Brexit: As Britain And EU Trade Talks Stall, Chances Of No Deal Loom Larger

While talks between the U.K. and the European Union over their future trade relationship have stalled, fears are growing that Britain will exit the EU with no trade deal.

In that event, the relationship between London and Brussels would revert to terms mandated by the World Trade Organization – which would involve various tariffs.

Last week, Michel Barnier, the EU’s chief negotiator, said a trade deal between the U.K. and the EU "seems unlikely" by the end of the transition period – Dec. 31. The U.K. has adamantly refused to extend that deadline.

Britain’s chief trade negotiator David Frost stated: “Agreement is still possible, and it is still our goal, but it is clear that it will not be easy to achieve. Substantive work continues to be necessary across a range of different areas of potential U.K.-EU future cooperation if we are to deliver it. The EU is still insisting not only that we must accept continuity with EU state aid and fisheries policy, but also that this must be agreed [to] before any further substantive work can be done in any other area of the negotiation, including on legal texts. This makes it unnecessarily difficult to make progress.”

The next round of talks is scheduled to start on Sept. 7.

“Given the little amount of time available and the divergent strategies of both sides, the scope of the agreement remains limited,” Dutch bank Rabobank wrote in a research report. “Such a limited agreement will have negative ramifications for the U.K. economy and, to a lesser extent, the EU economies that have a close economic relationship with the U.K.”

Rabobank also warned that trade barriers will “rise considerably,” whether a trade deal is struck by the deadline or not.

“European and British companies that once traded freely in each other’s markets will have to cross newly-erected barriers,” Rabobank noted. “This costs both time and money. There is only so much a trade deal can achieve. ... There will be customs checks carried out at the EU-U.K. border, goods that cross borders will have to satisfy rules of origin requirements to qualify for tariff-free entry, and trade will continuously be subject to the threat of anti-dumping measures and countervailing duties.”

As a result, Rabobank warned, some small businesses on either side of the English Channel, may decide that the cost of overseas trade is not worth the trouble.

“For some of those [small companies], the adjustment to a new [free trade agreement] could be just as frustrating as an adjustment to WTO standards,” the bank noted.

As for larger firms, Rabobank indicated that those which are already intertwined in international supply chains “may eventually find out that it is much easier to produce in the EU or in the U.K. and then simply sell only the final product into the other market.”

Thus, trade and investment between the EU and the U.K. will decline considerably over time, Rabobank added.

Rabobank pointed out that while the EU has shown willingness to make some significant concessions, the British have failed reciprocate.

“Ultimately, the talks boil down to the trade-off between regulatory autonomy and the ability to have deep international trading relationships,” Rabobank added. “Since this U.K. government puts sovereignty at the center of how it sees Brexit, the scope for any agreement remains very limited.”

How would a no-trade deal between the U.K. and Europe affect the U.S.?

David I. Kass, clinical professor of finance at University of Maryland, told International Business Times that if there is no trade pact between the U.K. and EU then the pound sterling is likely to decline in value.

“Then, U.S. goods will become more expensive in the U.K., likely reducing sales of U.S. companies exporting to the U.K.,” he said. “Also, U.S. companies with operations in U.K. could have their supply chains disrupted with corresponding adverse consequences.”

Steve H. Hanke, a professor of applied economics at Johns Hopkins University in Baltimore who also served on President Reagan's Council of Economic Advisers, told IB Times that the lack of a trade deal between the U.K. and EU would be largely a U.K.-EU affair.

“And, I must say, it would be a nasty affair, as the EU is very vindictive,” Hanke added. “But, among other things, a ‘no-deal’ would move the U.K. closer to the American orbit.”

Patrick Bradley, senior vice president-investment research at Brandywine Global Investment Management in Philadelphia, told IB Times that the end of the transition period at year-end will have the greater impact on the two participants trying to cobble together a trade treaty, the EU and the U.K.

“U.K. automobile exports, for example, would be hit with a tariff, raising the cost of a vehicle and potentially negatively affecting demand for British cars,” he said. “In terms of economic impact, think about 50%. Around 50% of U.K. exports go to the EU and just over 50% of U.K. imports come from the EU. Services will be impacted too, particularly the all-important financial services. Outside of the EU umbrella, the U.K. will have to negotiate its own trade treaties.”

John Ellmore, director and co-founder of Know Your Money, a U.K. price comparison site, told IB Times: “If the U.K. and EU fail to reach a trade deal, the economic ramifications will be felt globally – and the U.S. will be no exception. There will be unavoidable shockwaves affecting financial markets and currency values. But this will likely be short-lived. After all, when the U.K. voted to leave the EU in June 2016, there was volatility, but markets quickly recovered.”

Ellmore added that over the long-term, the lack of a trade deal between the U.K. and EU will disrupt supply chains.

“Products that both businesses and consumers are used to having easy and cheap access to might suddenly become hard to attain or more expensive,” he said. “For the U.S., this could present both challenges and opportunities. For example, businesses in the U.K. and EU might look to American firms to replace their current suppliers, post-Brexit. Conversely, consumers in the U.S. could see goods from Europe become more expensive as the knock-on effect of trade tariffs between the U.K. and EU present themselves.”

Ultimately, Ellmore noted, if trade talks between the U.K. and EU break down, pressure will mount on British Prime Minister Boris Johnson to quickly negotiate a trade deal with the US.

“If the U.K. is cut adrift from the EU, then the U.S. – which is the U.K.’s largest single-country trading partner – will find itself in a stronger negotiating position, meaning it might agree more favorable terms for U.S. businesses when it comes to trade with Great Britain,” he said.

(Know Your Money will be acquired by U.S. personal finance firm, Nerdwallet)