It was four and a half years ago when the UK voted to leave the EU and it seems that negotiations started nearly immediately. Talks and more talks, deadlines that were extended and extended again, but no deal was in sight. Eventually, four and a half years later and we’re less than 2 weeks from when the UK officially leaves the EU and, there-is-still-no-deal.
While talks are still ongoing, they have bogged down and are moving as a snails pace. The big issue is fisheries – the British want to ensure that British fishing grounds are for British boats first and everyone else afterwards, whereas the EU wants unfettered access for their boats. Apparently, reaching a fair deal on this is a fundamental condition on any UK-EU free trade agreement. Fishing isn’t a big part of either economy; the issue is strictly political. The UK sees it as a sovereignty issue and wanting to be the master of their own waters. The EU sees it from a practical point of view in that there has always been a quota system of the amount and types of fish and such an arrangement should remain. It seems they are splitting hairs over something that economically will not have a significant impact. At this point, understanding how much time is left (the UK Parliament also needs to approve any deal) Boris Johnson is preparing his country for a no deal outcome.
So, they keep talking and they don’t figure out fisheries. What happens when in Brussels the clock strikes midnight on January 1, 2021? Well, that’s when this becomes an issue. A no deal Brexit (which is what this will be in this scenario) defaults the trade relationship between the UK and the EU to World Trade Organization minimums. That means tariffs and everything by the book. WTO standards are a starting point and not meant to be a trade regime. This will hurt the UK. It will also hurt the EU but to a much smaller degree. In the UK, the value of the pound sterling will nearly immediately drop as will GDP (even more than what was lost because of COVID) and tariffs will make everything more expensive – from the costs of doing business to the costs of groceries. The purchasing power of the average Briton will decrease as prices go up. Price increases may also trigger inflation. Foreign investment, at least in the short term, will also decrease – companies that want to do business in Europe will more than likely look to an EU member-state to set up shop rather than the UK. There will be less spending and as such much less money flowing through the economy which will lead to further economic contractions and on and on and on. On the somewhat positive side (for the rest of the world, at least), the negative effects of a No Deal Brexit will largely be confined to the UK.
Trading with the EU on WTO terms is not going to be sustainable for the UK, not even in the short term. The UK will need to create a proper deal – much like the one they have been trying to achieve for the past four and a half years. The difference is they will be trying to make this deal from a WTO trade regime – a very uncomfortable place and negotiating from a position like this, we suspect that the UK will be much more agreeable to EU terms on fisheries. Along with other things, too.