10: What If the UK Crashed into a No-Deal Brexit?

Episode Summary

Executive Summary: The episode examines the economic consequences of a no-deal Brexit with economist Swati Dhingra, emphasizing that WTO terms would restore tariffs, intensify non-tariff barriers, and disrupt highly integrated UK-EU supply chains. The discussion argues the biggest costs would come from regulatory divergence, border delays, and loss of market access in sectors like autos, pharmaceuticals, aviation, and financial services, with broad GDP and regional impacts.

Main Topics: Why no-deal Brexit remains central in politics (Priority: 5/5): The hosts ask why 'no deal' is still publicly discussed, and Dhingra explains it serves both tactical bargaining and practical contingency-planning purposes, especially given the tight timeline for negotiating and ratifying a new EU-UK arrangement. Tariffs under WTO rules (Priority: 5/5): Dhingra explains that no deal would place the UK and EU into standard WTO relations, reintroducing tariffs on bilateral trade and potentially on trade with third countries if existing EU-negotiated agreements lapse. Non-tariff barriers and regulatory divergence (Priority: 5/5): The conversation stresses that tariffs are not the main issue; the larger problem is the reemergence of customs checks, standards verification, and compliance costs once EU regulatory alignment no longer applies automatically. Sector-specific disruption: autos, pharma, aviation, financial services (Priority: 5/5): The episode highlights how deeply integrated sectors would face the greatest harm because they depend on cross-border supply chains, shared regulation, passporting rights, and mutual recognition of standards. Border frictions and administrative capacity (Priority: 4/5): The hosts and Dhingra discuss the practical burden of policing trade at Dover, Calais, and other crossings, noting that the UK would need many more customs agents and systems to avoid major queues and delays. GDP, regional inequality, and longer-run adjustment (Priority: 4/5): Dhingra cites estimated medium-term output losses and argues Brexit could worsen existing wage stagnation and regional divides, with harder-hit areas facing more persistent adjustment costs. Limits of alternative trade strategies (Priority: 4/5): The episode considers ideas like unilateral tariff cuts, joining TPP, or striking new US/India deals, but Dhingra argues these cannot offset the scale of lost EU trade and investment.

Key Arguments: No-deal Brexit would mean the UK trades with the EU on WTO terms, ending zero-tariff access and requiring tariff alignment with WTO non-discrimination rules. The biggest economic harm comes not from tariffs alone but from non-tariff barriers: customs checks, rules-of-origin, standards compliance, and regulatory duplication. Highly integrated industries like automobiles would be especially exposed because their supply chains cross the border repeatedly and operate on just-in-time logistics. Pharmaceuticals and aviation depend on shared regulators and mutual recognition; without it, approvals and safety oversight could be disrupted or relocated. Financial services are vulnerable because passporting and regulatory equivalence are uncertain and less common than many assume, even in deep EU trade agreements. Alternative trade deals cannot quickly replace the EU market: the EU accounts for roughly half of UK trade and foreign investment, while gains from deals with the US or India would be much smaller. A no-deal outcome could reduce UK GDP by around 3.5% to 6% over five years compared with staying in the EU, according to the estimates cited. Brexit risks amplifying regional inequality because weaker-wage areas may be less exposed initially but could recover more slowly, while London is more exposed but more resilient. The UK’s capacity to administer border and regulatory checks is limited, making bottlenecks at ports and logistical delays a serious concern. Sector-specific regulatory divergence would raise consumer and producer costs by forcing repeated proof of compliance and increasing uncertainty about future standards.

Data Points: Average developed-country tariff cost: about 1.5% - Dhingra says tariffs between developed economies are relatively low, making non-tariff barriers more important. UK customs agents: 5,000 - Current UK capacity to perform border enforcement tasks. Germany customs agents: 35,000 - Used as a comparison to show how much larger a similar-sized country’s border enforcement capacity can be. Car exports to EU from typical UK plant: 40% to 60% - Share of output from a typical UK car plant destined for the EU market. Car inventory on stock: about 2 hours - Illustrates how tightly optimized the auto supply chain is for cross-border trade. EU tariff on WTO members for cars: around 10% - Potential tariff level the UK auto industry could face on EU trade under WTO terms. Border crossings in auto supply chains: 40 times - Automobile parts or vehicles may cross borders repeatedly, compounding tariff and delay costs. Existing EU trade agreements for the UK: 30+ agreements - These agreements could lapse if not grandfathered after Brexit. Estimated duration for a shallow trade agreement: about 2 years - General benchmark for negotiating a limited trade deal. EU-Swiss trade agreement evolution: about 20 years - Example of how long deep trade arrangements can take to develop. Projected UK GDP change over five years: -3.5% to -6% - Estimated impact if Brexit trade costs are imposed compared with staying in the EU. Impact of unilateral liberalization: 0.3% of GDP - Estimated gain from the UK unilaterally cutting tariffs, described as too small to offset Brexit losses. Impact of a new US trade deal: 0.7% of GDP - Estimated boost from eliminating tariffs with the US, still far below the losses from reduced EU trade. UK trade and foreign investment share with EU: about half - Used to show why replacing EU market access is difficult. Potential trade decline with EU: 13% to 40% - Range of estimates mentioned for trade falling if Brexit raises barriers. UK-India trade baseline: under 5% - Shown as too small to offset EU trade losses even with a strong increase. Potential UK-India trade increase: 33% - Cited as an optimistic scenario that still fails to replace EU trade volumes. EU aviation agency setup cost: £400 million for a decade - Estimated cost for the UK to build its own equivalent aviation safety agency. EU clearing house location dispute: Eurozone requirement proposed - Example of regulatory uncertainty in financial services and legal contestation. UK wage growth context: almost 30 years of low wage growth - Used to frame Brexit’s effects amid already weak domestic economic performance.

Pivotal Quotes: "any deal is better than a no deal" — Swati Dhingra: Explaining the political rhetoric around Brexit negotiations and why 'no deal' is used as leverage. "The relevant question is not about what is going to happen tomorrow. The relevant question is if we are to Brexit, what happens?" — Swati Dhingra: On the limits of short-term forecasting and the importance of long-run economic analysis. "we can't anywhere come close to the 50%, 45% number that we see with the European Union" — Swati Dhingra: Comparing the scale of potential new trade with India to existing EU trade relationships.

Implications: A no-deal Brexit would likely raise costs, slow trade, disrupt supply chains, and pressure major sectors. Businesses should prepare for border delays, regulatory duplication, and possible relocation; policymakers face large losses and limited ability to offset them quickly.