Richard Barfield, the author of Brexit FactBase, has published a 76-page report explaining the UK’s trade position after Brexit and the departure from the European Union.
The Executive Summary:
Trade is the heartbeat of any economy. Healthy trade signifies a healthy economy which creates jobs and funds public services. UK GDP splits 80% services, 10% goods, and 10% other and provides over 32 million UK jobs which follow the same split.
Seven to eight million of those jobs depend on international trade. The economy is sensitive to changes in trade and if trade falls, the economy suffers.
UK trade benefits from over 40 years of investing in integrating the UK into the world’s largest, virtually friction-free market. The value of EU membership to the UK economy runs at about 4% of GDP – worth about £80 billion a year (about nine times the UK’s annual net contribution). International trade is a major factor in the UK economy with a combined value of imports and exports equal to 63% of GDP in 2017. Half of that trade is with the EU27.
To succeed, international trade must overcome many barriers such as different cultures, languages, and legal systems, which increase the cost of trade or restrict market access. The most obvious physical barrier is distance, which introduces transportation costs and delays. As a result, most countries conduct most of their international trade in both goods and services with their neighbours.
In 2017, 49% of UK trade was with the EU27 plus 7% with other European countries and territories (principally EFTA states, UK Crown Dependencies and Gibraltar). The EU has entered into preferential trade arrangements with around 90 other third countries (including those provisionally in place and those pending, such as with Canada and Japan), facilitating trade with EU member states: a further 12% of UK trade was with those countries. The EU is negotiating with several other third countries which accounted for more UK trade.
The UK trade ecosystem is complex with many links and dependencies. Imports and exports are inter-twined. Exports of manufactured products in sectors like automotive and food usually depend on imports of intermediate components and raw materials. UK services and goods depend on each other, for example, restaurants, hotels, and supermarkets depend on food manufacturing. Service sectors are often linked, for example financial services and professional services depend on each other. Technology services are pervasive.
The trade barriers that are most directly relevant to Brexit are tariffs, customs, and regulation. Tariffs are taxes charged to the importer of goods when they are imported. Apart from agricultural and automotive goods, these are typically small. Customs barriers include clearance procedures required at the border (to ensure that correct tariffs are paid, and that taxes such as excise duty and VAT are paid). Tariffs and customs barriers relate to goods; regulatory barriers relate to goods and services. For goods, customs and regulation are usually more important than tariffs. For services trade, it is regulatory barriers that matter.
The purpose of WTO is to help trade flow as freely as possible for the benefit of all. The WTO has succeeded in reducing tariffs globally to minimal levels (with the main exceptions being agriculture and developing countries). WTO members have reduced tariffs and some trade barriers through regional trade agreements such as customs unions and free trade areas. The WTO continues to permit these initiatives,
but its main focus is now on assisting its members to lower or remove non-tariff barriers.
Tariffs are easy to measure and average about 3% of UK imports. The cost of non-tariff barriers is harder to estimate, but trade economists agree that they are more expensive than tariffs. The Government assumes that, trading under basic WTO terms, non-tariff barriers would cost the UK the equivalent of a tariff of 5% to over 20%, depending on sector (except for construction, assumed to be zero).
The EU is the global leader in removing trade barriers between countries, principally between its member states. The EU Single Market is unique – complemented by the EU Customs Union, EU customs cooperation and the EU VAT area. Together, these four frameworks allow EU businesses to trade freely in the EU with no tariffs and minimal non-tariff barriers from customs and regulation.
Brexit’s Impact on Trade
Brexit increases trade barriers – all Brexit options will impede UK trade with the EU compared to full EU membership, UK exports to the EU will suffer, and imports from the EU will become more expensive. This twin-pronged attack on international trade will reduce UK competitiveness putting jobs and livelihoods at risk and will discourage investment in the UK.
Against these risks, Brexit could bring some benefits to trade. Potential benefits include opportunities to negotiate UK-specific trade deals with non-EU countries and to reduce regulation. However, the regulatory and trade opportunities are unspecified and uncertain, and the Government believes that the benefits to trade of Brexit are likely to be much smaller than the costs.
Long-run estimates of economic impacts are useful to rank Brexit options and compare the consequences. As a rule of thumb a long-run 1% drop in overall UK exports is equivalent to a 0.2% to 0.3% drop in UK GDP, which translates into a similar effect on long-run employment.
We consider how trade barriers could change with Brexit starting with Basic WTO and working up to EEA. The Basic WTO option introduces the highest barriers to trade and the EEA option the lowest. Various studies quantify the estimated impacts of the barriers on UK trade, which we translate into impacts on GDP and employment.
The Basic WTO option would mean substantial disruption to supply chains, with new tariffs, regulatory barriers and customs checks applying on day one of Brexit. Even the low ends of the estimate ranges for the other options show that the impacts of Brexit on trade and employment would be significant (the estimate ranges reflect uncertainty about the outcomes).
The Basic WTO option would see reductions in overall exports of 12% to 13% (£72 billion to £78 billion), which would lead to a loss in GDP of 2.4% to 3.9% (£48 billion to £78 billion). The employment effect would be equivalent to long-run job losses of 0.8 million to 1.3
million (assuming wages and productivity remain unchanged). Average household income for 2017 was £33k, so a 2.4% to 3.9% drop in GDP would translate, in round terms, to a drop of £800 to £1300 in average household income.
Even the EEA option is expected to have a material impact on exports, of £30 billion to £48 billion with an employment effect equivalent to the loss of 0.3 million to 0.8 million jobs. The trade impact of the EEA option flows principally from the UK’s exit from the EU Customs Union. This affects trade in goods, particularly in relation to UK-EU integrated supply chains. There is then a knock-on effect to services trade associated with goods. A similar impact would be seen with a CETA-style FTA (a Comprehensive Economic and Trade Agreement), but it would be more marked because UK-EU services trade would suffer more under a CETA than with an EEA arrangement.
The Brexit option that would limit Brexit trade damage to a minimum would be an EEA arrangement combined with a customs arrangement.
Sectors and Regions
The sectors that will bear most of the costs of Brexit due to trade effects are financial services; automotive; agriculture, food and drink; consumer goods; and, chemicals and plastics. The three sectors with the most jobs at risk are administration and support services, wholesale trade, and legal and accounting services.
Regions outside London and the South East are most likely to suffer from Brexit trade effects. These regions have been less resilient to previous economic shocks. The regions expected to be most at risk from trade effects are Cumbria, Hampshire, Herefordshire, Gloucestershire, Lancashire, Leicestershire, East Riding/North Lincolnshire, Warwickshire and Wiltshire.
Regions with a high proportion of EU exports in the most vulnerable goods sectors include Norther Ireland and Cornwall (food, live animals and manufactures), Northumberland, Tees Valley and Durham (chemicals, machinery and transport equipment) and East Wales (manufactures, machinery and transport equipment).
Over the last two years the Government has not identified significant foreseeable Brexit trade opportunities, so it is unlikely that major opportunities exist. A deal with the US is unlikely because the UK needs to protect its trading relationship with the EU, the UK’s biggest trading partner. The Government’s own estimates show that the economic value of possible new trade deals is expected to be small compared to the costs (even with a US deal). The damage to UK-EU trade will dwarf the trade benefits of deals with other countries.
Similarly, opportunities to deregulate appear to be minimal. The UK is lightly regulated compared to other developed countries and the UK needs to remain aligned with EU rules after Brexit to facilitate trade. In fact, in relation to trade, Brexit will bring more bureaucracy and regulation, not less. Deregulation in other areas like environment and labour standards would be politically challenging.
Unforeseen trade opportunities could arise from Brexit for some UK-based businesses who would innovate and adapt to capture them. Those unspecified opportunities should be weighed against the inevitable loss of future opportunities from full EU and Single Market membership, and the weakening of the UK’s competitive and global advantages.
The high-level estimates in this briefing indicate the seriousness of the consequences of Brexit for trade and jobs. The future UK-EU trading relationship needs to be defined clearly before the UK leaves the EU in order to assess and plan for the implications of Brexit for the UK — sector by sector and region by region.