products into the EU.