Deal or No Deal:  Sliding closer to the Brexit cliff-edge – Updated

PM May has suffered a crushing Parliamentary defeat on the Brexit ‘divorce arrangement’.  The universe of possibilities for the next few months ranges from a ‘no-deal’ exit through to no Brexit, with the chance of a second referendum also in the mix.  New Zealand exporters to the UK are likely to be in for an extended period of uncertainty, and will want to think about contingency planning.

A little over two months out from “Brexit Day” on 29 March, the UK-EU Withdrawal Agreement, negotiated with the EU late last year, was roundly rejected by a historically large margin in the House of Commons on 15 January.  Subsequent PM May faced a vote of no confidence on 16 January, but this was narrowly defeated with the support of governing partner the DUP and hardline Brexiteers.

PM May’s Withdrawal Agreement had tried to reconcile contradictory political priorities – to deliver both a “hard” and a “soft” Brexit – but in the end satisfied almost no-one.

“Unless deliberate action is taken to avert it, the default will be a ‘no-deal’ outcome on 29 March.  This is widely feared as having catastrophic economic implications for the UK (and EU) as well as disrupting trade with third countries…  ”

Confusion is the order of the day

Where this leaves the process is far from clear.   PM May is obliged to bring a new deal to Parliament by Monday 21 January, but one can only speculate on what this might contain: the EU has made it clear that it will not renegotiate the deal, although there will certainly be pressure on the Prime Minister to try and she has said she will explore cross-party comprises with all opposition parties.

Scenarios: no deal, no Brexit, ‘People’s Vote’?

One possible alternative scenario would be the extension of ‘Article 50’ (the departure mechanism) to defer the exit date, but in order to agree, the EU would likely require this to be aimed at accommodating either a second referendum (a ‘People’s Vote’, for which popular enthusiasm is mounting, although polling suggests would still be close) or a general election (less likely).  Equally it is technically possible – although perhaps not politically so at this stage – for the UK unilaterally to withdraw Article 50, halting Brexit.

Most worryingly, however, unless deliberate action is taken to avert it, the default will be a ‘no-deal’ outcome on 29 March.  This is widely feared as having catastrophic economic implications for the UK (and EU) as well as disrupting trade with third countries.

Where does this leave New Zealand exporters?

Uncertainty for the next few months is a given, but there is also a risk of severe disruption for New Zealand exporters to the UK, potentially as soon as the end of March.  Rejected along with the Withdrawal Agreement was the ‘transition period’ under which current trade arrangements would have continued to apply through to the end of 2020 before a new UK-EU trade deal was to have been agreed.

This means that, potentially as soon as 30 March, New Zealand exporters could encounter difficulties both at the border (where the necessary infrastructure and systems for an independent UK are unlikely to be in place) and in the market (if UK exports are unable to trade into the EU market over unfavourable WTO MFN tariffs, the resulting downturn and domestic oversupply may mean downward price pressure in the UK for some products).  New Zealand businesses will want to give serious consideration to contingency planning for a possible no-deal outcome.  MFAT, NZTE and MPI have prepared some useful guidance for this contingency (see links at the end of the blog).

Implications for a UK-NZ FTA

Longer term, what this means for an independent UK trade policy – including the possibility of an FTA with New Zealand (see our paper here) and other trading partners – remains to be seen.   Given recent events, the UK will have stronger reasons than ever to move quickly on FTAs post-Brexit (especially if the “cliff edge” happens), but it is likely that the relationship with the EU will be its major focus for the foreseeable future.  The ‘Political Declaration’, which sketched out elements of a future trade agreement between the EU and UK, was part of the Withdrawal Agreement package.  If the latter fails, that creates further ambiguity about the nature of trade between the two, and its scope for negotiating bilaterally with other countries.

New Zealand papers on Brexit planning:

• MFAT advice on Brexit
• NZTE advice on Brexit
• MPI advice on Brexit for the agriculture sector

UK and EU papers on a no-deal outcome:

• UK technical papers
• UK Partnership Pack: preparing for changes at the UK border after a ‘no deal’ EU exit
• EU – European preparedness notices  

This post was prepared and updated by Stephanie Honey, Associate Director of NZIBF.