The four main possibilities are
- A hard Brexit with immediate customs duties, costs, widespread chaos and disruption across all UK related trade with unpredictable knock-on effects happening on 31 October 2019 (postponed to 31 January 2020 with an effective exit date on 31 December 2020) or after some further postponement
- A Withdrawal Agreement by which everything remains the same at least the end of 2020 very possibly the end of 2021 and very possibly quite a bit longer with no changes whatsoever but with the possibility of a hard Brexit still hanging, depending on the political mood.
- A longer-term free-trade agreement kicking in most likely in 2021 or later although possibly earlier after a rancorous hard Brexit with most likely zero or close to zero customs duties on all non-agricultural products but requirements for customs declarations on the export and import of all goods, certification of origin and possibly other checks, with the possibility of new and unique simplifications which might make the position a little bit easier but would still involve friction in trade,
- A closer long-term agreement with a customs partnership between the EU and UK which would most likely, depending on its scope avoid all customs duties and might, if it was sufficiently close, avoid most customs and regulatory declarations and checks in the movement of goods. There is no guarantee that this would avoid all friction in the trade as the closer it would be to what is required, the more pointless Brexit would be in that the UK would come close to being a member of the EU without any input, a position which is unlikely to be attractive to it.
For the purposes of describing the two main risk scenarios, we have used the expression hard Brexit or soft Brexit below. Hard Brexit is intended to refer to Britain leaving the EU without a deal on 31 October 2019 (postponed to 31 January 2020 with an effective exit date on 31 December 2020) or perhaps after an extension. It may be that even in this situation some steps will be taken to mitigate the very worst consequences by side agreements on specific issues by the EU and UK.
Unilateral steps may be taken by each much as happened to a significant extent already, reflected in both the EU and UK no-deal notes, which we mention at various points. On the other hand, there is also the scenario of a trade war, in which steps which could be taken to facilitate business in particular sectors are not undertaken or held back from being undertaken as part of the tactics of each side in seeking to reach its desired outcome.
For all practical purposes, a hard Brexit even with mitigations is likely to be severe and is a distinct risk from the softer type Brexit which we describe. A soft Brexit is intended to refer to a Brexit involving most likely a transitional or implementation period to the end of 2020, 2021 or later followed by a trade agreement which would remove a lot of the most extreme consequences of Brexit.
It would still leave a very changed landscape which will have the most profound consequences for your business and the whole economy. In reality, there is a range of degrees of soft Brexit. One significant possibility is that there would be a trade agreement in which there would be very low or zero duties on your goods, (but not on all goods in particular agriculture and food).
There would be still customs procedures and requirements for certificates of origin. It is entirely possible that a new unique solution will be developed in particular in the context of Northern Ireland Republic of Ireland trade. It is quite possible that this new unique simplified and facilitated arrangement will apply to all UK EU trade including Republic of Ireland Great Britain trade. There will still be procedures and costs which do not now exist but there would be no tariffs.
The other main variant of soft Brexit is a customs partnership where there would not be customs duties and where there may or may not be customs procedures. There may be simplified customs like procedures. There may be still delays at borders and checks in some versions of a customs union. This applies to the EU Turkey customs union for the reason that Turkey is not in the single market in relation to regulatory and in particular transport and other services which impact on the moving of vehicles.
Before 1993 the EU countries had been in a customs union for over 20 years but there were still customs procedures by way of statistical controls, regulatory checks, management of VAT various other reasons. In the period 1987 to 1993 the EU single market harmonised enough standards to make these controls no longer necessary. In a way, Brexit even with a customs union is rolling back the single market so that at some point even with a customs union, there may be some checks and friction of the border.
One should, therefore, consider Brexit both in the context of the risk of a hard Brexit which is still about 40%-50% in late August 2019 and a longer-term soft Brexit, with a trade or customs agreement which is probably about 60% or 70% probability at today’s date. It is necessary to watch the position now that Boris Johnson has become Prime Minister, very carefully and see how matters unfold. These odds could change very significantly if a hard Brexit supporting prime minister is elected and can carry the UK Parliament. This may take a General Election in the UK.
Withdrawal Agreement and Standstill Period
If an amended version of the Withdrawal Agreement is ratified, then there would be the certainty at least until the end of 2020 perhaps 2021 or longer if there are more extensions (although only one is contemplated), that the position will continue as is it is. Technically the UK would have left the European Union and would not be partaking in any of its institutions.
However, it would appear during the transitional period for all purposes as if it was still a member. The UK would most definitely be outside the EU so that the chance of going back would be much less than under a scenario, such as that mentioned below under which it had not yet left but there was contemplated departure date in say two years.
No Deal Brexit a Considerable Risk
Despite, the election of Boris Johnson as Prime Minister, the opinion of commentators and the betting odds are still against a no-deal exit. However, the odds have shortened considerably.
A no-deal Brexit is still the default legal position both in UK law and EU law. The UK Withdrawal Act had provided that 29th March 2019 was this exit date. This has been postponed to 31st October 2019 (postponed to 31st January 2020 with an effective exit date on 31st December 2020) by agreement of the UK and EU 27 states.
It does appear clear from so-called indicative votes and from legislation passed by the UK Parliament against the wishes of the UK government that there is majority support in Parliament against a no-deal Brexit.
Equally, the EU seems determined not to have “no deal” and seems willing to take the necessary steps to avoid it. It would involve
- a sudden big-time with numerous laws and trading rules changing overnight
- Immediate customs duties customs obligations regulatory controls
- immediate cessation of single market rights for
- likely negative economic effects
- logistics chaos
- currency falls
Second Referendum / No Brexit – Heavily against the Odds for Now
The Labour Party announced on Monday, February 25 that it would support a second ballot on EU membership with the possibility of “remain” being on the ballot paper, at least in some circumstances. It is not clear precisely what the Labour Party would support and both informed commentators and betting odds seem to think the possibility of a second referendum being held and passing are significantly less likely than likely.
The Labour Party is heavily split, and it is believed that many Labour MPs would not support a second referendum so that even with whipped Labour MPs, rebel defecting Conservative MPs and the support of other parties such as the Liberals, Scottish and other Nationalists, there would still not be a majority. Accordingly, while a complete reversal of Brexit is possible in view of the Labour Party’s move, Brexit still seems much more than likely to happen not by a significant margin at this point
The chance of revocation and a second referendum and indeed the chance of a second referendum passing appears low as of mid-April 2019. There does not appear to be supported in the House of Commons from the various indicative votes. There are those who say that it could still be left as the only alternative and so is a possibility.
For what it is worth the odds of a second referendum are negative and have varied between about 9/1 against to 3/1 against. This is potentially useful as it represents the cumulative bets and opinions of a wide range of persons who are prepared to lay money on the outcome.
Some Kind of Brexit Likely
Assuming the most likely scenario, that there will be a soft Brexit sometime in the next 2 to 3 years, the question arises as to which type of soft Brexit might happen. The declaration of the future relationship leaves opens any number of possibilities.
There were a number of indicative votes in the UK Parliament to see if a majority might be found for any particular form of Brexit or no Brexit at all. Various propositions were put ranging from revoking article 50 implying a second referendum and possibly no Brexit through intermediate options of varying forms of continuing closeness with the EU to a hard Brexit i.e. crashing out on WTO terms.
The results of the first indicative votes (27 March 2019) were
Leave without a deal: 160 – 400.
Common Market 2.0: 188 – 283.
EFTA and EEA: 65 – 377.
Customs Union: 264 – 272.
Labour’s alternative plan: 237 – 307.
Revoking Article 50: 184 – 293.
The results of the second indicative votes (1 April 2019) were
no deal 160 – 400
customs union 273 – 276
customs union plus single market 261- 282
second referendum 280 -292
All indicative votes were defeated. This may be quite misleading in terms of the ultimate outcome as a significant amount of tactical voting was undertaken. A large body of UK government ministers and junior ministers were required to abstain/whipped so the vote was not fully free.
Many MPs voted to maintain their favoured outcome e.g. the second referendum or revoke and did not vote for their less favoured option e.g. customs union or single market.
The UK government commenced discussions with the Labour Party after the indicative votes. It is suggested that the talks are going positively. However, it still appears that the Labour Party requires a customs union at a minimum whereas the Conservative government is more inclined to a free-trade agreement with customs facilitation. The talks ultimately failed,
Main Longer Term Possibilities
As of August 2019, the principal possibilities relate to the type of Brexit that may occur. The three principal variations are
- a free-trade agreement which as set out below would imply low or zero customs but customs and regulatory barriers;
- a customs agreement or arrangement which would imply no customs controls or minimum customs controls but some customs like controls in relation to regulation which may or may not be possible to undertake away from the border (both east-west and North-South)
- a customs agreement and single market arrangement which would probably facilitate no controls but would still lead to legal differences / regulatory barriers in some areas but would be much less disruptive
It is estimated in economic terms that about half the cost of the friction in trading under a no free-trade agreement is referable to customs costs and customs duties and approximately another half are referable to regulatory barriers. Both possibilities are still very significant but would apply in different ways in different industries.
It appears on balance that the Conservative party favours a free-trade agreement with customs facilitation but that the Labour Party favour a customs agreement but do not appear to favour single market membership. However, they are both highly divided with the full range of opinions in both.
One possibility is that the UK including Northern Ireland, would be in a customs union or close customs relationship (with no tariffs or customs controls) and close regulatory alignment with the EU. In that situation, the degree of customs controls between Ireland and the UK (including Northern Ireland) might be minimal to non-existent. The whole point of a customs union and regulatory alignment would be to take away friction in trade. This would be a largely pointless Brexit
Another distinct possibility is that there would be a comprehensive free trade agreement between the EU and the UK, with almost zero tariffs and most likely zero tariffs on nearly all or all of your products. There may be special arrangements for NI even in this case, but that would involve customs checks between GB and NI which might be resisted. There is a distinct possibility of special light touch customs controls for Northern Ireland.
The risk profile around customs checks would be different from a hard Brexit. Duties would not be an issue or major issue. The ultimate customs arrangements between the Republic of Ireland and Northern Ireland post-Brexit remain highly uncertain. They are pivotal in the ongoing uncertainty in relation to the terms on which Brexit might occur