In less than two months, the United Kingdom is set to depart the European Union. London’s disengagement from the EU after four decades is a monumental task.
Given the tremendous policy upheaval, American firms who trade and do business in both the UK and EU have consistently called for clarity and certainty on the way forward. Up to now, London and Brussels have been unable to coalesce around a mutually acceptable withdrawal agreement, let alone a long-term trade deal. Just this week, members of the UK Parliament again chose to defer a final decision for at least a few more weeks.
With every passing day, the UK edges closer to crashing out of the EU without a deal on March 29. Such a “no deal” scenario would have severe impacts on the movement of goods, services, data and people, with attendant impacts on global financial markets.
How severe? The British government and the Bank of England recently examined the impact of crashing out of the EU without a deal: “the economy would be between 6.3% and 9% smaller after 15 years than if the UK remained an EU member, according to the government.” The Bank of England examined a “doomsday scenario” that would “leave the economy more than 10% smaller at the end of 2023 than it would have been had the UK stayed in the EU.
Here are some of the specific complications:
First, the UK would immediately lose its preferential access to its largest trading partner. This has multiple implications. British exports will be subject to EU tariffs and significant new customs checks and could be rejected at the border for lack of proper authorizations or certifications. European exports to the UK would face similar disruptions. New checks at the border would be particularly disruptive for small and medium-sized enterprises, especially those who currently only do business within the EU single market.
Second, no deal would mean no transition period, which companies are banking on to sustain the status quo until the future UK-EU relationship is defined. This is absolutely vital for business to meet customer needs on the day after Brexit.
Moreover, there will be significant pressure to re-establish a customs and regulatory border on the island of Ireland to ensure that non-compliant British or third country goods do not slip into the EU market through the back door. To avoid such a politically divisive move, the draft withdrawal agreement includes the so-called “Irish backstop,” but this mechanism is at the heart of Parliament’s objections to the deal. Prime Minister May will seek to replace the proposed backstop with “alternative arrangements,” but so far the EU has categorically rejected this. Absent some mutually acceptable solution, re-establishment of a hard border is a real possibility.
The impacts of new border restrictions would be severe: the UK’s own revenue and customs department estimates that customs declarations at ports like Dover will increase fivefold. Delays of only 60-70 seconds per truck at Dover will be enough to cause a “permanent traffic jam” across southern England’s highway system. These delays will particularly affect perishable items, food, and medicines. To avoid these risks, grocery stores and pharmaceutical companies have been urged to stockpile up to 6 months’ worth of products, but there is insufficient warehouse capacity to maintain adequate quantities.
Road haulage between the EU and the United Kingdom also will be severely restricted, as the number of British drivers legally licensed to provide services on EU territory would be sharply limited. UK air service providers won’t fare much better: they would lose the right to access multiple countries, preserving only the right to fly passengers or cargo directly between the UK and a single EU entry point. American air carriers and delivery service providers would lose the ability to complete onward flights after initially arriving in the UK from the U.S.
Against this backdrop, it is entirely reasonable to expect that manufacturers would move at least some of their UK operations to the EU to avoid supply chain delays or increased costs of moving suddenly dutiable inputs across the border multiple times.
Movement of data and people also will become an issue. Unless and until an adequacy decision is made by the European Commission, data will be unable to move freely between the UK and EU. Likewise, firms operating in the UK may be restricted in their ability to send workers on temporary contracts to the continent, with particular negative effects on the UK’s dominant services sector.
Meanwhile, UK regulatory agencies are ill-equipped to approve medicines, vehicles, food safety, or airplanes in a timely fashion, as these duties have been performed by EU institutions for decades. In the chemical sector, the UK’s exit from the EU system for chemical regulation would entail the re-registration of thousands of substances at a cost of tens of millions of dollars to industry.
More broadly, the EU will lose the world’s fifth largest economy, which represents more than 15% of the EU’s combined GDP. The UK will no longer benefit from the EU’s network of more than 40 FTAs. By extension, UK content will no longer count towards rules of origin requirements for EU goods exported to FTA partners. Finally, the UK will lose its ability to shape EU policy and become a rule-taker, and the U.S. would lose a valuable pro-growth ally in EU decision-making circles.
The UK Parliament has said it wants to avoid a no-deal scenario, but the risk of grave economic consequences grows more real with each passing day. Firms are edging closer to – or have already begun – executing costly contingency plans.
If the British government cannot secure changes sufficient to win parliamentary backing, an extension of the March 29 deadline will be essential to avoid a disastrous cliff edge. It’s imperative that lawmakers and negotiators now devote the full force of their efforts to sealing a deal.
Related: Quick Take: Your Primer on Brexit – and Why It Matters to U.S. Businesses
Correction: The post originally stated the UK "represents fully 25% of the EU’s combined GDP." Actually, it represents more than 15%. We apologize for the error.