Deal or No Deal: What happens if the UK leaves the EU without a comprehensive agreement?

By Dean Godson

This call for evidence, by our Director Dean Godson, is also featured on ConservativeHome

That’s it. The Prime Minister has triggered Article 50. The “Great Repeal Bill” White Paper has been published. The UK will definitely leave the EU by March 2019.

From our offices in Westminster, it is clear that much of the collective brainpower of Whitehall officials and politicians is concentrated on the topic of Brexit. However, it is worth also considering what happens if we don’t get a deal. What happens if it becomes clear, as we approach the end of the two year negotiation window, that the UK cannot secure an attractive deal for Brexit? Or more likely, that by March 2019 we can only agree a partial deal covering some issues and not others, or agree a deal with some Member States and not others?

What happens then? What do we do next to make a success of things?

While the focus of attention should clearly be on negotiating the best possible Brexit deal with the EU, would it not also be sensible for the UK to put in place contingency arrangements in the event that negotiations break down? At what point is it sensible for civil servants to begin to put contingency arrangements in place? Could the creation of credible contingency arrangements strengthen the UK’s hand in the negotiations? In which areas would the UK be in a strong position in the event of “no deal”, and where might the risks lie for the UK? Would the creation of credible contingency arrangements help to substantiate the position that “no deal is better than a bad deal”?

Brexit Contingency Planning

Over the next few months, Policy Exchange will examine the practical implications of the UK exiting the EU without a comprehensive deal in place, the opportunities and risks this presents, and the extent to which the UK can turn this to its advantage. We will be examining this question in a series of articles and events, driven by each of our specialist research units, and culminating in a forthcoming report.

This will seek to assess the immediate effects of Brexit on a wide range of policy issues, from trade and migration, to fisheries and air traffic control. In addressing this question, it is sensible to distinguish the immediate practical challenges of a departure from the EU with no agreement, from the medium to long term policy issues. For example, failing to agree a deal with the EU could give rise to immediate issues concerning border controls and the movement of goods and people, which can be considered separately from longer term questions about the future direction of immigration or trade policy. It is also sensible to distinguish matters concerning public expenditure from matters of policy and regulation; likewise, short term transition costs from longer term implications.

On preliminary examination, a number of policy areas clearly stand out as presenting immediate issues in the event that there is no deal:

• The Brexit “divorce” settlement: in the event that the UK leaves the EU with no post-Brexit agreement, disputes over the past relationship – including monies that the UK may or may not be said to owe to settle outstanding financial liabilities – will continue. How are such disputes to be adjudicated? To what extent can the UK frame its Article 50 negotiating process in order to contain any potential liabilities? Is there room, in the course of negotiation or afterwards, for the UK to claim a share of EU assets? If both parties agree, the International Court of Justice might adjudicate any disputes. Should the UK consent to adjudication by this body?
• Foreign Affairs and Defence: Foreign and defence policy is less affected in legal and technical terms by EU membership than other areas of policy. The UK’s relationship with NATO will be unaffected in the short-term, as will existing bilateral agreements with France and other EU states. However, to what extent could the failure to agree a Brexit deal create short term issues concerning intelligence cooperation, information exchange and joint military operations? Membership of “Europol” is one of the areas that will need to be addressed for example. What would the implications be if the UK ‘crashes out’?
• Trade and Customs: Membership of the Single Market and Customs Union means that goods moving within the EU are currently tariff-free and subject to light touch border checks. In the Prime Minister’s Article 50 letter, she made it clear that the UK will leave both the Single Market and Customs Union and seek to put in place a Free Trade Agreement with the EU (as recommended in our report, Clean Brexit). The negotiation of a Free Trade Agreement could take longer than the two-year Article 50 process, and it is therefore possible that there will be a period of time when the UK’s trading relationship with the EU is based on WTO rules alone. The EU is unlikely to impose punitive tariffs on the UK, as it would have to apply them to all its trading partners under WTO rules. But non-tariff barriers may proliferate and the UK would need to decide how to respond. The UK should seek to make progress on trade deals with non-EU countries and examine existing EU FTAs to see where the UK can build on them. In addition, the UK could explore the potential trade benefits that re-joining the European Free Trade Association (EFTA) may offer. What are the economic benefits of the Single Market given the apparent export success that countries outside it, such as Malaysia and the US, exhibit without trade agreements with it? Would the UK wish to put in place border checks for EU imports? What IT systems would be involved and what practical IT procurement challenges would this present to the UK Government? Given reports which a fivefold potential increase in customs declarations, and that there are already problems with the present digital Customs Declaration Service that is being developed, what further challenges will Brexit involve? What are the implications of this in terms of staff and will the new system be able to cope with this increased volume of traffic? To what extent can technology reduce these barriers to trade in practice?
• Farming: The application of tariffs to agricultural products will be disruptive to UK agricultural exports, which have spent the last 40 years in an artificial, highly protected and subsidised market. Would the UK Government want to abolish the Common External Tariff and quotas that currently protect EU farmers and food producers from international competition, thereby lowering UK food costs? How can the Government ensure that the consumer’s voice and best interest is put at the heart of the process? The big issues surrounding farm subsidies within the Common Agricultural Policy and environmental stewardship are for the longer-term. But what transitional arrangements will need to be put in place in the short to medium term?
• Status of EU citizens in the UK and UK citizens in EU:On departure from the EU, the status of EU citizens living in the UK and UK citizens resident in the EU at that point would be an immediate issue. This raises questions about what is an appropriate cut-off point, and what the terms should be for those who arrived here before or after the cut off point. Those who could easily prove that they have lived here for five years or more would qualify for permanent residency. Based on current rules, those coming after the cut-off point would not only need visas for work, but may also have to accept more restrictive access to the welfare state. Currently all non-EU immigrants who are here for more than 6 months need biometric cards. Would this in future apply to all EU citizens or just those arriving after the cut-off point? The UK may be able to act unilaterally to determine how EU citizens would be treated in the UK, but would the UK want to do this without agreeing mutual treatment for UK citizens resident in the EU? If it becomes impossible to reach agreement on this at EU level, could the UK then seek bilateral arrangements with countries such as France, Portugal, Spain, Malta and Cyprus where there are significant numbers of UK expats?
• Migration and travel: Related to this, there would also be some very practical issues concerning the short-term movement of people to and from the UK and Europe. Post-Brexit, would the UK immediately end the “EU channel” at ports and airports and treat all non-UK citizens alike? In the event that there is no deal, would UK citizens need to obtain a visa to travel to the EU and vice versa? What impact would this have on the level of checking required at borders? What impact would this have on business travel and tourism? Would Border Forces (in the UK and EU) need to expand to avoid overloading the system? Could there be challenges concerning systems, IT and procurement? Could all of these issues undermine existing arrangements such as the Le Touquet agreement with France which governs border controls at the English Channel?
• Northern Ireland: All of the complexities about borders apply in a more amplified form in relation to the Irish border. The UK and Irish Governments will be desperate to avoid the cost, complications and political sensitivities associated with creating a hard border, but what are the alternatives? In practice the dangers of free movement into the UK via the Irish Republic are probably exaggerated. Those wishing to enter the UK could easily come as tourists and remain, with unrecorded jobs. In any case intelligence cooperation is likely to be forthcoming from Dublin. In extremis, could checks be imposed at Northern Ireland’s ports and airports (where most travellers already show photo ID)? How would any sort of special arrangement for Northern Ireland be sensitive in relation to the question of Scotland’s future place in the Union? How would the Government counter Scottish National Party arguments that a harder Northern Irish border would show that the disruption associated with the same thing between Scotland and England could be minimised? What would the additional complications be if the devolved institutions at Stormont are not restored?
• Gibraltar: Gibraltar raises similar issues as those for Northern Ireland above: much of the work force arrives from Spain each morning and leaves in the evening. Given that the EU has suggested that Spain should be able to veto any agreement on Gibraltar, will this be a sticking point for a wider deal?
• Crime and Security Co-operation: Amongst the most high profile issues are crime and security. This is one issue where, given the common threats, there will be a genuine wish on both sides to reach some form of agreement, but this is unlikely to be easy or quick. The Prime Minister has made clear that she wants to maintain cooperation on law and order, yet most existing formal channels of cooperation, including the European Arrest Warrant, are subject to European Court of Justice (ECJ) jurisdiction and oversight. Given that Iceland and Norway have access to information sharing arrangements from outside the EU, could we assume that the UK would still have access to intelligence? Could the UK fall back on agreements which preceded the European Arrest Warrant such as the European Convention on Extradition? How much would we lose by leaving Eurojust, which enables prosecutors to collaborate to set up Legal Joint Investigation Teams to investigate international crimes like terrorism? How indispensable is Europol given that the US and even Russia share information and expertise with them?
• Aviation and airspace: In the area of air traffic control it is possible that the status quo could continue, reflecting the pivotal geographical position of UK airspace in transatlantic travel and the significant role that UK air traffic controllers play in setting the benchmark for safety and management of its complex risks. Currently British airlines are able to fly freely between and within Member States throughout the EU under the Single Aviation Market – and can fly freely to the US thanks to the EU-US Open Skies agreement. Given that aviation agreements can take years to negotiate, what happens if we are unable to put in place a transitional agreement which will safeguard airlines’ ability to operate as before or to protect the freedom of consumers to travel? Will British airlines continue to be able to fly within the EU without becoming EU companies (which some operators, such as Easyjet, are already exploring)? If we leave the EU Common Aviation Area without negotiating access, will it still be legal for British airlines to fly to European destinations? What would the impact be of the UK not remaining a full member of the European Aviation Safety Agency (EASA)? How would any changes to the border and customs regime affect passengers and cargo travelling by air?
• Fishing and Territorial Waters: Following Brexit, the UK will regain control of fishing rights in UK waters that were ceded to the EU under the Common Fisheries Policy. This raises immediate questions concerning the access to UK waters granted to non-UK vessels, and whether they can reclaim historic rights under international law. There are also questions about the UK’s ability to police its waters, and whether the Royal Navy has the capacity to carry out this role. Further questions arise about how to construct a fisheries policy which is sustainable. Should the Government consider a comprehensive review of the science of fish stocks, aquatic management and future policy? How can the UK Government help the UK fishing industry adjust to the imposition of the Common External Tariff if the UK leaves the EU without a deal on trade, for example by developing new international markets?
• Banking and Financial Services: Exiting the EU without a deal will have implications for financial markets and banking. There would be an immediate loss of “passporting” rights for UK financial institutions, preventing UK-based firms from doing business elsewhere in the EU unless they have fully capitalised subsidiaries. The UK may not be able to rely on regulatory equivalence, whereby financial institutions from non-EU countries can operate in the EU if their regulatory regime is deemed equivalent to that in the EU. But this is a political decision by the European Commission, which may not be minded to grant it to the UK in a “no deal” situation. As the EU has already recognised the principle of equivalence in financial regulation with the US, would they be willing to extend this to the UK – and how long might that take? Could there be implications for the clearing of Euro-denominated securities such as sovereign bonds issued by EU Member States and derivative instruments and would this raise further issues about liquidity in these markets? Should the Treasury and the Bank of England consider an audit of the relative costs of regulation, its policy objectives and effectiveness to ensure London remains a competitive international financial centre?
• Legal continuity: It is important that the UK’s departure from the EU should not result in legal instability. But what can or should be transposed from EU law into UK law will vary depending on whether there is a deal, and hence on whether the UK will have a continuing relationship with some EU institutions or reciprocal arrangements with some or all EU Member States. How should Parliament, the Government and the devolved institutions best prepare for the legal changes that will be necessary to maintain legal continuity if the UK leaves without a deal? How should preparations for this possibility inform the design of the Great Reform Bill itself? Should the Government publicise contingent legal changes in advance of Brexit which would only come into force if the UK leaves without a deal? What are the questions around the continuity of private contracts which the Government should consider?
• Legal services: The provision of legal services is an important part of the UK economy. Would departure from the EU without a deal put this in doubt? In order to maintain legal continuity, some existing EU regulations concerning choice of law should be transposed into UK law, but in other cases the UK may need to (re)join international arrangements employed by no non-EU states. Leaving the EU will end the automatic recognition of judgments. Will the UK’s existing bilateral treaties with major EU states make this largely irrelevant? Should the UK negotiate such treaties with other Member States? EU regulations provide for enforcement of judgments abroad but also limit the jurisdiction of courts. Might the UK’s departure from these regulations encourage the growth of legal services in England by removing the barriers to bringing actions against defendants in other EU Member States? Freed from EU regulations, might English courts be able to move more quickly, without waiting on foreign courts to determine whether they have jurisdiction? Likewise, might they be able to uphold the arbitration process more faithfully and enforce judgments more effectively and aggressively than is now the case? What preparations has the legal profession made in planning for a “no deal” scenario? Should the Law Commission have a role in this?
• Energy and Environment: Energy and the environment are areas of shared competency between the UK and Europe. In many cases energy and environmental policies are governed by European Directives, and the UK also abides by common energy market rules as part of the Internal Energy Market. To what extent would a ‘no deal’ scenario present immediate practical issues concerning energy markets? Would the energy still flow through European interconnectors when we need it? What, if anything, are the immediate implications of a ‘no deal’ scenario in terms of energy supply and security? Outside the remit of EU institutions will there be a need to create similar institutions in the UK?
• Education: Leaving without a deal would lead to a heightening of existing concerns within the education sector concerning the right-to-reside of EU national staff and students, especially within Higher Education (HE) where EU ties are particularly strong. Is it certain that the Government will resolve this quickly? What will the impact be on the large numbers of EU students and staff in UK universities, and on EU funding? Will HE institutions be able to increase incomes by charging EU nationals at the higher international fee rate? What other opportunities will there be for gaining funds? How might changes to regulations that currently affect certain forms of research affect university research activities?
• Public sector procurement: UK public procurement procedures currently conform to European Official Journal of the European Union (OJEU) procedures, which in turn relate to WTO procurement rules. What are the immediate consequences for public procurement outside the OJEU framework? How do we ensure there are robust public procurement arrangements that effectively serve the taxpayer? What are the alternatives and how does the UK ensure that they are used to serve consumer interests rather than producer interests and corporate rent seeking?

Call for Evidence

Over the next few weeks, each of the Policy Exchange research units will produce a series of articles exploring the above topics in more detail.

We are keen to gather evidence from interested parties (such as businesses, industry groups, politicians, academics and others) about the risks and opportunities presented by the UK leaving the EU without a comprehensive deal in place.

Submissions can be made in email or Word format, and should be no longer than 1,000 words. They can address one or more of the specific policy issues highlighted above, or identify new policy areas which we have not yet considered. Wherever possible, please describe, qualify and quantify your responses.

Any submissions will be treated confidentially and will be used to inform our research around how the UK should plan for Brexit, and the formation of appropriate contingency arrangements in the event there is no deal.

Contributions should be received by no later than Friday 28th April 2017, and preferably sooner.

Please email: brexit@policyexchange.org.uk