On December 24, 2020, the U.K. and the EU struck a provisional free-trade agreement that ensures the two sides can trade goods without tariffs or quotas. However, key details of the future relationship remain uncertain, such as trade in services. The deal was approved by the U.K. parliament, but still needs to be approved by the EU Parliament. However, the EU currently put the deal into place provisionally on January 1, 2021 for two months while the EU parliament scrutinizes and takes time to ratify it.

Since Brexit, the U.K.'s departure from the European Union (EU), on Jan. 31, 2020, the U.K. and EU have been trying to negotiate a new trade deal to govern the economic relationship between them. They have until midnight on Dec. 31, 2020. Then, the transition period during which the U.K. has stayed in the EU single market will end and U.K.-EU trade will be governed only by World Trade Organization (WTO) rules.

Since British voters passed the 2016 referendum to leave the EU, the terms of the parties’ post-Brexit relationship have been unresolved. For a long time, the options were characterized as a ‘hard’ Brexit, a complete split with few or none of the prior trade arrangements continuing, or a ‘soft’ Brexit, with their new relationship carrying forward many of the close, favorable conditions of the former arrangements.

However, as the deadline for reaching a trade agreement nears, the question has stopped being whether Brexit will be hard or soft, but whether or not there will be any trade deal post-Brexit, or no deal at all.

Current State of Negotiations

Currently, the main issues holding up a deal are EU fishing rights in U.K. waters and maintaining a ‘level playing field” in terms of economic competition. A level playing field basically means that in order to have access to the EU single market, the U.K. will need to abide by the same rules and regulations to ensure that it doesn't have an unfair advantage over EU businesses.

Fishing rights seem to be the principal obstacle to a deal. Even though fishing amounts to less than 1% of EU trade, it is important to several European countries, particularly France, because of domestic politics. Already the U.K. has announced that Royal Navy patrol ships are ready to protect U.K. fishing grounds in the event of a no-deal Brexit.

An agreement on the terms for a level playing field appears likely. The EU and U.K. already had been prepared to maintain their current environmental, labor, and social standards as a baseline. The U.K., which had been reluctant to agree to comply with any higher standards that the EU might adopt in the future, has indicated it can agree to a mechanism to preserve fair competition with respect to regulatory standards in the future. 

Repercussions of a Deal or No-Deal Brexit

Although failure to reach a trade agreement would be detrimental to both the U.K. and EU, the U.K. would be more adversely affected because the EU market accounts for approximately half of British export trade. Some British politicians would accept a no-deal Brexit in order to have the freedom to set up the U.K.’s own trade deals and rules. Other British officials view this approach as economically perilous and burdensome, requiring significant time for the U.K. to draw up its own independent trade agreements with the EU and other countries that have treaties with the EU. The leader of the opposition Labor Party, Keir Starmer, who was against leaving the EU, has criticized the Tory government’s failure to make a deal. With only a limited time left to strike a deal, it is likely that even if one is achieved, it will be a ‘thin’ deal. That means one that leaves many issues unresolved to be dealt with in later negotiations, likely creating problems.

A no-deal Brexit will result in tariffs on EU-U.K. trade and extensive new regulations affecting the cost and availability of good and services. In addition, companies and individuals engaged in cross-border business will relocate personnel and operations, obtain new licenses and registrations, and make other operational adjustments. This will result in imported goods becoming much more expensive, squeezing consumer spending across the U.K. and weighing on the many firms that depend on European materials and do business with European partners. Even if a deal is reached, the U.K.’s departure from the single market is expected to have a negative, albeit less severe, impact on the British economy.

Economists across the world have repeatedly warned that Brexit would entail increased costs and regulatory challenges, particularly for the British. When economists discuss a no-deal scenario, their predictions have been even more dire. Over the next 10 years, a no-deal outcome has been projected to result in the U.K.'s gross domestic product (GDP) being 8% lower than it would be otherwise. The immediate impact on equity markets and currencies may not be as large as you'd expect. This is because markets have likely already priced in a no-deal Brexit to a significant degree, and the effects of the COVID-19 pandemic may have a larger short-term impact.

The Chairman of Tesco PLC., the enormous groceries and merchandise retailer, recently predicted that a no-deal outcome could result in a 5% increase in British food bills. In addition to tariffs affecting a vast array of products from vegetables to automobiles, the logistics of border checks and new paperwork requirements will increase costs and potentially compromise the availability of goods. Many fear chaos at the ports. Adding the disruption of a no-deal Brexit to the pandemic’s economic impact poses issues throughout the British economy and beyond.