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Salzburg Global Fellow and creator of the Brexit FactBase Richard Barfield comments on the latest Brexit developments
This article was first published by Der Standard. Richard Barfield is the creator of the Brexit FactBase and a former director in PwC's Financial Services Risk and Regulatory Practice for Banking and Capital Markets. Barfield is a Salzburg Global Fellow who has attended three programs.
The views and opinions expressed are those of the author(s) and do not imply endorsement by Salzburg Global Seminar.
The UK and the EU are hoping to agree a Brexit Withdrawal Agreement in the coming days. The UK Government will then ask the UK Parliament to vote on it.
The UK media obsess about ‘deal’ or ‘no deal’ but miss a fundamental point about a deal. If a withdrawal agreement is agreed, it will contain no trade deal apart from a temporary transition arrangement for around two years. A non-binding political statement will sketch out the future relationship – details are to be filled in through negotiations expected to last for several years after 29 March 2019.
Brexit has put trade at the center of the national debate in the UK for the first time since the early 1970s. It is not surprising that many politicians and commentators are finding it difficult to deal with trade issues. Most British politicians, including many senior ones, give trade superficial attention.
My recent report “UK trade and the World Trade Organisation” explains the UK’s trade position after Brexit and the trade implications of the departure from the European Union. Trade is the heartbeat of any economy. Healthy trade signifies a healthy economy which creates jobs and funds public services. If trade falls, the economy and jobs suffer. Seven to eight million UK jobs depend on international trade.
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 runs at about 4% of Gross Domestic Product (GDP) – €90 billion a year (or nine times the UK’s annual net contribution to the EU). In 2017, imports and exports were worth €1.4 trillion. Half of that trade was with the EU27.
To succeed, international trade must overcome many barriers such as different cultures, languages, and legal systems. The most obvious physical barrier is distance, which introduces transportation costs and delays. As a result, most countries conduct most of their trade with their neighbors and not on basic WTO terms.
In 2017:
The US is a major UK trade partner (15% of trade) who benefits from several bilateral agreements between the EU and the US. These lapse on Brexit.
The UK trade ecosystem is complex: imports and exports are intertwined. Exports of manufactured products in sectors like automotive, food and pharmaceuticals 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.
Brexit increases trade barriers, which will impede the UK’s EU-related trade. New tariffs, customs, and regulatory barriers mean UK exports to the EU will suffer, and imports from the EU will become more expensive. This twin-pronged attack will reduce UK competitiveness putting jobs and livelihoods at risk and will discourage investment in UK-EU trade.
Against these risks, Brexit could bring some benefits to trade through reduced regulation and independent trade deals with other countries. However, the regulatory and trade opportunities are limited, unspecified and uncertain. The UK Government believes that the benefits to trade of Brexit are 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.
The impacts on UK jobs are bounded by two options: a “Basic World Trade Organization” option which introduces the highest barriers to trade and the European Economic Area (EEA) option (like Norway) the lowest. 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.
The Basic WTO option would reduce employment by the equivalent of 0.8 million to 1.3 million jobs (assuming wages and productivity remain unchanged). Even the EEA option is expected to have a material impact on exports, of with an employment effect equivalent to the loss of over 0.3 million jobs. This 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.
Job losses will not be limited to the UK. In the EU27, Ireland is particularly at risk as well as regions in Germany, the Netherlands, and Belgium. Much UK trade with Austria depends on integrated supply chains which are very vulnerable to new trade barriers in sectors like automotive, pharmaceuticals and power generation.
The Brexit option that would limit Brexit trade barriers to a minimum would be an EEA arrangement combined with a customs arrangement. The latter is an essential requirement for an invisible border between the UK and Ireland.
The high-level estimates in my report indicate the serious 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 the implications of Brexit for the UK — sector by sector and region by region.
The Brexit movement in the UK won the 2016 referendum by appealing to populist emotions, but it now runs the risk of being destroyed by popular anger over the prospect of lost jobs and ruined livelihoods. Anger will rise as the UK-EU negotiation marathon continues and the economic consequences for UK voters unfold.