Brexit: No-deal “a drop in the ocean” for economy compared to Covid-19
Brexit has taken a backseat from the headlines this year, but the deadline for extending the transition period is approaching. We expect a partial trade deal to be done by the end of 2020.
The impact of Brexit has been put into a different context as a result of the dramatic economic effects of the Covid-19. Nonetheless, it is back in the spotlight and is likely to remain so in the coming months.
Despite the disruption caused by the pandemic, the UK government is refusing to allow for more time to complete the trade negotiations before the Brexit transition period comes to an end.
As set out in the Withdrawal Agreement, the UK can request a two-year extension to the transition period by the end of June 2020; however, with the UK government determined to draw a line under the whole affair, many are becoming increasingly concerned that a trade deal may not be agreed in time.
What's the state of play in negotiations?
On 15 June, UK prime minister Boris Johnson took part in a virtual meeting with European Commission president Ursula von der Leyen and European Council president Charles Michel. Though neither side was willing to back down, they agreed to “inject new momentum” into trade talks, setting a new deadline for the end of July.
Talks have reportedly been in deadlock for weeks over several key areas. The EU is pushing for access to UK fishing waters, which the UK refuses to accept, while the UK is refusing to sign up to being a rules and standards taker for any future changes in standards. Moreover, the EU wants the UK to agree to maintaining a “level playing field”, or in other words, not to undercut the EU on labour laws, environmental standards and corporate subsidies (or state aid).
The reportedly positive mood following the meeting suggests both sides believe in the mutual benefits of a trade deal, and that there is room for compromise. The EU states that 31 October is the real deadline as member states will need time to ratify the agreement. Unlike the Withdrawal Agreement, the trade deal will require unanimous backing, which raises the risk of hold-outs.
Some will remember the 2016 EU-Canada trade deal (Ceta pact) which almost collapsed when Belgium delayed its ratification due to opposition from the Walloon regional parliament. There has to be enough time to overcome such obstacles.
We continue to expect a partial trade deal to be agreed by the end of the year, with potentially an add-on deals agreed in subsequent years. Given the lack of available time, the agreement is likely to focus on the sectors that take the highest priority for both sides. As previously indicated by the UK government, services will not be included in the agreement.
What if there is no deal?
If both sides fail to agree on even a partial deal, then we can expect to see tariffs being applied to the flow of goods heading in both directions, potentially raising prices and reducing demand. Both sides would suffer, though the impact on the UK would be larger given the relative sizes of economies.
However, given the current economic backdrop, the negative impact from a no-deal Brexit would be a drop in the ocean compared to the impact from the coronavirus lockdown. It will be incredibly difficult to separate and distinguish the impact of each shock.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.