The effect of a 'Brexit' on Institute of Export members

Fri 21 Aug 2015
Posted by: Tony Ridge, Director and Trustee of the Institute
IOE News

The EU referendum debate is highly polarised.

‘Catastrophists’ warn that a ‘Brexit’ – a British exit from the EU – would wreck the UK economy, costing three million jobs and £92bn of trade. The ‘lone wolves’ (those wanting Britain to go it alone) maintain that the EU, with its over-regulation, is the UK’s main problem – and that we will soar once out of it

So what are the implications of Brexit for IOE members whose main concern is the UK’s standing as an international trading nation and the future of UK international trade?

The UK is one of the world’s leading economies and trading nations. To maintain this we need to keep trade volumes high and have an influential voice in negotiations.

With this in mind, there are two points to consider:

1. A ‘no’ vote itself would change nothing in the sense that the next day we would still be in the EU with its rules and regulations. Much would hang on the outcome of the possibly long and rancorous withdrawal process.

2. Most commentators agree that the Brexit process would be highly damaging to both trade and investment.

So what are the post-Brexit scenarios?

As the EU is the UK’s biggest trading partner, the dire predictions of the catastrophists are based on the belief that on Brexit, UK/EU trade would vanish. In practice, much would depend on what deal, if any, the UK made with the EU.

The picture for ‘goods’ is very different to ‘services’. The value of our imports of goods from the EU in all major categories except aerospace exceeds our exports. Also, trade is highly integrated, making barriers impractical. So in the event of Brexit, the EU would have a strong incentive to make deals to keep trade going. There are a number of possible models: Negotiated bilateral terms (the ‘Swiss’ model); membership of EEA (the ‘Norway’ model); or a ‘Single Market Lite’ (yet to be invented). Although the price of such a ‘deal’ would be to accept many EU regulations without a say in them, many EU rules embody standards which we would support.

The lone wolves reckon we could do without a ‘deal’. The EU is bound by WTO agreements on tariffs, and they calculate extra costs to UK exporters would average about 4%. This is probably optimistic – EU tariffs are much higher in some sectors: e.g. cars, chemicals, clothing and food, beverages and tobacco so the probability is that we could make deals with the EU on goods.

However, prospects for a ‘deal’ re trading services – which is important to the UK economy – are different. Unlike goods our services sector achieves favourable balances with EU and non-EU trading, none more so than our biggest export the financial services. Here, the EU would have less incentive to do ‘deals’, plus the Single Market in services is nowhere near as advanced as in goods.

Perhaps any loss of EU trade would be compensated for by increased non-EU business? Those in the ‘yes’ camp argue that leaving the EU would be risky for global trade negotiations and we would be an isolated voice. The other side believes we could hold our own.

In relation to goods, there are the previously mentioned incentives for trading partners to do deals – plus we could form ad hoc alliances. As above, it is different for services, where current negotiations are starting to tackle the removal of non-tariff barriers to trade in services (including financial services), such as local regulation. Our services sector supports such liberalisation, and so far the EU has too. This could change if the UK voice was missing.

Inward investment (FDI) to the UK is another factor with CEOs of large companies threatening to pull operations out of the UK if we left the EU.

To sum up, the results of a ‘no’ vote for UK international traders may be that free trade in goods worldwide receives a boost – at some cost to trade with the EU – while free trade in services suffers a setback in the EU and globally.

The outcome for FDI is uncertain. A recent report by think-tank Open Europe concluded that the ‘politically realistic’ outcomes of Brexit after 12 years range from 0.8% loss to 0.6% gain of GDP, compared to non-Brexit. It would be interesting to learn from IOE members how their sector might be affected.

But 12 years is medium term – long-term there are big risks. One day we hope the balance of trade will change and we will be net exporters to the EU. We may secure a fair ‘deal’ on exit but this won’t last forever. Long term, there could be significant obstacles to UK/EU trade, leading to a loss of FDI and gradual strangling of UK international trade – almost as if our economy was under sanctions.

The fashion for globalisation may pass: protectionism might return. The UK could then bitterly regret not having a seat at the table and the lone wolves could find themselves out in the cold.

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