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The Economics of Brexit for the UK Economy
The document outlines the main features of the EU single market, including free trade, mobility of labor, and the movement of capital and services. It discusses Brexit, specifically the UK's decision to leave the EU, implications for trade relationships, and the possible effects of various Brexit scenarios, such as hard and soft Brexit. It also examines the impact of Brexit on the UK economy, trade balances, and the potential consequences for developing countries.
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The Economics of Brexit for the UK Economy
- 1. European Union andBrexit Year 13 Economics Revision Webinar
- 2. Main Characteristics ofthe EU Single Market • The EU single market is built upon four key freedoms: 1. Free Trade in Goods: Businesses can sell their products anywhere in the EU’s member states and consumers can buy where they want with no penalty 2. Mobility of Labour: Citizens of EU member states can live, study and work in any other country. The aim is to improve the mobility of labour. 3. Free Movement of Capital: Financial capital can flow freely between member states and EU citizens can use financial services such as insurance in any EU state. 4. Free Trade in Services: Professional services such as pensions, architecture, telecoms and advertising can be offered in any member state.
- 3. Enlargement of theEuropean Union • Since 1957 then there have been six main waves of enlargement of the European Union • 1973 (UK, Ireland and Denmark) • 1981 (Greece) • 1986 (Portugal and Spain) • 1995 (Austria, Finland and Sweden) • 2004 (Latvia, Lithuania, Cyprus, Malta, Slovenia, Slovakia, Estonia, Hungary, Czech Republic, Poland) • 2007 (Bulgaria and Romania) • 2013: (Croatia) • In June 2016 the UK became the first member nation to vote to leave the European Union • Article 50 was pressed in March 2017
- 4. Brexit – TheUK’s decision to leave the European Union • On June 23rd 2016 the UK voted in a referendum to leave the European Union. • Prime Minister David Cameron resigned the morning after the vote • A few weeks later, Theresa May was elected leader of the Conservative Party and new Prime Minister. • The terms of the UK’s new economic relationship with the EU remain uncertain. Article 50 was invoked in March 2017, there is a maximum period of two years before the UK finally leaves the European Union.
- 5. Major Export Marketsfor UK Goods and Services Export Sources Country Value % of Total Cumulative £ million UK Exports Percentage (%) 1 United States 37 364 12.7 12.7 2 Germany 30 730 10.5 23.2 3 Netherlands 22 367 7.6 30.8 4 France 19 089 6.5 37.3 5 Irish Republic 18 145 6.2 43.5 6 China 15 511 5.3 48.8 7 Belgium & Luxembourg 12 317 4.2 53.0 8 Switzerland 10 318 3.5 56.5 9 Spain 9 299 3.2 59.7 10 Italy 8 808 3.0 62.7 Nearly a quarter of total UK overseas trade in goods and services is done with the United States and Germany. Seven of the top ten export markets for Britain are with European Union countries. This emphasises the importance of a trade agreement after Brexit.
- 6. Major Import Sourcesfor the UK Economy Import Sources for the UK Country Value % of Total Cumulative £ million UK Imports Percentage (%) 1 Germany 60 820 14.6 14.6 2 China 36 900 8.9 23.5 3 Netherlands 33 160 8.0 31.5 4 United States 28 283 6.8 38.3 5 France 25 274 6.1 44.4 6 Belgium & Luxembourg 21 443 5.1 49.5 7 Norway 18 489 4.4 53.9 8 Italy 16 581 4.0 57.9 9 Spain 13 813 3.3 61.2 10 Irish Republic 11 911 2.9 64.1 Germany is the biggest source of UK imported products, Germany is the world’s biggest exporter of manufactured products and UK consumers have a high income elasticity of demand for them. China is now the second biggest source of imported products for the UK.
- 7. UK Trade Balancein Goods and Services with the EU The UK runs a trade surplus with Ireland but large trade deficits with countries such as Germany and Spain. Source: Office for National Statistics -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 UK trade in goods and services balance with selected EU countries, 2003 to 2014, annual balance, £ billion France Germany Ireland Netherlands Spain Rest of EU
- 8. Hard and SoftBrexit • Hard Brexit • Means that the United Kingdom leaves the EU Single Market and trades under World Trade Organization rules • Under WTO rules, each member must grant the same market access—including charging the same tariffs—to all other members as the most favoured nation • Soft Brexit • Involves the option of staying in the Single Market (like Norway) • As a member of the European Economic Area (EEA), Norway has a free trade agreement with the European Union, which means that there are no tariffs on trade between the two
- 9. There are manyways to leave the European Union!
- 10. A Future Outsideof the EU – the Norway Option • The so-called Norway option allows for the free movement of goods, services, capital, and people • But Norway has no formal input into shaping the rules of the single market although all new rules must be adopted • Annual fee is paid by Norway for access to EU single market • Under the Norway option, all UK banking and financial service regulation would be ‘mutually recognised’ as good enough, and thus all EU members would have to automatically grant full access to UK-based firms • Norway option does not include free trade in food, or participation in EU agriculture subsidies (CAP) or in the EU’s regional policy, and nor does it require Norway to adopt EU trade policies with respect to non-EU nations.
- 11. A Future Outsideof the EU – Joining EFTA • EFTA is the European Free Trade Area • EFTA membership provides the UK with less access to the Single Market beyond goods trade • Switzerland is the most prominent EFTA member and is required to strike bilateral treaties with the EU to secure access to the Single Market for specific services only. • In 2014 the Swiss voted in favour of restricting migration. The EU has made it clear that this is incompatible with access to the Single Market. • Switzerland makes a smaller per capita contribution to the EU budget than Norway in the EEA, to reflect the lower level of market access.
- 12. Outside of theEU – WTO Option & Unilateral Trade • WTO is the World Trade Organisation • UK will be completely out of the EU single market. • It will face the EU’s external tariff on goods and services in the absence of a comprehensive free trade agreement • Gains in having more control over migration policy and freedom to trade with rest of the world including establishing free trade agreements with emerging countries • Unilateral free trade is the option favoured by a group called “Economists for Brexit” • This involves the UK leaving the EU Single Market • Elimination of EU trade barriers on imports – pressing for global free trade • Control of borders to support migration control • Democratic control of UK laws and regulations
- 13. Will London retaincompetitive advantage in services? • Pre-referendum, many argued that London’s pre- eminence as a global / EU centre for financial and related business services could be threatened by Brexit • Impact depends crucially on the Brexit deal that is eventually negotiated especially with passport rights • Passport for banks and financial firms allows firms authorized by any EU Member State (MS) to establish branches or provide cross-border financial services in other MS • London retains many strengths: 1. Large pool of highly skilled labour including critical mass of knowledge on financial services, accounting and law (comparative advantage based on strong human capital) 2. Language, strengths of the UK legal system and a highly convenient time-zone
- 14. Will London retaincompetitive advantage in services?
- 15. A Future Outsideof the EU – Overview of some Options EEA (Norway) EFTA (Switzerland) Customs Union (Turkey) World Trade Organisation Option Migration controls ❎ ❓ ✅ ✅ EU budget contribution ❎ ❎ ✅ ✅ Compliance with EU rules ❎ ❓ ❓ ✅ Free to negotiate with third countries ❎ ✅ ❎ ✅ Passporting rights ✅ ❎ ❎ ❎ Direct access to Single Market ✅ ❎ ❎ ❎ Import tariffs? ✅ ✅ ✅ ❎
- 16. EU Countries likelyto be most affected by Brexit Country Trade with UK measured as % of GDP % of investment from the UK Comment Netherlands 7.6% 27.6% Closely aligned in many EU policy debates; favours liberalisation of EU Ireland 11.8% 7.5% Most deeply integrated with the UK, only country with (soft) land border Germany 2.8% 2.4% High total value of trade, UK leaving increases political power of French Spain 2.5% 6.0% Around 800,000 UK expats living in Spain, big tourism and trade linkages
- 17. Brexit – UK’sNet Contribution to the EU Budget Forecasted net UK contributions to EU budget from 2014/15 to 2019/2020 (in £m) 9,054 8,385 10,178 8,049 8,908 9,374 0 2000 4000 6000 8000 10000 12000 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 NetcontributionsinmillionGBP
- 18. Possible Short-Term Impactof Brexit on the UK Economy Impact Comment Weaker exchange rate (depreciation) Sterling fell against US dollar and Euro in wake of Brexit vote Higher prices for imports Over 50% of UK imports come from EU, about half of which are intermediate goods such as component parts High current account deficit External deficit of more than 5% of GDP requires strong net inflows of capital on the financial account – perhaps to achieve this harder post- referendum because of macroeconomic uncertainty Short run real GDP growth Expected to take two years to negotiate EU exit terms after Article 50 There was a dip in confidence but the real economy stabilized fairly quickly helped by the depreciation in sterling Housing market Fall in confidence may lower mortgage demand Possibility of decline in overseas demand although weaker pound increases real purchasing power of US dollars in UK property market Unemployment Unemployment tends to be a lagging indicator of the economic cycle – a year after Brexit the unemployment rate fell to a new low of 4.6%
- 19. Impact of Brexiton Developing Countries Trade Foreign investment Economic growth Aid Migration and remittances Global collaboration Brexit is likely to have effects on developing countries over time. Much depends on the nature of the Brexit deals that the UK makes with the EU and other nations + the impact of Brexit on UK growth and government finances. “The UK’s vote to leave the EU comes at a time when many developing economies are already facing multiple shocks: lower oil and commodity prices, a stronger US dollar and a slowing Chinese economy.” Source: UK ODI Report, July 2016
- 20. Aspects of Brexiton Developing Countries Slower UK growth & weaker £ Contraction in exports to UK from developing nations Countries such as Bangladesh & Kenya most affected Migration flows are uncertain - possible short term rise Fall in external value of £ reduces value of remittances South Africa, Uganda, Nigeria especially affected UK aid was $18.7 billion in 2015 - falling £ cuts the real value 10% of UK aid flows through the EU Key is whether the UK maintains their 0.7% of GNI aid target after Brexit
- 21. Micro & Macroimpact of decision to leave single market
- 22. Brexit – MicroImpact of UK leaving the Single Market Point 1 Point 2 Point 3 Some UK firms and industries might suffer from a decline in net inward migration from EU The EU is a customs union and leaving it may lead to higher import tariffs on EU exports. Leaving the EU might cause delays at borders as UK firms comply with EU rules Higher import prices increase costs for UK firms who then experience lower profits. Consumer welfare would suffer The assumes that the UK is unable to negotiate a wide- ranging free trade deal with the EU before Brexit is finalized In sectors such as hospitality, technology and construction, EU workers have helped overcome skills shortages. A fall in UK net payments to the EU could fund increased investment in better technical training for UK workers Many products cross borders several times. Just in time delivery requires minimal border delays, costs will rise Most UK exporters already comply with EU regulations. Post Brexit, businesses will have less red tape to deal with
- 23. Brexit – MacroImpact of UK leaving the Single Market Point 1 Point 2 Point 3 Leaving the single market will allow the UK economy to limit net inward migration from EU Leaving the EU will allow the UK to make many free trade agreements with other nations Leaving single market diminishes UK trade with EU and will cut inward investment Free trade deals with fast- growing emerging economies might see a surge in UK exports which will add to GDP growth However complex trade agreements take time. The recent EU-Canada free trade deal took seven years to agree. This will provide opportunities for UK people to find work and also lead to a slower growth of house prices and rents But the UK suffers from long run skills shortages. Parts of the economy and the NHS are hugely reliant on migration 44% of Britain’s exports go to the EU - £220bn out of £510bn. Higher tariffs would make UK exports harder to sell in the EU This depends on the trade deal we make with the EU. Inward FDI depends on many factors including tax & regulations
- 24. Forecasts of effectsof the UK Leaving the EU
- 25. Brexit: Some “itdepends on” evaluation points Post Brexit Will some owners of labour and capital successfully achieve their own Brexodus from the UK once the terms of trade with the EU become clearer? Depends on scope / scale / timing of trade deals with EU and other countries. How strong will the UK’s bargaining power be in discussions with EU27? Depends on whether UK can keep significant numbers of highly- skilled EU workers post Brexit in industries in which the UK has comparative advantage + staffing the NHS Depends on the impact of Brexit on UK universities - in 2012, universities generated an annual output of £73 billion, contributed 2.8% of GDP and supported over 750,000 jobs Depends on the ability of UK manufacturing businesses to modify their existing supply-chains and their success in pivoting export sales to non-EU countries Depends on the extent to which the UK government is able to replace existing EU funding in areas such as research, farm support and workplace training initiatives Depends on the the impact of higher trade costs from being outside the EU on UK productivity and innovation - the long-run dynamic effects might be bigger than the static effects e.g. on consumer prices
- 26. European Union andBrexit Year 2 Revision Webinar
Editor's Notes
- #14 Financial services is a key sector potentially affected by Brexit but a mass exodus from UK is most unlikely. UK gov’t will seek to protect other sectors heavily invested in UK – eg car industry
- #15 Most banks want to keep a foothold in the EU common market. The exact details are still evolving but Deutsche Bank for example is planning to relocate some 4,000 jobs to someplace else in the EU or Eurozone. Locations which could profit from the banker's Brexodus are Frankfurt and Paris but also Dublin, according to a report by Bloomberg.
- #24 UK will seek to strike trade deals with non-EU countries but these will take a long time to deliver
- #26 New UK-EU trade agreement likely to be based on ensuring market access for key industries which have already invested heavily in UK (eg cars, financial sector)