The UK economy is likely to suffer for a decade after leaving the EU under the most probable post-Brexit trade scenarios, according to a new study from the RAND Corporation, made available to EURACTIV.com before publication.
Only one of the eight presented options would see the UK economy better off than it is now: a trilateral UK-EU-US free trade agreement, which does not seem very likely.
Leaving the EU with no deal, which would mean reverting to basic World Trade Organisation (WTO) rules, would cause the greatest economic loss for the UK, the study said. The result would be a loss in GDP of nearly 5%, or $140 billion, in the ten years after Brexit, compared with the UK’s economic performance inside the EU.
Researchers at RAND have measured likely monetary changes in GDP growth, GDP per capita, trade and foreign direct investment for the UK, EU and US across the eight trade scenarios.
The scenarios include five ‘hard Brexit’ options: WTO rules, a free-trade UK-EU deal, a free trade UK-US-EU deal, a UK-US deal, and an extended transition period during which EU and UK tariffs do not change, but other non-tariff barriers emerge.
Three ‘soft Brexit’ scenarios include the Norwegian model (membership in the European Economic Area), the Swiss model (series of bilateral agreements), and a full customs union. UK Prime Minister Theresa May has ruled out the option of remaining in the EU customs union after Brexit.
UK Brexit Minister David Davis said on 6 December that the British government itself has not yet conducted formal sector-by-sector analyses of the impact that leaving the EU would have on the economy. He argued they are not necessary yet.
EU leaders are expected to approve at a summit on 14-15 December that Brexit talks should progress to a second phase, the post-Brexit trade relations, after reaching a deal last week on the three key issues – Northern Ireland, the rights of citizens and the Brexit bill.
If negotiations result in WTO trade arrangements, the UK would likely move further from EU standards, the study said. Over time, it would significantly increase non-tariff barriers, harming the ability of UK businesses to sell goods and services to EU countries.
The services sector, which includes the financial and banking sectors, is particularly important as it dominates the UK economy, contributing to around 80% of GDP.
The EU would also lose out under the WTO scenario, but the effect is relatively minor – a 0.7% drop in GDP in the ten years following Brexit.
Of the eight scenarios analysed, the most beneficial to the UK economy would be a trilateral UK-EU-US agreement, under which UK GDP would be 2.2% higher, or 7.1% better than under the WTO rules scenario.
This is even slightly better than continued EU membership. The EU and US are also forecast to make significant economic gains under this trade scenario. However, a TTIP-like arrangement is seen as very unlikely in the current political environment on both sides of the Atlantic, the study said.
Other trade scenarios could be better for the UK than WTO rules but would still lead to economic losses compared with continued EU membership.
These include ‘hard Brexit’ scenarios, such as a UK-EU free trade agreement (net UK GDP decline of 1.9% ten years after Brexit), UK-US free trade agreement (2.5% decline) or UK-EU transitional zero-tariff agreement (2.1% decline).
The ‘soft Brexit’ scenarios would also result in economic decline, albeit smaller: the Norway option (1.7% decline), the Switzerland option (2.4% decline) or staying in the customs union (1.8% decline).
“The analysis clearly shows that the UK will be economically worse-off outside of the EU under most trade scenarios. The key question for the UK is how much worse-off,” said Charles Ries, vice president at RAND International and lead author of the report.
“It is in the best interests of the UK, and to a lesser extent the EU, to achieve some sort of open trading and investment relationship post-Brexit.”
A UK strategy of trying to pick apart European unity would be unlikely to work since it is in the best interests of all EU member states to work together, RAND said.
The EU, for its part, may see a benefit in adopting a ‘zero sum game’ approach, and its top political priority is to discourage other member states from withdrawing.
Ries explained: “Based on our insights, it is in the best interests of the UK to cooperate with its EU partners to find a new relationship with Europe. This would preserve economic benefits for both sides, but also give the UK the freedom from EU rules which it seeks.
However, “the EU is likely to want to ensure that it does not give too much away to the UK during negotiations, and may seek to adopt a ‘zero sum game’ approach to preserve the union,” Ries wrote in the report.
For the US, the study found, political and security effects are likely to be more important than the economic impact. The potential economic gains/losses for the US after Brexit are relatively small except in case of a TTIP-like arrangement, which would result in substantial economic gains for the US.
“The US will greatly miss the influence and global perspective that the UK brings to EU decision-making, particularly around security and defence. In fact, the UK’s EU membership often ensured that EU measures did not undermine NATO and the strong transatlantic partnership. The economic impact from Brexit is very much a secondary concern for the US,” Ries said.