‘Should I stay or should I go’ … BREXIT 23 June 2016
Surprisingly, there isn’t a great deal of objective, independent research on the economic impact of Britain either staying in the EU or coming out. Capital Economics have written a report looking at the likely impact of Brexit on the UK, purely from the perspective of economics and a summary of their findings is below for your information (Capital Economics Limited, 2016).
If the United Kingdom were free to impose restrictions there could be a “rush for the border” ahead of the restrictions, resulting in a surge in migration in the short term. European Union migrants already in Britain would almost certainly be given leave to stay, just as British citizens living in Europe could remain there. Furthermore, if European Union migrants already in the United Kingdom knew that it would be hard to get back in if they left, they might stay longer than they otherwise would have. Emigration out of Britain could fall alongside a rise in immigration, perhaps leaving net migration little changed or even higher in the short term.
Most importantly, the government would gain the ability to implement a different migration policy, with criteria probably set according to people’s skills and professions, rather than where they come from. Accordingly, the quality of migrant labour could rise, boosting Britain’s productivity performance and plugging labour shortages in specific sectors.
But migration policy is not the only way in which Brexit would impact the labour market. The United Kingdom would be freed from many of the European Union’s restrictive regulations (such as the Agency Workers’ Directive, which gives temporary workers the rights of full-time workers).
Trade and the manufacturing industry
Official trade statistics show that the European Union is the destination of about half of all British goods exports. The share is a little lower if services exports are included too but is still a sizeable 45%. Given that total exports account for 30.5% of British output, this means that the value of all goods and services exports to the European Union are equal to 14% of the overall United Kingdom economy. However, The Office for National Statistics estimates that exports that pass through the ports of Antwerp and Rotterdam are counted as exports to the European Union, but are bound for re-export outside it. The trade statistics show that 7.9% of Britain’s goods exports go to the Netherlands and 4.3% to Belgium /Luxembourg, but the true figures of exports with these countries as the final destination will be lower than this (Office for National Statistics, Newport, 2015).
The trading links are bigger if we include the more than 60 countries that the United Kingdom trades freely with because they have a free trade agreement with the European Union. These include Switzerland, South Africa and Turkey. Taking into account Britain’s exports to these countries means that 63% of its goods exports are linked to European Union membership.
The chances are high that a favourable trade agreement could be reached after Brexit, as there are advantages for both sides in continuing a close commercial arrangement. Given the scale of trade interdependence between the United Kingdom and the European Union’s members, and the advantages of maintaining a close commercial arrangement, there would be little to be gained on either side from hostile trade relations after Brexit. Indeed, given that the European Union is currently negotiating free trade agreements with countries that are much less important to it from a trading point of view, it would be odd if it did not try to reach an agreement with the United Kingdom. Similarly, there is no reason to think that Britain would not be able to negotiate new trade deals with those countries that it currently has free trade agreements with via the European Union.
What’s more, fears that exporters would be left high and dry the day after the Brexit vote are unfounded. Under Article 50 of the Treaty on European Union, a country leaving the European Union has 2 years in which to negotiate a withdrawal agreement, before the Treaties cease to apply to that country. During that two-year negotiation period, the United Kingdom would still effectively be in the European Union with unfettered access to the single market.
Cost of losing access to the single market
The European single market is more than a free trade agreement without tariffs. Goods can move freely because all members adhere to common regulatory requirements and technical standards. In addition, the single market provides for the free movement of services, capital and people.
Britain could in effect remain part of the single market by becoming a member of the European Economic Area. Norway, Iceland and Liechtenstein are outside the European Union, but in the European Economic Area. Meanwhile the Swiss, who are members of the European Free Trade Association but not the European Economic Area, have established free trading relations with the European Union and access to the single market through a series of bilateral agreements. Although their trade with the bloc is subject to Brussels’ ‘rules of origins’ regulations, both Norway and Switzerland have the freedom to determine their own trade policy and arrangements with third party countries.
The option of remaining in the European Economic Area (like Norway) seems an undesirable one in the event of Brexit. The whole point of leaving the European Union would be to gain substantial extra freedoms – which in that case would not be possible. At the same time, some of the United Kingdom’s influence over the European Union would be lost. The Swiss option is more plausible but would be subject to tough negotiations.
Assuming Britain does not remain in the single market, even if the United Kingdom managed to negotiate a free trade agreement, exporters would face additional costs in selling into the European Union. These would include extra costs of clearing customs and the administrative costs of complying with the European Union’s rules of origin.
They might also face other non-tariff barriers, such as quotas. They would also still need to adhere to European product standards in order to export freely to the union. To avoid producing some goods in one way to meet European Union standards, and others in another way, firms would presumably just continue to comply with most current regulations.
However, these factors would be an inconvenience rather than a major barrier to trade. The important fact is that other countries, such as the United States, manage to export successfully to the European Union despite facing these barriers. What’s more, the single market does not appear to have given Britain that much of an advantage in exporting to the rest of the union over countries that are outside the single market in recent years. It is easy to forget that the United Kingdom successfully sends half of its exports to countries that are not in the European Union despite, for example, incurring the costs of clearing customs to do so.
In addition, manufacturing has fallen substantially as a share of the British economy (and of course, European Union tariffs would apply only to goods, not services). Manufacturing has fallen from over 20% of GDP in the mid-1990s to less than 10% now.
Fears over the threat of Brexit to trade and resultant employment are often overdone, with some pretty big figures being bandied around regarding the potential loss to the British economy. The most striking – and most inaccurate – is that 3 to 4 million jobs, i.e. the number of people employed in exporting goods and services to the European Union, could be lost through Brexit. Given that this assumes that all exports to the Union would cease if the United Kingdom was to leave, it is a wild overstatement.
We would not go so far as to say that Brexit would definitely be a good thing for British trade and its manufacturing and services industries. That would depend on a host of factors we do not yet know (and in some cases may never know), including: the outcome of negotiations about the United Kingdom’s new trading relationship with the European Union; the future economic growth of the Union versus other markets; the success of the European Union in implementing new free trade agreements with other countries; and how
successful Britain could be at pushing for the completion of the single market in services if it stayed in the European Union.
Nevertheless, contrary to the claims of many authors and commentators, it is probable that the impacts of Brexit on trade would be relatively small. Even in the worst case scenario, adverse effects are likely to be largely confined to those sectors, mainly food production, that could be subject to a meaningful tariff under World Trade Organization rules. Moreover, it is certainly possible that leaving the European Union would leave the external sector better off in the long run if Britain could use its new found freedom to negotiate its own trading arrangements to good effect.
The production sectors in the economy face a more uncertain outcome than services. The range of potential outcomes is more variable as production sectors are more dependent on whether or not the United Kingdom agrees a trading agreement with the European Union – and the nature of any such agreement. The possibility of tariffs on goods exports to the European Union gives greater downside potential, while the opportunity to open up trade with other countries or to increase the sector’s competitiveness through greater competition or cheaper inputs gives it more upside potential.
Financial services and the City
There is a decent chance that the City would still prosper if the United Kingdom left the European Union. London’s pre-eminent position as a global financial centre predates the single market. The City possesses intrinsic advantages, including Britain’s legal system, the English language, a convenient time zone perfectly placed between the working hours of Asia and New York, openness to immigrants, a large pool of skilled labour and a critical mass of expertise in support services such as accounting and law.
And even if exports to Europe did suffer, these losses could be offset over the long term by the greater opportunities to boost trade with non-European Union countries. Brexit would free the United Kingdom from the rules of the European Union’s Common Commercial Policy, which prevents it from negotiating bilateral trade deals with other countries.
This potential for growth in trade with countries outside Europe applies to all exports but is perhaps more pertinent for financial services. In particular, there seems to be considerable scope for Britain to increase financial services exports to China and Hong Kong. They currently amount to just 2% of the United Kingdom’s total financial services exports, even though China is the world’s second largest economy.
Overall, financial services have more to lose immediately after a European Union exit than most other sectors of the economy. Even in the best case scenario, in which passporting rights were preserved, the United Kingdom would still lose influence over the single market’s rules. The City would probably be hurt in the short term, but it would not spell disaster. The City’s competitive advantage is founded on more than just unfettered access to the single market. A European Union exit would enable the United Kingdom to broker trade deals with emerging markets that could pay dividends for the financial services sector in the long run.
Britain, the European Union and regulation
One of the perennial concerns raised in the debate around British membership of the European Union is that of regulation – so-called ‘red tape’. At present, European Union regulations have to be applied across the whole British economy, even though only 14% of its output is exported there. The National Health Service must comply with the Working Time Directive and retailers with the Agency Workers’ Directive. The impact of the 100 most costly European Union regulations for British business has been estimated at £33bn annually.
Even if the United Kingdom still had to comply with European Union regulations in those sectors wanting to export there, it could reduce regulations in the 85% of the economy that does not. Membership of the European Economic Area – the ‘Norway option’ – would provide the United Kingdom with greater flexibility than at present but would still impose considerable constraints.
Foreign investment – The European Union’s investment in Britain
The European Union is an important source of foreign direct investment for the British economy. In 2013 (the latest year for which data are available), the European Union accounted for 46% of the United Kingdom’s stock of inward foreign direct investment and its share of the overall stock of foreign direct investment has been fairly stable over the past decade. However, inflows of foreign direct investment from European Union countries have been slowing over recent years and more investment has been flowing in from non-member countries.
In the World Bank’s Doing Business survey (which assesses countries according to the ease of doing business in them), Britain ranks highly in areas such as attaining credit, dealing with construction permits and protecting minority investors.
What’s more, the United Kingdom benefits from good transport connections, a welcoming political environment, a strong rule of law and the English language. This helps to explain why Britain has been more successful than other European Union countries in attracting inward foreign direct investment, capturing 28% of all investment into (European Union and non-European Union) Europe in 2014.
So concerns about a drying up of foreign direct investment if Britain votes to leave the European Union are somewhat overblown. Access to the single market is not the only reason that firms invest in Britain. Other advantages to investing here should ensure that foreign firms continue to want a foothold in the country. Accordingly, we still think that Britain would remain a haven for foreign direct investment flows even if it was outside the European Union.
The United Kingdom’s contributions to the European Union
There are different ways of examining Britain’s financial contributions to the European Union. In 2014/15, the United Kingdom paid a standard £13.7bn contribution, based on the size of its economy, to the European Union, plus an additional £2.3bn payment because each country must contribute a share of Value Added Tax receipts to the bloc. It received back £4.8bn through the British rebate and a £0.8bn fee for collecting duties on the European Union’s behalf – all adding up to a cost to the public finances of £10.4bn.
Some people prefer to quote the gross contribution, which, in addition to the above, also includes the £3bn of customs duties that Britain collects for the European Union and would get to keep if it left (although, if the United Kingdom used Brexit to increase its free trade with other countries, these customs duties would be reduced or disappear). Others prefer to take off the £4.4bn of funds disbursed by the European Union to British firms and households, for example via the Common Agricultural Policy. After all, the Government would probably reimburse at least some of those losing such European Union funds in the event of Brexit. Accounting for these 2 items leaves a net contribution of £9.1bn, though the ‘true’ cost of membership to the public purse may range from £6.1bn to £13.4bn, depending on whether these 2 items are included.
However, the United Kingdom might still need to contribute to the European Union’s budget. To be in the European Economic Area, Norway pays a contribution based on the size of its economy. Estimates of how much Britain would pay for a Norway-style arrangement vary but it is reckoned that contributions would be at least 56% of current levels and may only fall by 17%.
(Capital Economics Limited, 2016)
Apologies for some of the more technical data in here but I felt it was necessary in order to give a full picture of the pros and cons. I hope that you have found the above information informative and not opinion based on any particular political stance.
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27 May 2016