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It has been over four years since the United Kingdom (UK) voted to leave the European Union (EU). Although the UK has officially left the EU on the 31st of January 2020, nothing much has changed just yet. This is because the UK is now in an 11-month transition period, in which they still have to follow the EU’s rules. The idea behind this transition period was to allow some time for negotiations to take place about the future relationship between the UK and the EU and to end up with a comprehensive trade deal. Rules for a level playing field for fair competition and the EU’s rights to fish in British waters and vice versa are just two examples where the UK and the EU need to agree upon.

As we are nearing the end of the transition period, however, a No-Deal Brexit started to become a reality. Officials from both sides said a No-Deal Brexit is now the more likely outcome due to disagreements that are too wide to bridge. The UK prime minister Boris Johnson warned businesses to prepare to leave the EU’s single market without a trade deal, and the EU published its contingency plans in case no deal is signed before the end of the year. What are these topics that the negotiators cannot agree on, and what will be the consequences of a No-Deal Brexit?

The three big sticking points

Although a trade deal between the UK and the EU would be a very comprehensive one, three topics stand out in the negotiations. The negotiating teams from the UK and the EU, led by David Frost and Michel Barnier, respectively, still disagree on the following three major topics: Fishing rights, a level playing field on business competition rules, and how the dispute settlement and governance are taken care of.

Fishing rights

Although fishing is only a tiny fraction of the UK and EU economies (less than 0.1%), it may very well be the most sensitive topic. Fishing is a major source of employment for coastal communities in countries such as France and Belgium. Both of these countries would like to keep their access to the British waters, but for the UK, that is out of the question. The UK sees this as regaining part of their sovereignty and believes that “British fishing grounds are first and foremost for British boats”.

The negotiations cover how much of the fish that EU boats catch annually in the UK waters, roughly €650 million worth of fish, should be returned back to UK fleets. The UK seeks to strip EU fishermen of 80 percent of the fish they catch in British waters, while the EU offers to give up 15 to 18 percent to the UK. At first glance, this may look like an impossible task for the Brexit negotiators to come to an agreement. However, it is not just about this fish quota. It is also about where the fish can be sold. Roughly 75% of the fish caught by UK fishermen is exported and sold in the EU. This gives the EU a major advantage in the negotiations because parts of the UK’s fishing industry would collapse when faced with tariffs. Of course, given this advantage, the EU is pushing that without an agreement on fishing rights, the UK will not have access to the EU’s single market.

The UK’s coastal and deep-sea fishing waters. Sources: Financial Times, marineregions.org

Level Playing Field

A second topic in the negotiations between the UK and the EU is about having a level playing field for businesses. This is a trade-policy term for a set of rules that would prevent an unfair competitive advantage for companies in one country over businesses in other countries. Logically, the EU is not willing to grant access to its single market if the UK can give state support to British businesses, which would undermine companies in Europe. The EU Brexit negotiator Michel Barnier says it is crucial that there is an agreement on this topic, as the trade deal would grant the UK tariff-free access to the EU’s single market.

Furthermore, the EU wants to have rules in place to tackle competition distortions that may arise if regulations change over time, and would like to challenge possible violations of the level playing field rules in the UK’s courts. Prime minister Boris Johnson, however, believes that all these additional rules and regulations undermine the sovereignty of the UK, which is ultimately the whole reason why the UK decided to leave the EU.

To reach an agreement on this point looks quite impossible. An EU official recently said that there are still no signs of how these differences over fair competition can be reconciled. Boris Johnson stated that the UK must not be forced into following the competition rules of the EU and that the EU’s demand “basically means that whatever new laws they brought in, we would have to follow or else face punishment”. This is in stark contrast to the sovereignty the UK is looking for, making it one of the most challenging topics to negotiate on.

Governance and dispute settlement

The third topic, which is still very much being negotiated, is the governance and dispute settlement of possible violations of commitments. The EU wants to make sure that they can take action against violations of the rules and regulations it has made in the trade deal. This issue became even more critical after Boris Johnson violated the EU exit treaty last September, overriding the EU withdrawal agreement on Northern Ireland.

One of the key points in this dispute is that the EU wants to punish violations in one economic sector with tariffs in another economic sector. An example given by EU officials is that tariffs could be imposed on UK manufacturing should the UK violate any agreements on fisheries. The UK disagrees with this stance and prefers that one sector’s violations can only lead to tariffs being imposed on that sector only. Although there is still a disagreement between the UK and the EU on this topic, it looks like this dispute may be solved relatively quickly compared to the conflicts on fisheries and a level playing field.

Consequences of a No-Deal

As the three key points remain unsolved in the negotiations, a No-Deal becomes more and more likely. Last week the UK prime minister Boris Johnson already warned businesses in the UK to prepare to leave the EU without a trade deal. European Commission President Ursula von der Leyen also said that they both understand each other’s positions, but that the UK and the EU remain far apart. A No-Deal Brexit, however, would have serious consequences.

First of all, if the UK and the EU do not come to an agreement, the UK exports would be subject to the terms of the World Trade Organization (WTO). Every WTO member has a list of tariffs as well as quotas that apply to other countries. This means that all trade that crosses the UK borders will face these tariffs and quotas. Prices of European imports would increase, leading to direct consequences for consumers. This scenario is similar to the Australian relationship with the EU in terms of trade. The former Australian Prime Minister Malcolm Turnbull has already warned Boris Johnson that Australia’s trade relationship with the EU is not what the UK would want. He says that “there is a lot of friction in the system in terms of services” and that there are huge barriers to Australian exports.

Furthermore, a No-Deal Brexit would also mean that there will be border checks on UK and EU products. This would lead to large delays in transport and massive queues at the borders. And besides these long queues, the British tax authority HMRC estimated an annual increase of £15 billion in costs for extra paperwork alone.

A third consequence would be a negative impact on the British economy. The UK’s export to and import from the EU says it all. 46% of the UK’s export goes to the EU, making the EU their largest export market. Furthermore, 53% of the UK’s imports come from the EU. The tariffs and quotas may heavily impact trade, and thus the British economy.

The UK’s service industries would also get hit severely. This industry makes up 79% of the British economy and 45% of the exports. With many new trading restrictions having consequences for this sector, this also could harm the UK’s economy.

The UK Office for Budget Responsibility also estimated that a No-Deal Brexit would lead to a decline of 2% ($53 billion) of the UK’s output in 2021, and that more than 300,000 people will become unemployed by the second half of 2021. The long-run damage to the economy would be very significant, with an estimated loss of output of roughly 4% compared to a No Brexit situation.

Deal or No Deal?

A Deal or No-Deal Brexit comes close to a “do or die” question, especially for the UK. The consequences of a No-Deal Brexit will be quite severe, given the WTO tariffs and quotas, the border checks, and the impact on the British economy. However, once we reach the 1st of January 2021, major changes will happen, regardless of whether the UK and the EU can agree on a trade deal. Luckily there are already contingency plans in case no deal is signed. This would allow road and air traffic to move between the UK and the EU without much hinder. In the end, this would then be a temporary “friendly no-deal”, allowing the negotiations to continue after the official end of the transition period, and pushing the Brexit talks to its fifth year since the Brexit referendum took place.