“What would a ‘No Deal’ after the transition period look like?”
By Dominic Walsh, courtesy of Open Europe
How ‘No Deal’ could happen after the transition period
The revised Withdrawal Agreement agreed by Boris Johnson’s Government replaced the UK-wide ‘backstop’ with a new Protocol that applies only to Northern Ireland. Unlike the previous deal, this Protocol does not provide a baseline for the wider UK-EU relationship in the event that a trade deal is not agreed by the end of the transition period. It is therefore possible that the new deal could lead to a form of ‘No Deal’ or WTO terms-Brexit scenario from December 2020 – as the Government’s own current Brexit guidance admits. Moreover, the Northern Ireland Protocol could also end if a majority in Stormont votes to end it – though the earliest this could happen by is 2026.
The Withdrawal Agreement allows for the UK and EU to agree, by July 2020, to extend the transition period once, for a period of up to two years. However, the Government has so far ruled this out. In theory, the time available for negotiating, ratifying and implementing a trade deal is therefore just 11 months – an unprecedented timetable in the context of other EU trade deals. If the transition is not extended in July 2020 and a deal is not in place by December, the default would be that the UK and EU move to trading with one another on WTO terms. This would also be the case after any extension to the transition period.
However, there may be other ways for the UK and the EU to buy more time and avoid this ‘No trade deal’ scenario – even if the July deadline for agreeing an extension is missed. If more time is needed for negotiations, the UK and EU could agree to a new bilateral “standstill” agreement replicating all or some of the transition period. Alternatively, if a deal has been negotiated but more time is needed for ratification, then those aspects of the deal which are considered an EU competence could be applied “provisionally.” And in any scenario, the transition period will probably need to be followed by a genuine “implementation period” to phase in an agreed deal – especially if the deal is based on a basic Free Trade Agreement (FTA), which would be a significant adjustment for businesses. In short, if there is political will on both sides to avoid ‘No trade deal’, then missing the deadline for transition extension need not be insurmountable.
‘No trade deal’ is not the same as ‘No Withdrawal Agreement’
It is also important to remember that the post-transition version of ‘No Deal’ would be different to a scenario where the UK left the EU without a Withdrawal Agreement. Recognition of these differences must inform both the public debate over a post-transition ‘No Deal’ and the Government’s preparations for such a scenario. The key differences are summarised in the table below.
For a more detailed analysis of the consequences of leaving the EU with no Withdrawal Agreement, see Open Europe’s October 2019 report, ‘Manageable but Material: the consequences of No Deal and how the Government should respond.’
Even without a trade deal, the Withdrawal Agreement will provide some certainty in key areas
The Withdrawal Agreement would remain in force even if the UK and EU moved onto trading on World Trade Organisation (WTO) terms in December 2020. In several areas, this would provide greater certainty than in a scenario where the UK left the EU without a Withdrawal Agreement:
- UK and EU citizens would have stronger guarantees over their rights. In a ‘No Withdrawal Agreement’ scenario, there were some unilateral measures in place for citizens’ rights but these did not offer the same level of certainty as a bilateral deal. By contrast, the provisions of the citizens’ rights chapter of the Withdrawal Agreement would continue to apply in a ‘No trade deal’ scenario.
- There would not be any uncertainty over the UK’s payment of the financial settlement. A ‘No Withdrawal Agreement’ scenario would have cast political and legal uncertainty over whether the UK would pay all of the financial settlement. By contrast, in a ‘No trade deal’ scenario, the UK would have already agreed to pay the so-called ‘divorce bill’ (roughly £30bn, following the successive extensions of Article 50). Indeed, by December 2020, the UK would already have paid a considerable proportion of the financial settlement – around £10bn, according to the House of Commons Library.
- There would not be uncertainty over the land border in Northern Ireland, and Northern Ireland would be unlikely to experience a disproportionate economic impact. In a ‘No Withdrawal Agreement’ scenario, goods moving from Northern Ireland to the Republic of Ireland would likely have faced EU tariffs as well as customs and regulatory controls. This would have posed particular challenges to the Northern Ireland economy – indeed, NI was widely expected to be impacted harder by No Deal than any other region of the UK. In a ‘No trade deal’ scenario, however, the new Protocol on Northern Ireland would continue to apply (with consent for it tested in the Northern Ireland Assembly from 2024). The Protocol provides for tariff-free trade between Northern Ireland and the EU, along with full regulatory alignment on goods; there would therefore be no need for checks and controls at or near the land border. However, although the Protocol would be legally operational in this scenario, there may be questions over its practical functioning in the absence of a wider UK-EU trade deal. If Northern Ireland and Great Britain have fundamentally different trading relationships with the EU, this will have implications for the extent of East-West barriers to trade in the Irish Sea.
- The Withdrawal Agreement’s separation provisions would mitigate some of the adjustment costs. Without a Withdrawal Agreement, businesses would have had to adjust from EU membership to third country terms overnight. While there will still be adjustment costs for businesses in a ‘No trade deal’ scenario, the Withdrawal Agreement does contain provisions which smooth the UK’s exit from the transition period by allowing for the completion of ongoing processes. These include provisions for goods placed on the market before the end of the transition, ongoing customs and VAT procedures, and aspects of ongoing policing and judicial co-operation. Some of these provisions are time-limited.
Additional time to prepare will also make a difference in other areas
As well as the substantive difference of having a Withdrawal Agreement in place, the additional time – with the UK moving onto WTO terms in January 2021, rather than late 2019 – may also soften the impact in some areas:
- There would be more time, and a legal basis, for a data adequacy decision. In the run up to 29 March and 31 October, the EU refused to begin the process of granting the UK a data adequacy decision, arguing that there was no legal basis to do so until the UK had left the bloc. In a No Deal scenario, this would have meant potential disruption to data flows from the EU to the UK. However, once the UK leaves the EU and enters the transition period, the EU will be able to begin the process of granting an adequacy decision – which could be in place by December 2020, even without a wider trade deal.
- The UK Government would have an extra year for domestic preparation. While preparation for No Deal cannot mitigate the issues entirely, an additional year of preparation for UK ports and businesses will certainly make a difference. Indeed, many preparations for additional customs processes will be needed in any case if the future relationship is based on a free trade agreement.
- A stable parliamentary majority would reduce the legal uncertainty over domestic preparation. The deadlock in the last Parliament prevented the Government from passing Bills which were important for No Deal planning, such as the Immigration Bill, the Trade Bill and the Agriculture Bill. If the Conservatives had a parliamentary majority, this would not be an issue.
The implications for GB-EU trade and immigration would be largely the same as without a Withdrawal Agreement
In some areas, particularly trade, the consequences of ‘No trade deal’ will be largely the same as in a ‘No Withdrawal Agreement’ scenario:
- GB-EU goods trade would take place on WTO terms. Exports from Great Britain to the EU would face EU tariffs. Some goods would also be subject to third country regulatory checks and controls, creating additional costs for business. Imports into Great Britain from the EU might also face UK tariffs and checks, though these would likely be less burdensome and under UK control.
- The EU would treat the UK as a third country for services trade. Without an agreement, UK providers of services in the EU would lose preferential access to the single market, as well as mobility rights and recognition of professional qualifications. However, this could also have happened after the transition under Theresa May’s deal – the UK could have moved into the backstop, which only covered trade in goods, with nothing else agreed on services. Similarly, any FTA would also be likely to lead to an adjustment for services trade.
- The timeline for ending free movement of EU citizens to the UK would be very similar. In a ‘No Withdrawal Agreement’ scenario, the UK government planned to phase out free movement of EU citizens gradually, to be replaced by a new long-term immigration policy from January 2021. EU citizens would be able to move to the UK freely during this period, though post-exit day arrivals would only be conferred with temporary leave to remain. With a Withdrawal Agreement in place, free movement will continue as now until the end of the transition period, with the UK government seeking to end it thereafter – whether or not there is a wider UK-EU trade deal by then.
The two versions of No Deal would take place in fundamentally different political contexts
As well as the policy differences, the political backdrop to ‘No trade deal’ would be fundamentally different to ‘No Withdrawal Agreement.’ The latter outcome would likely have represented a significant rupture in UK-EU relations, with a ‘blame game’ likely to ensue over economic damage and Northern Ireland and a divisive fight over the status of the financial settlement. In this context, any joint or bilateral mitigation measures or ‘side deals’ were unlikely in the short-term.
In contrast, ‘no trade deal’, though not a harmonious outcome, would come about in a scenario where agreement on some of the most contentious issues, such as Northern Ireland and money, had already been reached by the two sides. The UK-EU institutional architecture established by the Withdrawal Agreement – such as the Joint Committee – will also remain in place, providing a platform for potential discussion of bilateral mitigation measures. In this context, the prospect of ‘side deals’ might be higher – though this will also depend on how acrimonious the failure to agree a deal is. It remains the case that, compared to an FTA outcome, a ‘No Deal’ in the second phase does carry wider geopolitical risks for UK-EU relations.
Dominic Walsh is a policy analyst who joined Open Europe in 2017. He holds an MA in British Politics and Contemporary History at King’s College London, where he obtained a Distinction.