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What will Brexit do to UK trade?

The big EU questions: With less than a month to go before the potentially epoch-making vote on British membership of the EU, the debate so far has been characterised by bias, distortion and exaggeration. So from now until the referendum we will be running a series of question and answer features that will explain the most important issues involved in a detailed, dispassionate way to help inform your decision

Ben Chu
Thursday 02 June 2016 17:55 BST
UK car exporters would face a 10 per cent duty if Britain votes to leave the EU
UK car exporters would face a 10 per cent duty if Britain votes to leave the EU (Getty)

Why are we asking this now?

The impact of Brexit on UK export and import patterns has become one of the central economic battlegrounds of the referendum campaign. The Remain side claim British exit from the UK would have a severe and negative impact on trade. The Leave camp dismiss this as hysterical scaremongering.

So why does trade matter?

The one thing both sides agree on is that trade does indeed matter a lot for our economy and our prosperity. As the Remain camp frequently point out there are some three million British jobs linked to British exports. That’s more than 10 per cent of all the jobs in the country. But it’s not just the fact that trade directly and indirectly supports a lot of employment in the UK that makes it so important in the view of economists. Increasing trade is seen as boosting the productivity of a country’s domestic firms. And rising private sector productivity increases GDP. And rising GDP ultimately increases living standards of all households. A thriving export sector also helps to attract foreign investment, something we in Britain need to cover our large annual current account deficit.

Read more of the big EU referendum questions here

EU Referendum: Latest Poll

So why would trade fall if we left the EU?

The argument of the Remain camp is that Britain could lose access to the European Union’s “single market”. This is the EU’s free trade area with 500 million people. Under the rules of the single market goods can pass unhindered by tariffs and other barriers between any of the 28 member states. So, for instance, a container of Scotch whisky can be shipped from the Highlands directly to Greece as easily as it can be sent down to Glasgow. When Britain entered the then European “common market” in 1973 there was a big boost to UK trade volumes. Remain argue that leaving would have the opposite effect.

What does the Leave camp say?

They deny leaving would hinder trade volumes and argue Britain would rapidly do a deal with the European Union and in the longer term trade even more with the world. They say that because Britain runs a trade deficit with the rest of the EU, meaning we import more from Europe than we export to the Continent, there’s an incentive for the EU to agree a quick deal. Otherwise, their own exporters (from German carmakers, to French luxury goods manufacturers, to Italian olive farmers) would suffer from losing access to the big UK market. The Remain side counter that the UK’s total exports to the EU are equivalent to 13 per cent of our GDP, but that the equivalent figure for the EU is just 3 per cent, meaning that we need them more than they need us. This suggests the balance of negotiating power could be the other way. In terms of trade with the rest of the world, the Leave campaign argue Britain alone could do better deals than the EU post-Brexit because protectionist interests on the Continent would no longer get in the way. Remain say the UK benefits hugely from having the EU negotiating on behalf of our exporters and that we will struggle to get a hearing without the bloc’s heft on the world stage.

So who is right?

It’s difficult to say because the timeframe for any EU trade deal would be determined as much by politics as economics. Leave is correct that it is in the financial interests of the EU to keep trading with the UK because we are a big market. But they might play hardball to discourage other states from leaving the bloc. A deal may also take some time because EU states simply cannot agree among themselves how to deal with the UK. Even if some are willing to do a quick deal to help their exporters, others may have a different agenda. Then there is the issue of 50 plus existing trade EU agreements with the rest of the world. The UK benefits from the trade deals agreed by the EU. The UK would need to establish new ones to carry on trading without facing tariffs. It’s not clear how long this would take. President Barack Obama on his recent trip said that Britain would be at the “back of the queue” when it came to negotiating a new deal with Washington.

President Obama has said that Britain would be at the ‘back of the queue’ when it came to negotiating a new trade deal with Washington (Getty)

What would be the terms of these new deals?

A bigger issue than the timing is the question of what sort of trade arrangement the Brexit side actually wants. Some seem to want access to the single market in the manner of Norway and Iceland. They are members of the European Economic Area (EEA). But EEA membership would imply adopting the same EU single market regulation rules and paying something (albeit less) into the EU budget each year. EEA membership also means accepting the free movement of people into Britain – which is vehemently opposed by many Brexiteers. Other leading lights in the Leave movement seem to be in favour of not trying to broker a deal at all and simply trading with Europe under the World Trade Organisation framework. This is how China and the US currently trade with the EU – and it would not require any complex negotiations. This would enable Britain to scrap EU regulation and close its borders to immigration from Europe. Yet this would also imply the UK’s exporters facing the EU’s common external goods tariff – with serious negative consequences for UK manufacturing exporters in particular. Car exporters would face a 10 per cent duty and UK-based financial institutions would lose their “passporting” rights to trade with the bloc.

So how much economic damage would this do?

Almost everything depends on what assumption one makes about the nature of the post-Brexit trade deal with Europe that would be concluded. The Treasury’s central estimate assumes a bilateral trade deal for the UK in the manner of Canada’s recent agreement with the EU. This envisages trade volumes falling by between 14 and 19 per cent by 2030 relative to otherwise. Some see that as a little strong. Oxford Economics modelled this scenario and assumed a relative 7 per cent fall in trade volumes over the same period. The London School of Economics’ Centre for Economic Performance calculates that the long-term costs to Britain of lower trade with the EU could be as high as 9.5 per cent of GDP. Leave campaign-supporting economists have not done much detailed modelling. But one study by Patrick Minford of Cardiff University shows a boost to GDP growth by 2020 on the basis of Britain dismantling all tariffs unilaterally post-Brexit. Under Minford’s assumptions this is great boon to some sectors of the economy which benefit from cheaper imports. But as Minford himself admits, this approach implies catastrophic damage to many exporting firms. “It seems likely we would mostly eliminate manufacturing, leaving mainly industries such as design, marketing and hi-tech” he wrote in the The Sun in March.

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