In February, UK in a Changing Europe, an authoritative body based at King’s College London promoting independent research into the complex and ever evolving relationship between the UK and the EU, published a comprehensive report entitled Brexit & Beyond.
Over the course of more than 70 essays, the authors analyse the impact of the break-up on much of life in the UK, from internal public policy to external relations, with chapters on public opinion, UK politics, the Union, the constitution and the law in between.
Here, we publish the foreword, written by the organisation’s director, Prof. Anand Menon, and one of the essays, Economics of Trade, by Dr Ingo Borchert and Dr Mattia Di Ubaldo.
OUR UNDERSTANDING OF BREXIT IS JUST BEGINNING
By Prof. Anand Menon
Brexit is done.
The formal negotiations are over — even though the Trade and Cooperation Agreement paves the way to many further negotiations between the UK and the EU. The interminable arguments and parliamentary wrangles over what Brexit might mean in theory are over, but our understanding of what Brexit does mean in practice is just beginning.
UK in a Changing Europe was created to make research-based evidence accessible to those interested in UK-EU relations in the context of the referendum. Subsequently, as the process unfolded, we have drawn on the expertise of social scientists to explain the negotiations and their implications.
Now the UK is finally able to embark on its new course, we believe that the need for social science to play a role in informing public and political debates is as great if not greater than ever. The contributions that follow underline the scale and scope of the agenda that confronts the United Kingdom as it prepares to grasp the opportunities and confront the challenges resulting not just from the decision to leave the EU, but also some of the long-standing issues that predate the referendum but which Brexit has made even more imperative to address.
This collection is meant both as a guide to the issues that will loom large of the months and years to come and as a signal that we intend to deploy the best social science research in order to understand and address them.
ECONOMICS OF TRADE
By Dr Ingo Borchert &
Dr Mattia Di Ubaldo
WHERE HAVE WE COME FROM?
Within the EU’s Single Market, UK manufacturers could be assured that what was lawfully produced at home could be sold in any other member state, with no further checks at the border. UK firms in financial or creative industries, or professionals providing legal advice, could move and establish themselves in other EU countries with a degree of freedom and flexibility unparalleled in any other trade agreement. Consumers also benefited from more product choice and easy access to services when in other EU countries.
Combined with geographic proximity, the Single Market and the Customs Union resulted in the EU being the top trade partner of the UK: the EU receives 42.5% of UK exports (46% of goods and 39% of services), while 51% of UK imports (53% of goods and 49% of services) originate in the EU. Overall 3.7 million jobs are associated with UK exports to the EU, not least as part of supply chains that extend beyond the EU to third markets.
WHERE ARE WE NOW?
The UK Government decided that Brexit meant leaving the Customs Union, the comprehensive rules of the Single Market, and instead renegotiating FTAs with third countries. This ‘disintegration shock’ will affect UK GDP, trade, and labour and capital markets.
There has already been an impact since the referendum, with UK investment and consumption below what they could have otherwise been due to revised expectations of future prosperity, UK services companies setting up EU subsidiaries to retain access to the EU market but not vice versa (EU investment in the UK declined), lower labour demand and fewer entries into exporting by those UK firms that are more at risk of facing higher tariffs with the EU.
On 24 December 2020, the UK and the EU reached an ‘agreement in principle’ on the text of a Trade and Cooperation Agreement, including an FTA that will provide for duty-free and quota-free trade of all goods. At the same time, frictions will arise in number of areas, not only because of the need for ‘rules of origin’ or meeting EU requirements on food safety and product standards. The scope for trading services is severely curtailed compared to the Single Market; for instance, audio-visual services are excluded from the terms of the draft agreement, UK airlines will no longer be able to serve two airports within the EU, and passporting rights for trading financial services will cease to exist.
Overall, therefore, this UK-EU FTA will avert a ‘no deal shock’ but it will not deliver anything resembling intra-EU trading conditions. The cushioning effect of the FTA on UK value added trade is estimated to be 20-25%. Put differently, most of the losses in trade and income would have occurred anyway because of the exit from the SM, which addressed nontariff barriers.
The position of Northern Ireland (NI) will be different to Great Britain (GB) because its trade remains aligned with EU rules. This implies the need for customs formalities and checks for goods flowing from GB to NI, as well as for EU tariffs levied on products at risk of moving into the Republic of Ireland. These barriers will negatively affect firms engaged in NI-GB trade, notwithstanding a recent agreement between the UK and the EU on the details of how the Protocol will be implemented.
WHERE ARE WE HEADING?
A major pro-Brexit argument has been the possibility of negotiating ambitious new FTAs. The UK has so far concluded ‘continuity agreements’ with some EU partners, covering 13% of UK trade, and an FTA with Japan, accounting for another 2% of UK trade. Other agreements are being negotiated (with the US, Australia, New Zealand, and the CPTPP bloc), in addition to the deal with the EU. Will these FTAs compensate for the losses of leaving the Single Market? The available evidence says no.
There are four main issues. First, the Single Market establishes deep integration that cannot be recouped with FTAs, even ambitious ones. Second, the share of trade with individual partners is small compared to the EU. Hence, to just break even, every one per cent drop in trade with the EU due to higher trade costs would require a much higher increase in percentage terms under a new FTA with a partner that accounted for less of UK exports.
Third, the UK is a much smaller player in trade negotiations (equivalent to only 15% of EU GDP) and may therefore be unable to obtain as many concessions from new partners as the EU. That said, the UK might strike deals better tailored to its specific interests.
Finally, negotiations are complex due to the difficulty of finding common ground on ‘behind-the border’ issues, such as regulatory measures, technical standards, and qualifications for professionals. Tariff reductions have little bite, as many are already low (except in agriculture). With the growing importance of e-commerce and digital services, nearly every digitally enabled services trade transaction (and many goods transactions too) are linked to data flows, making digital trade provisions vital. Yet, the provisions on data protection in the UK-Japan FTA are more lax than what the EU requires to allow personal data to flow across countries: this brings the UK closer to the standards in the CPTPP agreement, but raises worries about how the UK will align itself to the EU. More generally, diverging from higher EU standards to secure trade deals with ‘key partners’ is likely to lead to long and complex negotiations, or to impose costs on producers asked to comply with multiple sets of rules.
Most importantly, the UK is attempting to cut its losses from the break up with its neighbour by reaching out to large but faraway trading partners. Yet countries naturally trade more with markets that are large, geographically close and culturally similar. These ‘gravity’ forces are the main drivers of international trade, implying that the tight integration with the EU cannot be replaced by an ambitious trade policy directed towards Australia, Canada, Japan or the US.