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Why taking a no-deal Brexit off the table is good for business

·Senior Economics Correspondent at Yahoo Finance UK
Thousands of lorries pass through the Port of Dover to the European Union every week. Photo: Gareth Fuller/PA Images
Thousands of lorries pass through the Port of Dover to the European Union every week. Photo: Gareth Fuller/PA Images

Removing the threat of a no-deal Brexit would be a massive relief for British businesses.

This deeply damaging option could be taken “off the table” within days, according to comments made by UK chancellor Philip Hammond during a conference call this week with business leaders, according to a report in the Daily Telegraph.

The possibility that the country could drop out of the EU on 29 March without an agreed divorce deal and orderly transition period has been widely considered to be a worst-case scenario, rupturing trade ties between both sides and leading to the potential for food and medicine shortages. Car manufacturers would face the prospect of being forced to halt factory operations within hours.

A spokesperson for the Confederation of British Industry (CBI) told Yahoo Finance UK that avoiding a no-deal scenario would mean “a massive worry and a massive potential cost disappears.”

Business groups have consistently said that they want to keep their current trading conditions with the EU. Anything else would put them at a disadvantage. But no-deal would be the worst.

“’No-deal’ must be avoided at all costs,” said Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT). “Leaving the EU, our biggest and most important trading partner, without a deal and without a transition period to cushion the blow would put this sector and jobs at immediate risk.”

READ MORE: Hammond says Brexit could be delayed to avoid no-deal

Roughly 44% of all UK exports go to the EU each year, and more than 50% of Britain’s imports come from the bloc.

Sam Lowe, a senior research fellow at the Centre for European Reform, told Yahoo Finance UK it was helpful “from a political signalling point of view” that there was a will to stop a no-deal Brexit. But he said he was concerned it might not be enough.

“There’s a question of how you take no-deal off the table,” he said, noting that extending the Brexit deadline in March “still requires EU consent.”

“You’re still just pushing back the deadline,” he said.

Ultimately, businesses would want to know that a no-deal Brexit would be averted by having the UK revoke Article 50 and stop Brexit altogether, Lowe said. But that is not something prime minister Theresa May seems prepared to do as she works to honour the result of the 2016 referendum, where 52% of voters said they wanted to leave the EU.

READ MORE: What is a no-deal Brexit?

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.

If there is no Brexit deal, 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 manufacturing parts, fresh food and smartphones.

Some say WTO trade terms would be fine for the country. But trade experts and negotiators insist WTO rules are always suboptimal.

For example, under WTO trade rules, new cars shipped from the UK into the EU would incur a new 10% tariff, making British-made cars less competitive and less desirable for European buyers.

What next?

As the world waits to see what happens next, uncertainty remains. And this uncertainty will continue to worry business leaders and convince some to stop investing in the country as they wait for clarity.

Business investment in the UK has already declined for three consecutive quarters, something not seen in the country since the economic downturn of 2008 to 2009.

Some businesses are also diverting resources to stockpile items as they try to brace for a no-deal Brexit.

How bad would no-deal be?

The Bank of England (BoE) estimated in November that a no-deal Brexit with no transition would lead to an economic shock that would be harsher than the global financial crisis, causing the UK economy to shrink by about 8% within a year.

There are also expectations for inflation to peak at 6.5% and unemployment to peak at 7.5%. House prices could fall by about 30% and interest rates could spike, the BoE warned.

Even the government itself has warned that a no-deal Brexit would leave the UK economy about 9.3% smaller in the next 15 years, compared to a scenario where the UK remained in the EU.

READ MORE: 5 possible outcomes after MPs rejected May’s deal