Guest post Professor Glauco De Vita, Centre for Business in Society
The UK government recently sent out a leaflet to all households entitled: “Why the government believes that voting to remain in the European Union is the best decision for the UK”. Yet, as the Government’s pro-EU message is already being subjected to critical scrutiny (see https://theconversation.com/fact-check-special-government-leaflet-that-makes-case-for-britain-staying-in-the-eu-57691), for many Britons expected to cast their vote on the 23rd of June, the key economic implications of Brexit remain somewhat obscure.
The EU referendum, whatever the outcome, will inevitably have wide-ranging and far-reaching implications for the UK, politically, socially and, of course, economically, but the main economic impacts of the UK decision to exit or remain in the EU can be said to be the following:
- the impact on Britain’s contribution to the EU’s budget;
- the impact on Britain’s trade with the EU and with the rest of the world;
- the impact on inward foreign direct investment (FDI);
- the impact on regulation; and
- the impact on immigration from the EU.
Starting with the impact on Britain’s contribution to the EU’s budget, in the event of Brexit, the fiscal savings related to Britain’s current contribution of approx. £8.5bn pa (roughly 0.5% of the UK’s GDP) would need to be set against the likely losses to be incurred as a result of lower trade and investment. Moreover, fiscal savings of £8.5bn pa would only accrue if Britain left the EU entirely. If Britain sought continued access to the single market along the lines of non-EU members like Norway and Switzerland, Britain will have to make a contribution to the EU’s budget nonetheless.
Moving on to the impact on Britain’s trade with the EU, the EU is the UK’s main trade partner (approx. 44% of all UK exports and 53% of imports). UK exports to the EU alone – also thanks to the lower trade barriers granted by EU membership – correspond to well over 10% of the UK’s GDP. This trade (including imports) makes goods and services cheaper for UK consumers and allows UK businesses to export more. Brexit is likely to lead to lower UK-EU trade because of higher tariff and/or non-tariff barriers to trade. Post Brexit, the EU – and even more so the UK – would certainly have an incentive to negotiate a sensible Free Trade Agreement (FTA) but given that Britain’s share of EU’s exports constitutes less than 5% of the EU’s GDP, it would be erroneous to think that the UK holds all the cards. Dhingra et al. (2015) recently analysed two scenarios for how leaving the EU would affect UK-EU trade costs: an ‘optimistic scenario’ that assumes that the UK continues to have a FTA with the EU; and a ‘pessimistic scenario’ in which the UK is not able to negotiate such terms. Their conclusions point to a loss in UK welfare ranging from 1.1% (optimist case) to 3.1%. Inevitably, given the importance of EU markets, following Brexit, British negotiators would have to try to secure access to them, and the experience of countries like Norway shows that this would involve accepting many of the rules of the single market and a contribution to the EU’s budget.
In terms of the impact on Britain’s trade with the rest of the world, the UK’s ability to tap fast-growing markets outside Europe and sign more FTAs with non-European countries is likely to be constrained by the nature of painfully long and costly negotiating processes. Moreover, in the long run, it is unlikely that UK-negotiated deals will be better than the current EU deals the UK benefits from as a result of having its trade interests represented by the EU block (given its size and gravitas) at the negotiating table.
Brexit is also likely to impact the level of inward FDI. Currently, Britain is by far the largest recipient of FDI in the EU (mostly from US firms). Britain, of course, has many location advantages that make it an attractive investment location yet a fundamental advantage for foreign investors is as an export platform to the rest of the EU without trade barriers. Following Brexit this advantage would be lost, with a likely negative impact on the level of inward FDI.
With respect to the impact on regulation, Brexit could, in theory, allow the UK to be free to regulate its own markets, leading to some potential gains. However, leaving the EU is unlikely to result in an ‘economic liberation’ capable of transforming Britain’s economic prospects since firms wanting to continue to export to the EU would have to comply with many EU standards nevertheless. Hence, Britain would be left with “EU regulation without representation” (https://www.cer.org.uk/sites/default/files/smc_final_report_june2014.pdf).
Finally, whether Brexit would allow the UK to restrict immigration from the EU actually depends on the post-Brexit arrangement chosen to continue to have access to the single market. Yet should any such restrictions be imposed, theory suggests that this is likely to decrease total welfare. Di Giovanni et al. (2012) estimate such effect for the UK to constitute a loss of approx. 1.5% of GDP. In more general terms, a smaller proportion of EU immigrants receive benefits than do Britons and, collectively, EU migrants are net contributors to the UK public finances (for evidence see Dustmann & Frattini, 2013).
References
Dhingra S, Ottaviano G, Sampson T (2015) Should we stay or should we go? The economic consequences of leaving the EU. Centre for Economic Performance, LSE.
Di Giovanni J, Levchenko A, Ortega F (2012) A global view of cross-border migration. CReAM DP No. 1218.
Dustmann C, Frattini T (2013) The fiscal effects of immigration to the UK. CReAM, UCL, DP No. 22.
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