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Structural Brexit estimates
[...] To forecast the consequences of the UK leaving the EU, we must make assumptions about how trade costs change following Brexit. It is not known exactly how the UK’s relations with the EU would change following Brexit, so we analyse two scenarios: an ‘optimistic’ scenario in which the increase in trade costs between the UK and the EU is small, and a ‘pessimistic’ scenario with a larger rise in trade costs.
The optimistic scenario assumes that in a post-Brexit world, the UK’s trade relations with the EU are similar to those currently enjoyed by Norway. As a member of the European Economic Area (EEA), Norway has access to the Single Market. But because Norway is not a member of the EU’s customs union, it faces some non-tariff barriers that do not apply to EU members, such as rules of origin requirements and anti-dumping duties. In the pessimistic scenario, we assume the UK is not successful in negotiating a new trade agreement with the EU and, therefore, trade between the UK and the EU following Brexit is governed by World Trade Organisation (WTO) rules. This implies larger increases in trade costs than the optimistic scenario.
Under both scenarios we take a forward-looking view. We assume EU integration will continue over the next decade and the UK will benefit less from future integration if it leaves the EU. The ‘pessimistic’ scenario assumes integration continues at the same rate achieved over the last 40 years, while the ‘optimistic’ scenario assumes the speed of integration falls to half its historical rate.
Our estimates also account for fiscal transfers between the UK and the EU. Like all EU members, the UK contributes to the EU budget. The net fiscal contribution of the UK to the EU budget is around 0.53% of national income (HM Treasury 2013). One benefit of Brexit for the UK would be a reduced contribution to the EU budget. But Brexit would not necessarily mean the UK would make zero contributions to the EU budget.
In return for Single Market access, EEA members such as Norway make substantial payments to the EU. On a per capita basis, Norway’s financial contribution to the EU is 83% as large as the UK’s (House of Commons 2013). Therefore, in the optimistic case we assume the UK’s contribution to the EU budget falls by 17% (that is, 0.09% of national income).
In the pessimistic case we assume the UK makes a bigger fiscal saving. Eurostat data shows that, after accounting for the money the UK receives back from the EU to fund research, firms and other non-governmental bodies, the UK’s contribution to the EU budget is 0.31% of national income. Therefore, in the pessimistic case, the UK saves 0.31% of national income. [...]
Unilateral liberalisation after Brexit?
Following Brexit, the UK would no longer be bound by the EU’s common external tariff on imports. Proponents of leaving the EU argue the UK could benefit from this change by unilaterally removing all tariffs on imports into the UK. To study this unilateral liberalisation policy, we re-do our analysis with the additional assumption that the UK removes all import tariffs.
Table 2 reports the results. We find that unilateral liberalisation reduces the costs of Brexit by 0.3 percentage points in both scenarios. But the overall effect of Brexit is still negative. The reason is that WTO tariffs are already low, so further reductions do not make much difference. In today’s world, integration is not a matter of lowering tariff rates. It requires policies, such as hammering out regulatory differences in services provision that rely on international agreement and cannot be achieved unilaterally. [...]
Conclusions
The economic consequences of leaving the EU will depend on what policies the UK adopts following Brexit. But lower trade due to reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget.
Even setting aside foreign investment, migration and the dynamic consequences of reduced trade, we estimate the effects of Brexit on trade and the UK’s contribution to the EU budget would be equivalent to a fall in income of between 1.3% and 2.6%. And once we include the long-run effects of Brexit on productivity, the decline in income increases to between 6.3% and 9.5%. Other possible political or economic benefits of Brexit, such as better regulation, would have to be very large to outweigh such losses.