A 'no deal' Brexit will be a disaster in the making for UK

On December 31, 2020, as the world bids goodbye to a tumultuous year, a question will still loom for the UK - deal or no deal? That’s because the end of the year also marks the last day for the Brexit transition.

Both sides seem pessimistic about a deal working out – but some still hold out hope. Some kind of deal in place is especially important for the UK, which has already been stung by huge economic losses due to COVID-19. But there’s still a long way to go before such a possibility arises.

No gain scenario?

If there is indeed a no deal, the UK is in for a lot more trouble in 2021. The potential economic damage could even become one of the nation's greatest losses ever – worse than even what COVID-19 wreaked.

The biggest challenge is that with a no deal, all of the UK’s trade with EU would be governed by World Trade Organisation (WTO) rules and tariffs. In sum, both sides would be harmed, but the UK will be worse off. The EU’s GDP will only see a potential reduction of 0.7 per cent over 10 years, whereas, per our estimate, WTO rules could end up costing the UK 5-7 per cent of GDP in the same period.

Tariff troubles

With WTO tariffs, goods prices would increase on both sides of the border. Nearly 90 per cent of UK goods and services exported to the EU would require some measure of these. If this happens, we predict that the automobile, services and agriculture sectors would be the primary victims, with average tariffs of almost 11 per cent. The additional paperwork alone will cost approximately 15 billion pounds annually...

A no deal scenario will also reduce the UK’s ability to sell its services to members of the EU due to the high tariffs. UK firms will have no special privileges and would need authorisation for all activities. As the service sector contributes up to 80 per cent of the UK’s GDP, this can have an inordinate impact.

Currently, the deal process is also stuck with no common ground on the Irish protocol and on the Northern Sea fishing rights to the EU as well.

Softer solution, anyone?

There are still chances that both sides will agree to a limited deal – a soft Brexit – wherein some tariff-free trade will be agreed to. This will leave the UK free to deal with other countries. However, how the service sector will be impacted might be unclear.

In this case again, whatever happens, the EU would benefit more, because the UK currently has a 95 billion pound deficit in goods trade. The bottom-line? A no deal Brexit would be one of the worst things can happen to UK.

- Vipul Trivedi is Director at Vtrade Capital Investment ltd.