How would a no-trade-deal UK-EU relation, (similar to UK-US or UK-Japan) impact UK's national income and prosperity?A brief assessment of evidence to-date as of Q4 2016.
Interpretation of the available data suggests that bringing the EU/UK trade relation to the same level as EU/US or EU/Japan relations which are bound by WTO rules, would most likely be a negative outcome with detrimental impact to income and prosperity. However, research suggests that this is one of trade policy options available, while some suggest that there are alternative opportunities.
More specifically, UK’s membership of the European Single Market has the following trade characteristics: Tariff-free access to EU markets, no custom checks, common regulatory standards in products/services and access to 55+ markets worldwide through EU FTA’s. There is also a fiscal cost for the UK, estimated at £4bn in the form of net annual EU contributions (IFS report 116, 2016).
In contrast, EU and US are major economic partners, but do not share an FTA. According to a report for Eurostat, tariffs are in place and there are a number of Non-Tariff Barriers (NTBs) related to bureaucracy and regulations, notably in services and government procurement, with detrimental impact to both economies (Gambini et al. 2015),
EU and US governments, signed up to pursue the Transatlantic Trade and Investment Partnership in 2006. The gains of eradicating barriers via TTIP have been estimated to an annual €119bn for the EU, €95bn for the USA, as well as a €100bn increase in global income. (Gambini et al. 2015)
Similarly, the EU-Japan trade faces significant barriers with no FTA in place. A report by Copenhagen Economics (Sunesen et al. 2009). identifies key barriers, suggesting a “considerable unrealised economic potential to revitalise bilateral trade” (p.7)
According to the report, MFN tariffs are in place at 3.8%, while there are also considerable NTBs, such as environmental/technical regulations and differences in conformity procedures, impacting cost of trade and prosperity. Simulations ran for the same report estimated EU gains at €14 billion by eradicating tariffs, €29bn by minimising NTMs and €33bn of indirect welfare gains and Japan gains at €25bn, €28bn and €18bn respectively. In pursue of such benefits, EU and Japan governments, initiated negotiations for the EU-Japan Free Trade Agreement in 2013. (EU-Japan.com, 2016)
Given that no FTAs are in place, EU/US and EU/Japan trade relations are largely reliant on WTO rules. Most assessments of WTO scenarios for UK’s post-Brexit EU relation suggest a negative GDP impact by 2030, ranging from -2.7% to -9.5%, with only exception being Economists for Brexit, estimating +4%. (IFS 116, 2016).
Thus, to directly answer the question, if UK’s relations with the EU were to roll-back to such an extent as to reach the state of EU/US or EU/Japan relations, a significantly detrimental effect to income and prosperity should most likely be expected.
It is however not certain that such a scenario would materialise. The Institute of Fiscal Studies has identified 3 broad options of trade policy were the UK to leave the EU: EEA Membership (e.g. Norway , Switzerland ), EU-UK FTA variants (e.g. Canada ) and WTO variants (including current state of EU/Japan and EU/US relations).
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