What is a no-deal Brexit? The key things you need to know

Alanna Petroff
Senior Economics Correspondent at Yahoo Finance UK
Photo: Emmanuel Dunand/AFP/Getty Images

The UK is set to leave the European Union on 29 March 2019 at 11PM local time, sparking deep concerns that negotiators won’t have enough time to strike a formal exit deal.

Here’s what you need to know about a so-called “‘no-deal Brexit”:

What is a no-deal Brexit?

At its most basic level, a no-deal Brexit would see the UK leave the EU without any new formalised arrangements covering crucial issues including trade, migration, border control and even flights across the English channel.

Many consider this to be a worst-case scenario.

The UK currently enjoys frictionless trade with the other 27 EU countries, with a so-called “customs union” ensuring goods can flow between the nations without any restrictions, tariffs or customs checks. These nations operate as a single trading zone and impose tariffs on goods from countries outside their customs union, but once the items come in, they move around freely.

Leaving the EU without a new deal would mean the re-imposition of border checks and tariffs; a potentially disastrous situation for UK-based companies like car manufacturers who depend on moving their components across EU borders. Roughly 44% of all UK exports go to the EU each year, and more than 50% of its imports come from the bloc.

The UK is also part of the EU’s “single market,” which allows for the free movement of goods, along with services, investment and EU citizens. This could be likened to a free trade deal on steroids. As it stands now, a German doctor could move to the UK and find work in his field without any restrictions. A British firm can seamlessly provide banking services to Italian businesses without any issues.

This EU single market requires the harmonisation and standardisation of regulations across member nations, covering areas like product safety and environmental protection. This eases trade and ensures common standards.

In a no-deal scenario, British businesses may find they are shut out of providing services to their European partners and money would not be able to flow seamlessly across borders. Plus, Brits living in the EU, along with Europeans living in the UK, could run into a range of problems related to their legal status.

The politics

The UK government, led by prime minister Theresa May, is negotiating to leave the EU and has outlined a desire to strike a new comprehensive deal, but is also preparing for a no-deal scenario. In a bid to make the move easier, it’s also agreed to implement a transition period with the EU lasting until December 2020.

While Brexit talks have made progress on various issues including citizen’s rights, the clock is ticking and there’s still plenty more to finalise.

A major sticking point in the negotiations revolves around the Irish border between Northern Ireland (part of the UK) and the Republic of Ireland (which will remain in the EU.) As it stands now, people, goods and even cows can move across the border without any checks, but there are concerns about whether this situation can be maintained after Brexit. The risk of a hard land border between the two sides is a politically explosive issue.

The economic impact

A no-deal Brexit would likely lead to another sharp drop in the value of the British pound, creating a new round of high inflation for UK consumers who depend on a range of imports in their everyday lives.

The UK is expected to revert to World Trade Organization (WTO) trading rules, leading to a flurry of new customs checks, paperwork and tariffs at the borders, slowing down imports and exports of items including car parts, fresh food and smartphones. The UK could also be ejected from all the EU’s previously agreed free trade deals and treaties with outside nations, including the newly minted trade deals with Canada and Japan.

Financial services firms and car manufacturers based in the UK have been among the most vocal critics of Brexit, warning that any slowdown in trade and transactions would hurt their businesses and bottom lines. Lower profitability could ultimately lead to job cuts or businesses moving their operations elsewhere.

The effects of Brexit are already being felt as business investment in the UK has plunged, with executives saying they cannot invest in the country without understanding the UK’s future trading relationship with the EU.