How much would a no-deal Brexit cost the UK?

Although the United Kingdom (UK) left the European Union (EU) on 31 January 2020, a transitional period runs until the end of this year, during which the existing contractual arrangements continue to apply. By the end of this period the EU and the UK must have concluded a new free trade agreement (FTA), otherwise the result will be a disorderly (no-deal) Brexit, which would significantly reduce the UK’s gross domestic product (GDP).

The negotiations so far have given little cause for hope. The two parties remain divided on fishing rights, social, environmental and subsidy rules, the role of the European Court of Justice and the status of Northern Ireland. The Internal Market Act is particularly controversial: the UK government plans to remove special clauses from the already valid withdrawal treaty which are intended to bind Northern Ireland more closely to the EU’s internal market and customs union. Such action would be in breach of international law.

The EU Commission therefore took legal action at the beginning of October. If the UK government does not amend the controversial passages of the law within one month, the dispute could end up before the European Court of Justice. As the conflict intensifies, time is running out. In order to ratify the trade agreement on time, a deal would have to be struck by mid-November at the latest. If neither party changes course now, a no-deal Brexit will be inevitable.

Brexit will also weaken relations with non-EU members

Whether orderly or disorderly, Brexit means that the UK will leave EU institutions such as the European Court of Justice and Europol on 1 January 2021. It will also cease to be a member of the European single market and customs union, EU standards will no longer apply and the country will no longer contribute to the EU budget.

Most of the long-term effects of Brexit are likely to come from trade. In 2019, around 43 per cent of UK exports went to the EU and roughly 51 per cent of imports came from the EU, making it the UK's main trading partner. Administrative hurdles such as new certifications and approvals for customs clearance will increase the cost of trade. However, trade relations with non-EU members are also likely to be weakened for the time being, as not all agreements with third countries that had previously been signed with the EU have been replicated yet. The pound sterling could depreciate further, making foreign products more expensive.

Once the UK exits the European single market, its attractiveness as a business location for multinational companies will diminish and will be accompanied by a decline in foreign direct investment. The new immigration rules will make it more difficult to employ foreign workers. Although the UK will be able to save its annual contribution to the EU budget (0.4 per cent of its GDP), it will only benefit from this to a limited extent. Firstly, the UK’s withdrawal from the EU means that the country will no longer receive financial subsidies from the EU for regional development and competitiveness programmes and, secondly, its tax revenues are likely to be lower because its GDP growth will be lower too.

No-deal Brexit could significantly reduce GDP

In the absence of a free trade agreement, WTO rules would govern trade with the EU. The UK would then – as things stand now – apply duties and quotas on goods coming into the country from the EU, and the EU would apply third-country duties and quotas on goods from the UK. At the same time, the UK would have to trade with each WTO member on a ‘most-favoured-nation’ basis, i.e. on the same terms and conditions. This would increase the cost of living in the UK.

The EU would have to introduce border controls on UK products, which could lead to massive queues at the borders in the short term and delays in delivery of up to six months. Different regulations and product standards would further complicate trade with the EU and incur additional costs, although individual sectors might benefit from new, favourable legislation. Agreements such as the one on air transport would no longer apply. The theoretical consequence would be that UK aircraft would no longer be allowed to land at EU airports until a follow-up agreement is negotiated.

Overall, the economic consequences of a no-deal Brexit for the UK are likely to be significant in both the short and long term. A number of studies have attempted to estimate the consequences of different Brexit scenarios compared with the pre-EU status. It is generally assumed that long-term adjustments will not take place until 15 years after Brexit, as the effects described above impair productivity and thus diminish long-term growth potential.

Most studies agree that the higher the trade restrictions are, the greater the negative effect on GDP will be. On average¹, the studies under review predict that UK GDP in 2030 will be 2.5 per cent lower in the event of a no-deal Brexit than it would be under a FTA withdrawal. GDP is expected to be 5.3 per cent lower than a scenario without Brexit. Although adverse economic consequences are also expected for the EU, the majority of these are thought to be minimal.