LONDON/BRUSSELS (Reuters) - Britain and the European Union are seeking a post-Brexit trade deal, with failure likely to result in increased chaos in mutual trade, financial markets tumbling and huge economic costs.
Here are some of the potential pressure points of a failure to reach agreement on trade.
Investors and banks have long predicted a trade deal would be done, so a no-deal would hit the British pound, foreign exchange traders say.
But investor sentiment was hit by the sides saying on Saturday that there was still no agreement covering annual trade worth nearly $1 trillion, and sterling has fallen against the U.S. dollar since then.
The shock result of Britain’s referendum on leaving the EU in 2016 sent the pound down 8% against the dollar, its biggest one-day fall since the era of free-floating exchange rates began in the 1970s.
In the case of a “no deal” on trade , Britain would lose zero-tariff and zero-quota access to the European single market of 450 million consumers overnight.
Britain would default to World Trade Organization (WTO) terms in its trade with the 27-state bloc. It would impose its new UK global tariff (UKGT) on EU imports while the EU would impose its common external tariff on UK imports.
Non-tariff barriers could hinder trade, with prices widely expected to rise for British consumers and businesses
Borders risk disruption, especially the main crossing points, with experts saying shortages of certain foods are possible in Britain as it imports 60% of its fresh food, with disruptions in British lamb exports to the EU also possible.
Any disruption would be felt most keenly by sectors that rely on just-in-time supply chains, including autos, food and beverages. Other sectors likely to be affected would include textiles, pharmaceuticals, and chemical and petroleum products.
The EU is Britain’s biggest trading partner, accounting for 47% of its trade in 2019. It had a trade deficit of 79 billion pounds ($104.86 billion) with the EU, a surplus of 18 billion in services outweighed by a deficit of 97 billion pounds in goods.
Even with a deal, Britain expects thousands of trucks bound for EU countries to stack up in the southern English county of Kent, with delays of up to two days.
The impact would be felt sharply by the car industry in both Britain and the EU, with British automakers facing a 10% tariff on all car exports to the EU and up to 22% for trucks and vans if no Brexit deal is struck, 23 auto industry associations said.
The cost would almost certainly be passed on to consumers, it added, predicting 57.7 billion euros ($69.85 billion) in costs for EU plants and costs of 52.8 billion euros for UK plants.
In Britain, the Society of Motor Manufacturers and Traders, said a “no deal” Brexit would cut UK vehicle production by 2 million units over the next five years and undercut its ability to develop the next generation of zero-emission vehicles.
The outcome of the negotiations on fishing rights is also being closely watched as it will have political as well as economic fallout, even though fishing alone contributed just 0.03% of British economic output in 2019.
France has sought a deal that protects its ability to fish in UK waters for several years to come but has told its fishermen to prepare for a smaller catch.
The long-term impact could be costly for both Britain and the 27 remaining EU member states.
A no-trade deal would wipe an extra 2% off British economic output in 2021 while driving up inflation, unemployment and public borrowing, Britain’s Office for Budget Responsibility (OBR) has forecast.
The OBR said tariffs under WTO rules and border disruptions would hit parts of the economy such as manufacturing that were emerging relatively unscathed from the COVID-19 pandemic.
According to economic research by insurer Allianz in November, a hard Brexit - a sharp, disorderly split - could cost the EU as much as 33 billion euros in annual exports, with Germany, the Netherlands and France hit the hardest.
The shock would be felt unevenly across continental Europe, with those likely to be hit worst including Ireland, the Netherlands, Denmark, France, Germany, Sweden, Portugal, Poland, the Czech Republic Cyprus, Malta and Hungary.
The Halle Institute for Economic Research has forecast that EU companies exporting to Britain could lose more than 700,000 jobs if no trade deal is agreed.
Hylke Vandenbussche, a professor at Belgium’s University of Leuven, said in a report last year that Belgium would be the worst affected EU member state relative to its size, especially its food sector, with the loss of 10,000 jobs.
Both sides want to avoid a hard border between the British province of Northern Ireland and the Republic of Ireland, which is in the EU. Implementing the Northern Ireland protocol, which is part of the withdrawal agreement under which Britain left the EU on Jan. 31, will be complicated without a trade agreement.
Under the treaty, Northern Ireland remains, in effect, in the EU’s single market for goods and aligned to its customs rules after Dec. 31 - unlike the rest of the United Kingdom.
Exactly how checks, regulations and paperwork will work between Britain and Northern Ireland is not yet clear. But without a trade deal, the divide between Britain and Northern Ireland would become more distinct.
Brexit without a trade deal could allow Northern Ireland to become a back door into the EU’s single market, thus raising the spectre of a hard border on the island of Ireland for the first time since a 1998 peace deal.
The 1998 Good Friday Agreement ended three decades of sectarian violence between mainly Protestant Unionists who favour continued British rule and mainly Catholic Irish Nationalists who want a united Ireland.
Both sides would be likely to blame each other for any chaos after a no-deal exit and Europe would be split just as it faces the challenges of China’s rise, Russian assertiveness and the continuing fallout from the COVID-19 pandemic.
There could also be acrimony within the EU, which would lose one of Europe’s leading military and intelligence powers, its second-largest economy and the only financial capital to rival New York. Britain would be left far more dependent on its alliance with the United States.
Britain is pushing ahead with legislation that would allow it to break parts of the withdrawal treaty relating to Northern Ireland, making it unclear how far it would implement the divorce deal.
CITY OF LONDON
The world’s international financial capital is largely ready for Brexit as a trade deal was never going to cover Britain’s most globally competitive industry.
While most banks and investors have found ways to navigate Britain’s departure from the bloc, the long-term impact of an acrimonious Brexit would be unpredictable and the EU would be likely to try to grab more market share from the City of London.
London is the centre of the world’s $6.6 trillion-a-day foreign currency markets, accounting for 43% of global turnover. Its nearest EU competitor, Paris, accounts for about 2%.
The British capital is also the global centre for euro trading, a potential headache for the European Central Bank.
Editing by Alexander Smith, David Clarke and Timothy Heritage
Our Standards: The Thomson Reuters Trust Principles.