No-deal Brexit would 'cause chaos for just-in-time supply chains'

Out-Law News | 03 Sep 2018 | 4:46 pm | 2 min. read

A new report analysing a no-deal Brexit has predicted a slowdown in the economy and a significant impact for supermarkets, online retail and medical suppliers.

Academic think tank The UK in a Changing Europe said that while stockpiling by businesses and consumers could lead to a temporary uplift in demand and be positive for GDP, in the longer term there would be a negative impact from a fall in sterling and rising inflation.

The report, Cost of No Deal Revisited (34 page / 2.2MB PDF), said a recession was “clearly possible” in the short term, although it said the UK economy would continue to grow slowly in the longer term.

“Overall, the economic impact would likely be negative, but not disastrous. The largest source of uncertainty would be consumer spending, which accounts for more than half the economy. If consumers largely ignored the political drama of a possible no deal, the damage would be very much contained. If they sharply reduced spending in anticipation of hard times ahead, the economic impact would be severe,” said the report.

EU and competition law expert Guy Lougher of Pinsent Masons, the law firm behind Out-Law.com, said: “Leaving to one side the politics of the situation, it is clear that businesses should be engaging in scenario planning, if they haven’t already done so, in order to ensure that they understand the potential commercial and other implications of what a no deal scenario would mean for them.”

The think tank said the need to shift to World Trade Organisation (WTO) rules after a no-deal Brexit would require the reintroduction of tariffs, borders and other regulatory checks, slowing trade and disrupting food supply in the short term.

While some sectors could be supported by increased spending from the UK government, the think tank said problems in other areas could not be fixed in this way. It cited organic food and drink producers as one such sector, as the disruption to the organic certification regime “could be substantial, and, for some export businesses heavily reliant on trade with the EU, potentially existential”.

Aviation was another sector which the think tank identified as facing a particularly negative impact. The report said Brexit without a withdrawal agreement would result in the lapse of safety certification for UK aircraft, meaning that UK airlines would lose access to EU markets and third countries with bilateral air services agreements signed by the EU. EU airlines would also not be able to operate services to the UK.

Although the report acknowledged that contingency measures would limit the damage and help maintain connectivity, it said these would not provide for a continuation of the system currently in place and a UK-EU air services agreement would take “years to negotiate”.

It said the medical industry would face threats from a no-deal Brexit, with potential delays in obtaining drug supplies and approvals for new drugs.

The think tank said there was a frequent conflation of a no-deal scenario with a focus on trading under WTO rules, but it said negotiating new schedules would be “neither automatic nor straightforward”.

“The real impact of a chaotic Brexit relates not to the longer-term trading arrangements developed for the UK but, rather, to the short-term uncertainties associated with the disappearance without replacement of many of the rules underpinning the UK’s economic and regulatory structure,” said the report.

The think tank said it thought the likelihood of the UK government being able to negotiate mitigating deals in the event of a withdrawal without an agreement was slim, and that it made sense to plan for “the worst aspects of a chaotic Brexit”.

The UK in a Changing Europe director Anand Menon said: “Make no mistake, the impact of a no-deal Brexit will be severe. In the short term at least, considerable uncertainty and disruption will result.

“While it is wise to plan for no deal, and indeed attempt to mitigate against the worst aspects of a chaotic Brexit, it makes far more sense to avoid such an outcome altogether,” he said.

The UK government recently published 25 technical notices highlighting the practical effects of a no-deal Brexit, with further notices expected in the coming weeks.