Key Points
  • Non-tariff barriers as a result of Brexit can reduce U.K.’s services exports by 6-13 percent over a 10-year period

  • There are four Brexit scenarios that could play out – chaotic ‘no deal,’ hard Brexit after transition, customs union after transition and Norway plus

  • The challenge for the U.K. government in all scenarios is resolving the Irish border question and facilitating frictionless trade while staying true to the tenets of the Brexit referendum

"The UK wants to take back control of its money, law and borders. … We will respect that. But the EU also wants to keep control of its money, law and borders. And the UK should respect that."

- Michael Barnier, EU Chief Brexit Negotiator

With this quote, in an evening press conference at Brussels on July 26, 2018, the European Union (EU) effectively rejected the New Customs Partnership proposed in the U.K. government’s recent Brexit whitepaper. Published on July 12, 2018, the customs partnership proposed complete alignment of the U.K.’s customs regime with that of the EU, allowing the U.K. to collect tariff at its borders on behalf of the union. This would, in turn, enable friction-free movement of goods within the single market and avoid a hard border in Northern Ireland. However, Barnier stated clearly that the EU "cannot and will not delegate responsibility for its customs policy, VAT and tariffs" to a non-member.

Even as negotiators from both sides agree to return to weekly discussions from August to try and flesh out a Withdrawal Treaty in time for December, the impasse around the trade model and the Irish border question is becoming firmer than ever. Our blog  on the possible customs models that may evolve as Brexit negotiations move forward details the size of the customs infrastructure overhaul that the U.K. faces.

For the U.K., what also hangs in the balance is its ability to pursue profitable trade agreements with other countries – one of the key reasons for the Brexit referendum in the first place. The closer it aligns with the EU Customs Union in a bid to continue frictionless trade within the single market, the higher will its non-trade barriers with other countries become.

Research indicates that the bulk of the cost of international trade comes from non-tariff barriers such as regulatory and standards’ compliance, and licenses for access and settling cross-border disputes.  For example, the non-tariff costs on all goods between the EU and the U.S. was around 13 to 14 percent, with some sectors such as agricultural products and processed foods being considerably higher. The non-tariff barriers would become even more important for the services sector, which makes up 80 percent of the U.K. economy. It is estimated that non-tariff barriers arising from Brexit could reduce the U.K.’s services exports by anywhere between 6 and 13 percent over a 10-year period.

The Border of Dispute

The EU is pushing the U.K. to either opt for a clean hard Brexit, with a Free Trade Agreement (FTA) similar to the one it has with Canada, or to accept becoming a part of the European Economic Area (EEA) like Norway. However, the U.K. considers both extremes as a losing proposition, and would like the EU to show some ‘political will’ and help carve an innovative trade deal similar to the ones done with some other third countries recently.

A WNS DecisionPointTM analysis highlights five possible Brexit scenarios and their implications. With the EU effectively ruling out the Exclusive Goods Single Market Access proposed in the Brexit whitepaper, here are the other four scenarios that could still play out:

  • Chaotic ‘No Deal’: This is the most likely Brexit scenario if the Withdrawal Agreement is not agreed upon by December 2018. A hard border will have to be established on the Irish island, along with the entire infrastructure and systems for customs clearances at all major ports. The EU will have to allow grace time to allow such alternate arrangements to be made, and movements of trucks and flights will likely be grounded in the interim

  • Hard Brexit after Transition: The U.K. would sign a Withdrawal Treaty at the end of 2018, and an FTA in 2020. The customs border will be established along the Irish sea in 2021, leaving Northern Ireland a part of the single market even as the rest of the U.K. is out of it. There would be no frictionless trade in goods or services, but the U.K. would be able to pursue independent trade agreements with other countries

  • Customs Union after Transition:  In this scenario, the U.K. would sign an FTA as well as a Customs Union agreement with the EU in 2020. This will help address the Irish border problem, but Northern Ireland will still remain a part of the single market. But trade in industrial goods will be smooth with enhanced checks, while agricultural goods face longer delays at the border. Importantly, the U.K. faces restrictions on signing FTAs with other countries

  • Norway Plus:  A moderately soft Brexit, in this scenario, the U.K. concedes and signs an EEA-style agreement at the end of the transition period in 2020, remaining in the customs union and the single market. This ensures frictionless trade for goods and services, and also allows the U.K. to enter into third country FTAs. However, all of its red lines with respect to free movement of people, EU jurisdiction and fiscal contributions will be broken. Brexiteers consider this to be a defeat of the referendum

With the deadline for the Withdrawal Agreement looming large, businesses will be hoping for an end to the uncertainties around the final post-Brexit trade models. As things stand, the U.K. government faces an almost impossible task of delivering a Brexit that delivers on the Irish border question and frictionless trade, while satisfying the basic tenets of the Brexit referendum.

Click here for the Brexit series from WNS DecisionPointTM

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