03 March 2016

Bruegel: Fog in the Channel - Brexit through the eyes of international trade

In 2014, total UK trade was about 900 bn euros, with a total trade deficit of 139.5 bn. The UK imported predominantly from the EU, with which it had a trade deficit of 93 bn euro, and exported mostly to non-EU countries, with which it also had a trade deficit of 46bn. EU countries accounted for 53% of UK imports and 48% of UK exports.

All but 2 of the top-10 trading partners of the UK belong to the European Union. The UK’s main trading partner in 2014 was Germany, which accounted for 12.3% of all UK trade in that year. In second position was the United States (9.5%), followed by the Netherlands (7.5%), China (7.3%) and France (5.9%). Together, these 10 countries accounted for 61.4% of UK trade in 2014.

The UK was a net importer from 7 of its 10 main trading partners. The biggest bilateral imbalance in 2014 was the 36.3 bn euro trade deficit recorded with Germany, followed by the 26.2 bn trade deficit with China and the 12.3 bn deficit with the Netherlands. The biggest surplus position (16.5 bn) was recorded with Switzerland, followed by a 7.5bn surplus with Ireland and a 5.1bn surplus with the US.

Trade policy for EU Member States is conducted exclusively at the EU level. In case of Brexit, all the EU trade agreements of which the UK is automatically part as an EU member state would need to be re-negotiated on a bilateral basis. [...]

The EU currently has existing PTAs with 52 countries, and it is negotiating trade agreements with another 72 countries. In case of Brexit, the UK would therefore need to re-negotiate or start new bilateral negotiations on 124 trade agreements, plus 1 additional trade agreement re-defining its own trade status as a third country vis-à-vis the EU.

If we limit the focus to the top-50 trade partners of the UK, who account for 92% of all UK trade, 41 of them do have some trade agreements or ongoing negotiations with the EU. 18 of the UK’s top 50 trade partners are EU countries, 1 (Norway) is an EEA country, 1 (Turkey) has a customs union agreement with the EU, 8 countries have existing EU PTAs in place and 13 countries are currently negotiating EU trade agreements. This would translate into a minimum of 24 negotiations to be concluded.

Re-negotiating these agreements would take time: as an example, negotiations on the EU’s trade agreement with Canada started in 2009 and were only concluded with the legal review of the texts in February 2016. Meanwhile, the UK would also be excluded from the currently ongoing EU negotiations with the US, Japan and China, which would also need to be re-started on a bilateral basis. While Brexit supporters might argue that the UK would have more flexibility, when negotiating alone, it is also likely that its bargaining power would be considerably reduced compared to that of the EU, which is one of the top 3 traders in the world. [...]

Based on data from the WTO Tariffs Database, we find that the average (weighted by 2014 exports) MFN tariff on UK exports to the EU-28 would be about 3.2%. If we were to apply an average tariff of 3.2% to the total 2014 intra-EU exports –  which amounted to 182 bn euro – the average tariff cost would be about 5.84 bn euro. [...]

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