Brexit: deal or no deal Contents

Chapter 2: No deal

The Government’s position

7.In her Lancaster House speech on 17 January 2017, the Prime Minister set out the Government’s negotiating objectives for leaving the EU, and achieving a “new, positive and constructive partnership between Britain and the European Union”. She said:

“I know there are some voices calling for a punitive deal that punishes Britain and discourages other countries from taking the same path. That would be an act of calamitous self-harm for the countries of Europe. And it would not be the act of a friend. Britain would not—indeed we could not—accept such an approach. And while I am confident that this scenario need never arise—while I am sure a positive agreement can be reached—I am equally clear that no deal for Britain is better than a bad deal for Britain.”3

8.While the Prime Minister made clear that it was not her desired outcome, the possibility of ‘no deal’ has, ever since, been a matter of intense political discussion. For instance, the 2017 Conservative Party general election manifesto stated that “we continue to believe that no deal is better than a bad deal for the UK. But we will enter the negotiations in a spirit of sincere cooperation and committed to getting the best deal for Britain.”4 By contrast, the Labour Party manifesto stated that “leaving the EU with ‘no deal’ is the worst possible deal for Britain and … it would do damage to our economy and trade. We will reject ‘no deal’ as a viable option and if needs be negotiate transitional arrangements to avoid a ‘cliff-edge’ for the economy.”5 The Scottish National Party manifesto recalled that a majority of people in Scotland had voted to remain in the EU, and expressed concern at “the extreme Brexit being pursued by the Prime Minister”—also implicitly rejecting any possibility of ‘no deal’.6

9.Since the general election, the assertion that “no deal is better than a bad deal” has been heard less often. The Prime Minister’s Florence speech on 22 September did not repeat the phrase (although she did use it in response to a subsequent question). Instead, she cited the UK’s preparations “for a successful negotiation but also … our preparations for our life outside the European Union—with or without what I hope will be a successful deal”.7

10.The Secretary of State for Exiting the European Union, Rt Hon David Davis MP, told the House of Commons Exiting the EU Committee on 25 October that:

“No deal is an option. We have made that clear. It is not our preferred option: let’s be clear about that. I am careful about the way I phrase it. At the moment I start talking about no deal, people say, ‘That is what you really want.’ That is not the case; we want the deal. But of course we have reasons why we need no deal as an option literally right up to the moment of signing: because it would not be the first time in European negotiations where sudden, last-minute claims come in because they think they have got you over a barrel.”8

11.It is clear from Mr Davis’ remarks that, notwithstanding the shift in tone since the election, the threat of ‘no deal’ remains an important component of the Government’s negotiating strategy. The Government’s preferred option is a successful negotiation, leading to a close partnership between the UK and the EU. But it is also keeping the option of walking away from the negotiations in reserve, and will continue to do so right to the “moment of signing”, to forestall any attempt to force last-minute concessions out of the UK as the deadline approaches.

The EU perspective

12.In evidence to us on 12 July, the EU’s Chief Brexit Negotiator, Michel Barnier, stated:

“I want to reach an agreement because I know the cost and the price of no deal … I think we really need to explain what ‘no deal’ would mean … We really have to weigh up the consequences. It is certainly not the option I would choose … when we are in a classic kind of negotiation, ‘no deal’ means the status quo … Here we would go back 44 years, and I think that also needs to be explained.”9

13.On 12 November, Mr Barnier stated that, while no deal was not his preferred outcome, “It’s a possibility. Everyone needs to plan for it, member states and businesses alike. We too are making technical preparations for it. On 29 March 2019, the United Kingdom will become a third country.” He added that such an outcome would have “consequences in multiple areas”, from “the capacity of British planes to land in Europe to that of dogs and cats to cross the Channel”.10

14.The fact that both sides are treating no deal as a possible (albeit not desirable) outcome prompted us to examine:

Defining ‘no deal’

15.Box 1 sets out the relevant sections of Article 50 TEU.

Box 1: Article 50 TEU and no deal

“2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

“3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.”

Source: Treaty on European Union, OJ C 326 (consolidated version of 26 October 2012)

16.Under the terms of Article 50, ‘no deal’ can therefore be defined as a failure by the European Union and the UK to negotiate and conclude an agreement setting out the arrangements for the UK’s withdrawal before the Treaties cease to apply to the UK on 29 March 2019, two years after Article 50 was triggered, without any extension to that period having been agreed.

The impact of ‘no deal’

17.We asked our witnesses what the consequences, positive or negative, of ‘no deal’—that is to say, a complete failure to secure agreement—would be.

Positive consequences

18.Very few witnesses identified any positives arising as a result of ‘no deal’. John Foster, Director of Campaigns, CBI, told us:

“Positives are very difficult to come by, and … no deal is not an option that the CBI or our membership advocates in any way, but the one positive would be that it is decisive and quick. You are talking about a very complex relationship over 40 years, so no deal would provide a very definitive stop-off point.”11

19.John Longworth, Co-Chairman, Leave Means Leave, said that, while he would like to see a trade deal agreed, the UK’s negotiating position had been undermined by the Prime Minister not making clear in her Florence speech that “we were categorically prepared to walk away, that no deal was better than a bad deal.”12 He argued that “we are rapidly coming to a position where not only is no deal better than a bad deal but no deal may well be the very best deal … If there is no progress before Christmas, in order to have adequate time to prepare for a no deal scenario, we ought to declare before Christmas that we are moving to WTO13 in March 2019.”14 This was because, in his view, the benefits of leaving the EU “can only be crystallised if we leave the single market and the customs union. The longer we delay doing that, the more the costs rack up.”15

Negative implications

20.With the exception of Mr Longworth, the clear consensus view of witnesses to this inquiry (including some who supported Brexit) was that ‘no deal’ would be economically damaging for the UK. Ruth Lea CBE, Economic Adviser, Arbuthnot Banking Group, said that, notwithstanding her view that the UK economy stood to benefit from Brexit in the long term, an agreement was desirable because:

“There is a possibility of disruption to trade if we leave with no deal … You need a continuation of tariff-free trade, because even though we know that the average common external tariff is quite low—only about 3% or 4%—there are certain industries where it is relatively high, such as the car industry, where it is about 10% … The downsides of leaving with no deal should be put on the table.”16

21.The former Chancellor of the Exchequer, Lord Darling of Roulanish, could not see any benefits of ‘no deal’:

“Why do people round the world, and why have they since medieval times, traded with each other? Basically, it is because they recognise that they do better and become better off as a result … I am not aware of any country in the world—absent North Korea, and even it trades with China to some extent—that puts up barriers and says it is a jolly good thing. I also struggle to find any country of any significance that trades purely on the WTO rules; they all have agreements with somebody.”17

22.Lord Darling cited the impact of the imposition of tariffs on the automotive and aviation industries, given their complex cross-border supply chains. He warned that “you do not want to put into people’s minds the question, ‘Why are we doing it there? Why don’t we go and do it somewhere else where we don’t have all these things?’” He was also concerned about the practical effects of the introduction of non-tariff barriers.18

23.John Foster of the CBI said that there would be serious economic consequences across all sectors, including:

24.Miles Celic, Chief Executive, TheCityUK, thought that, in terms of financial services, the “real loser in a no-deal Brexit is Europe … There will be greater economic inefficiency across Europe, more fragmentation, fewer jobs within the industry and less supply for consumers”. TheCityUK also provided estimates of the substantial cost to the UK of ‘no deal’ (see Box 2), and Mr Celic concluded that the only “winners” from a no-deal outcome would be “New York and Asia”.20

25.Open Britain asserted that no deal was “a bad deal in its own right … not a viable option”, and “would have catastrophic consequences for the UK”. Not only would it mean the UK not having any kind of preferential trading relationship with the EU, but it would also mean the UK potentially jeopardising all the existing trading relationships with third countries that it currently enjoys by virtue of EU membership. No deal could also see the UK drop out of all existing justice and security cooperation with the EU, as well as losing the participation of UK research institutions in Horizon 2020.21

26.Professor Adam Łazowski, Westminster Law School, University of Westminster, argued that “a unilateral Brexit would create a legal vacuum in relations with the biggest trade block in the world and the main trading partner of the United Kingdom”. He too noted that the UK would lose all the preferential trade agreements it benefits from as a result of EU membership.22 The US Chamber of Commerce, US-UK Business Council agreed that falling back on trade under WTO rules was not a fail-safe, in particular given that international trade in services has not been liberalised to nearly the same degree as within the Single Market: “That matters in an economy like Britain’s where more than 80% of jobs and GDP are in the services sector.” They also pointed out that the UK’s independent membership in the WTO was contingent on all WTO members signing up to its revised tariff-rate quotas. They noted that a wide range of agricultural exporters including the USA, Australia, Argentina, Brazil, and New Zealand had already objected to the EU and UK’s initial proposal in regard to future agriculture quotas.23

Case studies

27.Boxes 2–8 set out what witnesses believed would be the impact of ‘no deal’ across a number of specific policy sectors and fields. It should be stressed that witnesses were asked to describe the impact of ‘no deal’, not the impact of Brexit. Nor was the evidence submitted to this inquiry necessarily a comprehensive cross-section of views: more detailed analysis of these issues can be found in the various Brexit-related reports we have published since the referendum.

Box 2: ‘No deal’ and financial services24

TheCityUK cited analysis25 that, in a scenario where the UK’s relationship with the EU largely rested on WTO obligations, 40–50% of EU-related financial services activity and up to 31–35,000 jobs in the sector could be at risk, as well as £3–5 billion of tax revenues per annum. This could rise to 75,000 jobs and £8–10 billion in tax revenues in the wider ecosystem.26

PIMFA noted that WTO rules do not in general apply to financial services and in particular not to retail investment and savings. They argued that no deal could result in a range of problems in relation to passporting and equivalence, access to funds, cross-border brokerage, the position of the financial services industries in the Crown Dependencies, and divergence, equivalence and market access.27

The Loan Market Association pointed out that the loss of the Capital Requirements Directive passport would have a major impact on lending and loan market activities conducted by banks. A sudden withdrawal of passporting rights could affect both the enforceability of existing loan agreements and the ability and willingness by UK-based lenders to enter into future agreements.28

Lloyd’s predicted that the transfer of personal data from the EU to the UK would also be more difficult for UK firms doing business in the EEA. London-based firms would therefore have to establish EEA subsidiaries or cease to write EEA insurance.29

The Association of British Insurers agreed, and argued that a system where UK insurers had to abide by dual or multiple regulatory systems in order to transfer data internationally would create inefficiencies, legal uncertainty, and risks, damaging the global competitiveness of UK insurance.30

Although we heard no evidence in this inquiry to suggest that there would be positives to a ‘no deal’ outcome, we note that in evidence to the Financial Affairs Sub-Committee, Barnabas Reynolds, of Shearman & Sterling LLP, argued that, given the strength of the UK financial services industry, a no deal outcome might “enhance the gravitational pull of the markets here. If we enhance that gravitational pull, everything will keep coming back here in reality, one way or another.”31

Box 3: ‘No deal’ and the agri-food sector32

The British Food Importers & Distributors Association said that no deal would lead to a lack of availability of key food products on supermarket shelves. Falling back on WTO rules could also lead to food prices rising by over 20%.33

The Wine and Spirit Trade Association said that no deal would lead to job losses, investment cuts, a decline in sales and potential business relocation. Under WTO schedules, customs tariffs would be imposed on wine, probably raising the price for consumers. Non-tariff barriers would present challenges regarding access to stock, transit availability, bonded warehouse space, packaging, machinery, access to labour and securing supply of future wine vintages.34

The Fresh Produce Consortium noted that the Port of Dover handled 600 lorries per day transporting fresh produce.35 In 2016, the UK imported 3 million tonnes of fresh produce from other EU Member States. Many suppliers dealing solely in EU imports have no experience of meeting customs requirements, and registration as an Authorised Economic Operator36 would not be feasible for most small importers.37

The British Retail Consortium warned that the average tariff on food products imported from the EU would be 22%, with tariffs on Irish cheddar of 44% and on beef of 40%. Its research pointed to potential rises in the price of cheese in the order of 6–32%, on tomatoes of 9–18%, and on beef of 5–29%. Non-tariff barriers would be burdensome in relation to customs checks, and health or veterinary checks stemming from sanitary and phytosanitary requirements.38

NFU England & Wales argued that a default to WTO terms would have a particularly devastating impact on the British sheep sector, which exports more than 30% of its total production each year (of which 96% goes to the EU). Other net exporting sectors such as the wheat and barley sectors would also be harmed by the imposition of duties. Overall, 71.4% of the UK’s food and non-alcoholic exports go to the EU. They also noted that the UK was a net importer of food, and that Brexit could present opportunities to increase the domestic consumption of home-grown food. However, the fact that not all imported products can be grown in the UK meant that an increase in consumer prices was likely.39

Dairy UK said that there would be an increase in UK wholesale and retail prices for dairy, severe erosion of the UK’s position in export markets, a growth in the sales of dairy substitute products, and particular disruption to the dairy industry in Northern Ireland (see Box 7). WTO tariffs for dairy products were prohibitively high, and would make EU imports much more expensive. Meanwhile UK dairy exports to the EU would become uncompetitive, as they would need to surmount the EU tariff wall.

Dairy UK cited a forecast by the Centre for Economics and Business Research suggesting an increase in wholesale cheddar prices of 51% and a 20% increase in the retail price of cheese. It was unclear how no deal would affect the supply of EU labour in the UK. On average, non UK-born staff account for 11% of the processing workforce.40

Although no evidence from the fisheries sector was submitted to this inquiry, we note that some within that sector have advocated a ‘no deal’ outcome. Fishing for Leave, for instance, have argued that a clean break from the EU, with no continuation of the Common Fisheries Policy, is needed to ensure the future prosperity of the UK fishing industry.41

Box 4: ‘No deal’ and freight, transportation and ports42

The Freight Transport Association stated that, in a worst case scenario, no deal could result in immediate imposition of new customs, sanitary and phytosanitary checks at the border. There could be a lack of adequate infrastructure at ports, airports and the Irish land border, as well as a lack of personnel and capacity in inspection facilities. This could lead to missed deliveries and the spoiling of perishable loads. The recruitment and training of new customs officials would take some years. The FTA also noted the uncertain impact on EU citizens working in the UK—14% of LGV drivers, 18% of forklift drivers and 26% of warehouse operatives in the UK are estimated to be EU nationals without a UK passport.43

The US Chamber of Commerce, US-UK Business Council cited HMRC’s estimate that customs declarations at ports like Dover would increase fivefold, from 55 million to over 255 million per year. They were unclear how ports like Dover, or the Channel Tunnel, would be able to handle these dramatically increased customs requirements.44

The Institute for Government noted that, in order to prepare the border for ‘no deal’, change would be needed across 30 Government departments and public bodies, as well as more than 100 local authority organisations. Private sector port operators, freight forwarders and shipping lines would need to adapt their infrastructure, paperwork and logistics. France, The Netherlands and Ireland would also need to plan for disruption at their ports. Operation Stack demonstrated how delays at Calais have a knock-on effect in Dover.45

The British Retail Consortium (BRC) noted that “Dover is primarily set up as a minimal check port designed for just-in-time supply routes for goods. It is not a Border Control Point for the purposes of checking third country meat or plant imports.” They said that the cost to the UK economy of significant delays to the flow of goods via Dover had been quantified46 at £1 billion per annum.

The BRC pointed out that up to 180,000 UK companies would be drawn into customs declarations for the first time. Companies would have to operate new excise and VAT systems for compliance purposes.47 This was backed up by evidence from specific industries. The Confederation of Paper Industries, for instance, warned of the damaging impact of inspection requirements, requirements to prove legislative compliance on a shipment by shipment basis and rules of origin for converted paper products.48

Johnson & Johnson warned that non-tariff barriers, including regulatory changes, lack of harmonisation, delays, and custom related effects (customs clearance costs, increased lead times due to border formalities, adapting IT systems for the thousands of annual shipments between the EU27 and the UK for each sector) would have the most significant impact on its business. A no deal scenario could potentially disrupt the supply of medicines, medical devices and other healthcare products from the EU to the UK.49

Box 5: ‘No deal’ and aviation50

At a meeting of the EU Internal Market Sub-Committee on 30 November 2017, witnesses representing the aviation sector expressed confidence that a deal would be reached to cover the sector.51 The consequences of failure to reach a deal, however, would be grave.

ADS Group, representing the UK’s aerospace, defence, security and space industries, stated that no deal was “the worst possible outcome for our sectors, raising the cost of doing business, reducing our influence and damaging the UK’s reputation. Leaving the membership and regulatory framework of the European Aviation Safety Agency (EASA) could cause a regulatory vacuum for industry, and increase long term costs of re-establishing UK expertise.”52

Dr Tobias Lock, Edinburgh Law School, noted that “UK airlines would no longer have a valid operating licence as they would no longer be based in an EU Member State … and licences issued by the UK’s aviation authority would no longer be recognised as licences issued by a [Member State]. To avoid the worst consequences, the UK could unilaterally decide to recognise licenses issued by EU Member States and give EU airlines equal access (e.g. Ryanair as an Irish airline operates many intra-UK routes), but there would be no guarantee that this would be reciprocated by the rest of the EU in case of a no deal Brexit.”53

The American Chamber of Commerce to the EU stated: “The EU-U.S. Open Skies Agreement permits U.S. (cargo) airlines to operate flights from the U.S. to any two international (but not domestic) EU points. (The same applies for EU airlines flying into U.S.) It is imperative for business continuity, and for the flow of cargo air traffic in general, that this existing arrangement is maintained when the UK leaves the EU … Even if the UK elected to maintain the EU-U.S. Open Skies Agreement, this would not automatically extend the right of U.S. (cargo) carriers to fly between an airport in the UK and one in the EU. Since these flights would no longer be intra-EU, continuing the current regime would require EU approval.”54

The London Chamber of Commerce and Industry noted that there was no WTO ‘fail safe’ for the aviation sector: “The ultimate danger is that without a deal, flights from the UK and to the EU and other parts of the world will be grounded on exit day … And without an early deal—meaning clarity for airports, airlines and travellers as soon as possible in 2018—the uncertainty around what might happen will begin to weigh on the decision making of those considering travel.”55

Box 6: ‘No deal’ and higher education and research

MillionPlus argued that no deal would be “extremely damaging for UK universities and should be avoided if at all possible”. They cited in particular the reputational damage, deterrent effect and confusion that could arise from the designation of EU students as international students. No deal could also place existing EU-funded research projects in jeopardy.56

The Russell Group concluded that no deal would affect universities’ ability to deliver world-leading research and education. No deal on the rights of EU citizens to live, study and work in the UK could lead to a loss of talented researchers and technicians with specialist skills who could not be replaced easily by UK nationals. If the UK and EU did not secure an agreement on science and research collaboration, UK institutions would cease to be eligible for Horizon 2020 funding on the day of exit. This would mean funding for existing projects would be withdrawn and researchers would immediately lose the ability to bid for this funding, with a detrimental impact on international competitiveness.57

The British Heart Foundation also noted that the EU was a major funder of UK research, and helped to promote international collaboration. Uncertainty about what could happen to UK access to Horizon 2020 funding after March 2019 could discourage EU researchers from approaching British counterparts to collaborate on projects. They too expressed concern about the reputational damage caused by uncertainty over the status of EU researchers and healthcare professionals in the UK. They also stressed the need for maximum possible cooperation and alignment with the European Medicines Agency on the regulation of medicines and medical devices.58

Box 7: ‘No deal’ and the impact on Ireland and Northern Ireland59

The Institute for Government observed that “if the UK leaves the EU with no deal, it will not be possible to put in place any agreed arrangements to manage the border in Ireland. The UK could (possibly) decide to turn a blind eye. But the land border will represent the external frontier of the EU’s Single Market and Customs Union and it is hard to envisage how they would manage that without some sort of controls in place.”60

Dairy UK noted that imposition of a WTO schedule would be a severe challenge for the dairy industry in Northern Ireland because of its reliance on the export of raw milk to Ireland and of products to the rest of the EU. In 2015 Northern Ireland dairy exports to Ireland were £154 million, constituting 15% of total sales, while exports from Ireland to Northern Ireland were £61.6 million. In addition, Irish dairy co-operatives own approximately 60% of the processing capacity in Northern Ireland. The imposition of customs controls at the land border would be the least desirable outcome for the dairy sector, and would create uncertainty around the ability of the dairy sector in Northern Ireland to continue to operate as it does currently.

The British Retail Consortium feared that no deal would have a severe impact on retail businesses with significant operations in Ireland. They also cited a report prepared for the European Parliament’s Agriculture and Rural Development Committee on UK-EU agricultural trade, which modelled the damaging effects of a no deal scenario on UK and Irish GDP and agri-food consumer prices.61

Professor Feargal Cochrane, University of Kent, was concerned about the high degree of uncertainty over the impact of Brexit on the Irish border. He noted that the Prime Minister’s Florence speech “was unable to provide anything beyond a statement of what [the UK Government] would like to see happen rather than what it could actually and verifiably deliver on the border question”. He added that “in the Irish context, it is entirely possible that it will be the EU, rather than the UK, that reinstitutes border checks to protect its frontier with a non-EU state after Brexit.62

Although we did not receive evidence on the implications of ‘no deal’ for Gibraltar, as well as for the other Overseas Territories, the Crown Dependencies, and Sovereign Base Areas in Cyprus, we note that the implications for them could also be particularly significant.63

Box 8: ‘No deal’ and citizens’ rights64

British in Europe warned that ‘no deal’ could result in “an imperfect and patchwork solution and lead to years of practical problems for more than 4.2 million British citizens in the EU and EU citizens in the UK who moved pre-Brexit to other EU countries in good faith and with the legitimate expectation that their EU citizenship rights were irrevocable”.

British in Europe proposed that, in order to protect citizens’ rights in the event that broader agreement cannot be reached, any agreement on citizens’ rights should be set apart from the rest of the negotiations. The way that the negotiations had been structured meant that “matters and compromises that have direct repercussions for the lives of real people are being mixed up with the discussions as regards the financial settlement and the Irish border. There is no way of avoiding the conclusion that citizens and their rights are being used as bargaining chips in these negotiations. Unless and until citizens’ rights are ringfenced from the rest of the negotiations, this position will not change.”65

Scenarios for ‘no deal’

28.The evidence summarised in the previous section sets out the potentially serious consequences of failure to reach any kind of deal during the Brexit negotiations. In reality, however, there are various possible permutations of ‘no deal’, both in terms of the extent of agreement, and in terms of timing. The impact of ‘no deal’ could be more or less grave depending on which if any of these scenarios in fact materialised.

29.The UK in a Changing Europe, in research published in July 2017, described six broad scenarios for the negotiations:

30.A key factor, implicit in all these scenarios, is timing. Three important dates have emerged: December 2017, when the European Council will decide whether sufficient progress has been reached in withdrawal negotiations to justify the commencement of discussions on the future UK-EU relationship; October 2018, when Michel Barnier has stated that the withdrawal agreement will have to be finalised, in order to allow time for consideration and ratification by Westminster and by the European Parliament; and 29 March 2019, when the two years allowed under Article 50 will elapse. These dates are reflected in Figure 1.

Figure 1: Possible ‘no-deal’ scenarios

timeline of possible 'no-deal' scenarios

31.Of the three dates, the first two could potentially be varied, whereas the deadline of 29 March 2019 for completion of the Article 50 process is fixed. The existence of such a ‘hard deadline’ is already ratcheting up the pressure on both sides. The longer it takes to agree that sufficient progress has been made on stage one issues (bearing in mind that the original intention was to reach agreement on phase one in October 2017), the less time will be available to discuss the future relationship, to explore complex political and legal issues, and to resolve areas of disagreement.

32.There are also factors outside the control of the parties to the negotiations, which could potentially result in an agreement falling at a late stage. For instance, the Government has undertaken that the withdrawal agreement will be enshrined in primary legislation, which will have to be passed in the right form by both Houses of Parliament. Moreover, before any withdrawal agreement can be ratified by the EU, the consent of the European Parliament is required. As part of its consideration the European Parliament may, by analogy with the procedure for ratification of international agreements under Article 218 TFEU, seek the Opinion of the Court of Justice of the European Union (CJEU)67 as to whether the draft agreement is compatible with the Treaties. A Member State may also refer the draft agreement to the CJEU.68 If the Court were to hold that the withdrawal agreement were incompatible with the Treaties (as it did, for instance, in the case of the proposed accession of the EU to the European Convention on Human Rights69) the EU would be unable to proceed with ratification.

33.Such scenarios could present the two sides with the choice of returning to the negotiating table or accepting a late ‘no deal’ outcome. As Michel Barnier has said, the clock is ticking, and, unless the possibility of the negotiating period being extended (as provided for in Article 50) is left open, the likelihood of ‘no deal’ is increased. Against this backdrop, the Government’s proposal on 13 November to enshrine an exit date of 29 March 2019 in domestic legislation is particularly unhelpful.

Mitigating the impact of ‘no deal’

A ‘bare bones’ agreement

34.It will be clear from the previous section that, while much of our evidence focused on the possibility of a complete breakdown in negotiations, the term ‘no deal’ in fact covers a range of possible permutations. For instance, the Secretary of State described complete failure to reach agreement as “not impossible, but very, very, very improbable”. A more likely outcome, in his view (albeit still “a small possibility”), was “some sort of basic” or “bare-bones” deal, “without the bits we really want”:

“In the event that we did not get a full deal, the interest of both sides on, say, counterterrorism cooperation, justice cooperation or data exchange cooperation is so great that I find it hard to believe that we will not get some fundamental deal there … If we do not end up with some sort of arrangement with Euratom, we would have to create, as in the Nuclear Safeguards Bill currently going through the Commons, another structure which effectively gives us the same safety arrangements … it is so patently in everybody’s interests that we have, say, an aviation deal—not just for us and our holidaymakers, but what would the absence of one do to the economy of Spain or Italy or other countries that have regions heavily dependent on tourism, or what would it do to Poland if the 1 million Poles in Britain could not go back and forth between them?”70

35.While Mr Davis suggested that such an agreement would cover “fundamental issues” such as counter-terrorism, justice, data exchange, nuclear safeguards and aviation, he did not specify the exact areas that it would cover, nor the mechanism by which it would be reached. Asked whether scientific and research collaboration would be included in a ‘bare-bones’ deal, he was vague, telling us that it was his “hunch—no more than that, frankly”, that “there is massive advantage for both sides to continue the movement of people, ideas and money as science projects get bigger and bigger. So [Brexit] would not be the end of the story.”71

36.Moreover, Mr Davis did not specify whether a ‘bare-bones’ deal would sit alongside a withdrawal agreement covering the ‘phase one’ issues currently under negotiation, including citizens’ rights, the financial settlement, and resolution of UK-Irish issues.

37.Other witnesses cast doubt on both the feasibility and value of a ‘bare-bones’ deal. Owen Tudor, of the TUC, pointed out that:

“If you were going to go for some sort of bare-bones deal, that itself would take some time to negotiate, so at what point do you make the decision to go for such a deal given that the clock will still be ticking? I am uncertain that even a bare-bones deal could be negotiated by March 2019.”72

38.John Foster said that, while a ‘bare-bones’ agreement was “a deal”, it was “just a very bad deal”. He continued:

“It is also difficult to identify a set of political circumstances where decisions are taken that allow the UK to remain in the single aviation market and the single electricity market so that the lights stay on in Northern Ireland, but then no transition is agreed. I struggle to see how the jigsaw puzzle comes together where you have a set of four or five barebones deals but not a transition.”73

‘Stopping the clock’

39.In the event that negotiations are continuing as the deadline approaches, the Secretary of State envisaged a ‘stop-the-clock’ procedure, to reduce the risk of a ‘timed-out’ Brexit. This suggestion reflected his view that “sometimes European negotiations have gone the whole distance and more than the whole distance”.74

40.Lord Darling offered some support to Mr Davis’ view, predicting that there was:

“A 50% chance that we will reach the end of this process with the traditional car crash followed by the traditional crisis meeting in the middle of the night. Then we will agree to roll the thing over and will meet for another period of time. Greece is a good example of how things do not get fixed, despite everybody saying that they want to fix them. These things just go on and on, and that situation is not fixed yet. It will take time.”75

41.However, whereas the EU has sometimes stretched self-imposed deadlines, it seems to be wishful thinking that Article 50 could be overridden by ‘stopping the clock’. As Professor Catherine Barnard, Professor of European Union and Employment Law, University of Cambridge, pointed out, “Article 50 would still determine what is going on. Article 50 says that unless the two-year period is extended, which requires the unanimous agreement of the 27, the treaties will cease to apply on 29 March 2019.” She therefore judged that the only way to ‘stop the clock’ would be to use the explicit provision within Article 50 to extend negotiations, in the process extending the UK’s EU membership: “Then, assuming there is political will, we will have to ask the EU whether it is prepared to extend that two-year period, but it would have to agree that by unanimity.”76

Contingency planning

42.In reply to a 24 October House of Commons debate on “the preparedness of the United Kingdom to leave the European Union with no agreement”, the Parliamentary Under-Secretary of State for Exiting the European Union, Steve Baker MP, said:

“The Treasury has committed more than £250 million of new money to support Departments such as the Department for Environment, Food and Rural Affairs, the Home Office, Her Majesty’s Revenue and Customs, and the Department for Transport in this financial year for exit preparations, including under no deal.”77

43.Subsequently, in his budget statement on 22 November, the Chancellor of the Exchequer announced:

“While we work to achieve this deep and special partnership, we are determined to ensure that the country is prepared for every possible outcome. We have already invested almost £700 million in Brexit preparations and today I am setting aside over the next two years another £3 billion. I stand ready to allocate further sums if and when needed. No one should doubt our resolve.”78

44.We asked our witnesses whether the Government’s contingency planning for ‘no deal’ was sufficient. John Longworth (speaking in early October) said:

“If the UK Government were serious in pursuing a no-deal option, they would look at taking practical measures very soon to implement it. It is not enough simply to plan it on paper, because to be ready to have a reasonably smooth exit without a deal by March 2019 we need to be doing stuff now … It is unfortunate that the Government did not crack on and start to upgrade the HMRC IT system quickly enough. That has delayed that process and wasted time.”79

45.Other witnesses were sceptical about how far it would be possible to prepare for no deal. The UK Trade Policy Observatory acknowledged that, while there was a notable difference between “an ordered exit from the EU with no deal which involves detailed planning and crashing out, the former will require a gargantuan undertaking by the UK Government if it is to prepare for a ‘no deal’.”80

46.Lord Darling considered the feasibility of preparing for the impact of ‘no deal’ upon Dover:

“It makes no sense to spend an awful lot of money concreting over Kent, which would not be uncontroversial … or to employ lots of people who you might not need at a time where there are very serious shortages in the NHS, for example. There is a limit to what the Government can do there. Even if you started spending the money today, I doubt things would be ready in time.”81

47.Owen Tudor argued that “the main effort the Government ought to be putting their mind to is not planning for no deal but trying to plan for a deal and to secure the agreement with the European Union on the deal that is needed”.82

Conclusions

The impact of ‘no deal’

48.A complete ‘no deal’ outcome would be deeply damaging for the UK. It would bring UK-EU cooperation on matters vital to the national interest, such as counter-terrorism, police, justice and security matters, nuclear safeguards, data exchange and aviation, to a sudden halt. It would place the status of UK nationals in the EU, and EU nationals in the UK, in jeopardy, and would necessarily lead to the imposition of controls at the Irish land border.

49.The wider economic impact of an abrupt departure from the EU single market and customs union, and the adoption of WTO conditions for trade, would be felt across a range of sectors, including financial services, the agri-food sector, and aviation. It would have a particularly disruptive impact on cross-border supply chains. The short-term impact on trade in goods would also be grave: the UK’s ports would be overwhelmed by the requirement for customs and other checks. There is simply not enough time to provide the necessary capacity, IT systems, human resource and expertise to deal with such an outcome.

50.While the evidence we received focused on the impact on the UK, no deal would also have a damaging impact on the EU. It too would feel the negative effects of a loss of trade with a major trading partner, and restrictions on the movement of goods and services, new customs checks and the breakdown of aviation arrangements would be mirrored on the EU side. In addition, the EU would feel the loss of police and security cooperation, scientific and research collaboration, and of access to the City of London as a motor of the EU’s financial services industry, and to the City’s capital markets.

The prospects for a ‘bare-bones’ deal

51.The Secretary of State for Exiting the EU has argued that a complete ‘no deal’ outcome is “very, very, very improbable”. He has also said that, in the “unlikely” event that a trade deal cannot be reached, it will be possible to agree a ‘bare-bones’ deal covering fundamental issues of shared concern. We are concerned that a ‘bare-bones’ deal would, in the words of the CBI, still be a “very bad deal”.

52.The Secretary of State’s confidence that at least a ‘bare-bones’ deal could be agreed skates over the potential obstacles, including the technical and legal complexity of such a deal, as well as its timing. We were also concerned by his lack of clarity in outlining the “fundamental issues” that a ‘bare-bones’ agreement would cover.

53.Furthermore, Mr Davis did not specify whether, in the event of a ‘bare-bones’ deal, the UK and EU would also have reached agreement on core withdrawal issues, such as the financial settlement, citizens’ rights, and the Irish border. As our report on Brexit: UK-Irish relations concluded, the imposition of a hard border on the island of Ireland could have serious economic, social and political repercussions, and must be avoided. In the absence of agreement on these issues, there can be no guarantee that even a ‘bare-bones’ deal will be agreed by the EU.

54.We urge the Government therefore to clarify, as a matter of urgency, the relationship between a hypothetical ‘bare-bones’ deal and the Article 50 withdrawal agreement, and also to set out which “fundamental issues” it believes should, of necessity, be included in a ‘bare-bones’ deal.

55.In addition, we reiterate the call in our 2016 report on Brexit: acquired rights for the Government to offer a unilateral guarantee to EU citizens resident in the UK outlining how their position will be protected, whatever the outcome of negotiations. It would then be for the EU and its 27 remaining Member States to respond in kind.

Is no deal better than a bad deal?

56.Given the overwhelming evidence of the destructive effect of ‘no deal’, the Government’s assertion that “no deal is better than a bad deal” was not helpful. If the two sides were negotiating a free trade agreement from scratch, failure to reach agreement would simply mean a continuation of the status quo—but that is not an option in the case of Brexit, where ‘no deal’ would mean the abrupt cessation of over 40 years of economic, political and legal partnership. It is difficult, if not impossible, to envisage a worse outcome for the United Kingdom.

57.The Secretary of State told us that “we need no deal as an option literally right up to the moment of signing”. This approach only ratchets up the pressure on the negotiations and the political rhetoric that surrounds them on both sides. It also risks becoming a self-fulfilling prophecy by leading to a breakdown of trust, making an unintended ‘no deal’ more likely.

58.The way in which both sides are now treating ‘no deal’ as a realistic possibility illustrates the point. While it is sensible for them to undertake contingency planning for ‘no deal’, both the UK and the EU must ensure that the very act of such preparations does not increase the likelihood of this outcome.

The time factor

59.It is clear that the later ‘no deal’ emerges as the outcome of the negotiations, the more damaging its effects will be. To hold out the prospect of a ‘no deal’ outcome until the eleventh hour, and even to suggest that the clock could be ‘stopped’ to allow negotiations to continue beyond that point, even when there is no obvious legal mechanism to do so, would be irresponsible. For one thing, it guarantees that uncertainty for business and citizens will continue, and even increase, as ‘Brexit day’ approaches.

60.At the same time, we urge the EU to show flexibility in its negotiating stance, to ensure that the UK is not driven to a position where it sees ‘no deal’ as the only realistic option. Both sides must work to find ways to allow discussions to move on as soon as possible to considering the future relationship between the UK and the EU. In particular, the breadth and depth of the issues to be discussed between the parties mean that in our view the parties should commence at least scoping discussions as a matter of urgency. The longer that discussions on the future relationship are delayed, the more likely ‘no deal’ becomes.

61.The key factor adding to the risk of ‘no deal’ is the lack of time—as Michel Barnier has said, the clock is ticking. The rigidity of the Article 50 deadline of 29 March 2019 in itself makes a no deal outcome more likely. But the Article 50 deadline could, in an emergency (for instance, if negotiations were unfinished, but close to completion) be extended, by unanimous agreement of the European Council. For the Government to compound the rigidity of Article 50 by enshrining the same deadline in domestic law would not, we believe, be in the national interest.


3 Rt Hon Theresa May MP, speech on ‘The Government’s negotiating objectives for exiting the EU’, 17 January 2017; https://www.gov.uk/government/speeches/the-governments-negotiating-objectives-for-exiting-the-eu-pm-speech [accessed 27 November 2017]

4 The Conservative Party, Forward together: the Conservative manifesto, 2017: https://www.conservatives.com/manifesto [accessed 27 November 2017]

5 The Labour Party, For the Many Not the Few, The Labour Party manifesto, 2017: http://labour.org.uk/wp-content/uploads/2017/10/labour-manifesto-2017.pdf [accessed 27 November 2017]

6 The Scottish National Party, Stronger for Scotland, (2017), p 8: https://d3n8a8pro7vhmx.cloudfront.net/thesnp/pages/9544/attachments/original/1496320559/Manifesto_06_01_17.pdf?1496320559 [accessed 4 December 2017]

7 Rt Hon Theresa May MP, speech on ‘a new era of cooperation and partnership between the UK and the EU’, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 27 November 2017]

8 Oral evidence taken before the House of Commons Select Committee on Exiting the European Union, 25 October 2017 (Session 2017–19), Q 36

9 Oral evidence taken on 12 July 2017 (Session 2017–19), QQ 1, 8

10 Jon Henley and Rajeev Syal, ‘EU planning for collapse of Brexit talks, says Michel Barnier’, The Guardian (12 November 2017): https://www.theguardian.com/politics/2017/nov/12/eu-planning-for-collapse-of-brexit-talks-says-michel-barnier [accessed 27 November 2017]

13 A corollary of failure to reach agreement with the EU on future trade would be that UK-EU trade would by default take place on World Trade Organization (WTO) terms. This would involve the imposition of tariffs on the majority of goods traded, and would also curtail trade in services. For an outline of the implications of a move to WTO terms see European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), chapter 6.

21 Written evidence from Open Britain (DND0030)

22 Written evidence from Prof Adam Łazowski (DND0036)

23 Written evidence from US Chamber of Commerce, US-UK Business Council (DND0037)

24 See European Union Committee, Brexit: financial services (9th Report, Session 2016–17, HL Paper 81)

25 Undertaken by management consultants Oliver Wyman

26 Written evidence from TheCityUK (DND0015)

27 Written evidence from PIMFA (DND0045)

28 Written evidence from Loan Markets Association (DND0006)

29 Written evidence from Lloyd’s (DND0028)

30 Written evidence from Association of British Insurers (DND0034)

31 Oral evidence taken before the EU Financial Affairs Sub-Committee, 11 October 2017 (Session 2016–17), Q 10

32 See European Union Committee, Brexit: fisheries (8th Report, Session 2016–17, HL Paper 78), Brexit: agriculture (20th Report, Session 2016–17, HL Paper 169) and Brexit: farm animal welfare (5th Report, Session 2017–19, HL Paper 15)

33 Written evidence from British Food Importers & Distributors Association (DND0020)

34 Written evidence from Wine And Spirit Trade Association (DND0018)

35 Chamber of Shipping estimate.

36 According to the Government, Authorised Economic Operator status “is an internationally recognised quality mark indicating that your role in the international supply chain is secure, and that your customs controls and procedures are efficient and compliant.” See HM Revenue & Customs, ‘Guidance, Authorised Economic Operator’: https://www.gov.uk/guidance/authorised-economic-operator-certification [accessed 27 November 2017]

37 Written evidence from Fresh Produce Consortium (DND0009)

38 Written evidence from British Retail Consortium (DND0011)

39 Written evidence from NFU England & Wales (DND0024)

40 Written evidence from Dairy UK (DND0031)

41 Fishing for Leave, ‘Conservative Conference Condensed’ (7 October 2017): http://ffl.org.uk/conference/ [accessed 4 December 2017]

42 See European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72) and Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)

43 Written evidence from Freight Transport Association (DND0023)

44 Written evidence from US Chamber of Commerce, US-UK Business Council (DND0037)

45 Written evidence from Institute for Government (DND0010)

46 By Oxera Economics

47 Written evidence from British Retail Consortium (DND0011)

48 Written evidence from Confederation of Paper Industries (DND0008)

49 Written evidence from Johnson & Johnson (DND0039)

50 See European Union Committee, Brexit: trade in non-financial services (18th Report, Session 2016–17, HL Paper 135)

51 Oral evidence taken before the EU Internal Market Sub-Committee, 30 November 2017 Session 2017–19) QQ 1–11

52 Written evidence from ADS Group (DND0027)

53 Written evidence Dr Tobias Lock (DND0003)

54 AmChamEU, Brexit and the future UK/EU Relationship (April 2017): http://www.amchameu.eu/system/files/position_papers/amcham_eu_position_paper_-_brexit_and_the_future_eu-uk_relationship.pdf [accessed 27 November 2017]

55 Written evidence from London Chamber of Commerce and Industry (DND0017)

56 Written evidence from MillionPlus (DND0013)

57 Written evidence from Russell Group (DND0044)

58 Written evidence from British Heart Foundation (DND0032)

59 See European Union Committee, Brexit: UK-Irish relations (6th Report, Session 2016–17, HL Paper 76)

60 Written evidence from Institute for Government (DND0010)

61 Written evidence from British Retail Consortium (DND0011) and European Parliament ‘Research for AGRI Committee: EU-UK agricultural trade: state of play and possible impacts of Brexit’ (October 2017): http://www.europarl.europa.eu/RegData/etudes/STUD/2017/602008/IPOL_STU(2017)602008_EN.pdf [accessed 4 December 2017]

62 Written evidence from Prof Feargal Cochrane (DND0025)

63 See European Union Committee, Brexit: Gibraltar (13th Report, Session 2016–17, HL Paper 116), Brexit: the Crown Dependencies (19th Report, Session 2016–17, HL Paper 136) and Letter from Lord Jay of Ewelme to Rt Hon David Davis MP, Secretary of State for Exiting the European Union, 13 September 2017: http://www.parliament.uk/documents/lords-committees/eu-select/Correspondence-2017–19/11-09-17-Overseas-Territories-letter-to-David-Davis-MP.pdf

64 See European Union Committee, Brexit: acquired rights (10th Report, Session 2016–17, HL Paper 82)

65 Written evidence from British in Europe (DND0035)

66 The UK in a Changing Europe, Cost of No Deal (20 July 2017): http://ukandeu.ac.uk/wp-content/uploads/2017/07/Cost-of-No-Deal.pdf [accessed 27 November 2017]

67 Article 263 Treaty on the Functioning of the European Union. The Court of Justice of the European Union formally includes both the Court of Justice (formerly the European Court of Justice or ‘ECJ’) and the General Court (formerly the Court of First Instance or ‘CFI’) (Article 19 Treaty on European Union). In the interests of brevity, throughout this report we use the term CJEU.

68 Ibid.

69 Opinion 2/13 (Full Court) of 18 December 2014. Following a request for its Opinion from the European Commission, the Court of Justice decided that the draft international agreement giving effect to Article 6(2) TEU and providing for the EU’s Accession to the European Convention for the Protection of Human Rights and Fundamental Freedoms, was not compatible with the EU Treaties. See also Opinion 2/94 of 28 March 1996 which dealt with the (then) European Community’s accession to the European Convention for the Protection of Human Rights and Fundamental Freedoms.

70 Oral evidence taken on 31 October 2017 (Session 2017–19), 9

71 Oral evidence taken on 31 October 2017 (Session 2017–19), 10

74 Oral evidence taken 31 October 2017 (Session 2017–19), 3

77 HC Deb, 24 October 2017, col 277

78 HC Deb, 22 November 2017, col 1046

80 Written evidence from The UK Trade Policy Observatory (DND0033)




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