The authoritative source for independent research on UK-EU relations

06 Jun 2017


UK in the world

Unlike some other countries – the US and France spring to mind – trade has not been a major issue in recent UK elections.

This reflected both EU membership and a broad political consensus that, within the EU, the UK should argue for a relatively liberal approach. Brexit, however, will mean the most fundamental reorientation of UK trade policy in forty years, so it not surprising that it is much more prominent in manifestos for this election.

The Liberal Democrats would stay in the single market and the customs union. Free movement of goods, services, capital and people would continue, and trade policy would still be set at the EU level. The loss of market access that would follow from leaving the EU would be minimized. Labour are less specific, to the point of inconsistency – they retain the option of being in the single market and the customs union, but also say that Brexit will mean an end to free movement, which is inconsistent with single market membership.

The Conservatives’ plans are rather more detailed. Immigration controls are central to their Brexit plan, which means that we will leave the single market, while the aspiration to do new trade deals with countries outside the EU means leaving the customs union. Together, this means a “hard Brexit”. If there is no new deal with the EU after the two-year period – the hardest possible Brexit – the UK would revert to World Trade Organization rules.

As a WTO member, the UK’s exports to the EU and other WTO members would be subject to the importing countries’ “most favoured nation” tariffs. This would raise the cost of exporting to the EU for UK firms due to higher tariffs and higher non-tariff barriers like customs checks and divergence in product standards.

Trade in services would also be subject to WTO rules. Since the WTO has made far less progress than the EU in liberalising trade in services, this would mean reduced access to EU markets for UK service producers. The Conservatives are also committed to seeking “a deep and special partnership including a comprehensive free trade and customs agreement.” But there is no mention of the compromises that might be required – that the UK might effectively have to sign up to EU standards with relatively little input and accept the de facto jurisdiction of the European Court of Justice in some respects – to secure a genuinely comprehensive agreement.

It is notable that there is absolutely nothing that will reassure key UK sectors, like pharmaceuticals, the financial sector, and the automotive industry, whose regulatory position, access to markets, or supply chains are threatened by Brexit. So what implications would this have in economic terms? The resulting reduction in trade would reduce incomes in the UK. Estimates vary and are highly uncertain, but the consensus among economists is that these impacts would be large. For example, recent research implies trade with the EU would fall by about 40%, reducing GDP by about 3% (or 2.4% net of the membership fees) every year.

Foreign investment would also fall, perhaps by 20%, further reducing GDP; and reductions in migration (as discussed in the immigration section) would further accentuate the impacts. Outside the EU, the UK would be free to set its own trade policy, which might help make up for the loss in trade and investment with the EU. The Conservatives’ ambition is that the UK will be the “world’s foremost champion of free trade..a global champion for an open economy, free trade, and the free flow of investment, ideas and information.”

If the UK chose to unilaterally cut its tariffs to zero, consumers and firms would face lower import prices and competition among UK businesses would rise. But with tariffs already low, the gains would be small – estimated at perhaps 0.3% of GDP – and commitments elsewhere in the manifesto appear to rule this out. Instead there is an emphasis on continuity – as well as seeking a comprehensive agreement with the EU, the UK will replicate both the EU’s current WTO arrangements and its existing FTAs with third countries.

This appears to be a greater short-term priority than agreement with third countries, reflecting the reality that such deals are unlikely in practice to compensate. Even a trade deal with the US – an economy of comparable size to the EU – that gave us tariff-free access to the US market would only yield benefits of about 0.3% of GDP. This is because the US is geographically further away and because it operates a very different set of regulations that would be difficult to harmonize or mutually recognize.

Countries like India and China are difficult to negotiate with, and will have their own complications like demands for easing migration controls or reluctance to open up their services sectors to UK businesses. Outside the single market, the UK would be free to set its own regulatory standards, but all parties rule out reducing standards for labour rules and environmental protection below EU levels – indeed all propose to increase some employment rights – so any GDP gains here are likely to be minimal.

Indeed, despite the rhetoric, commitments elsewhere in the Conservative manifesto – for example, to increase protection from foreign takeovers for British companies, and to “set up new frameworks for supporting food production and stewardship of the countryside” [while maintaining at least current levels of financial support] point, if anything, to a significantly less liberal and deregulatory approach than is currently the case within the EU.

The recently retired Permanent Secretary of the Treasury, Nick Macpherson, said that he was “struck by the protectionist tone to the so-called industrial strategy in Tory manifesto…Clarke, Brown, Darling and Osborne had many differences but when it came to trade they were Gladstonian”.

Obviously economic predictions are not always accurate. But the evidence on the connection between trade policy and trade patterns points in one direction. Falls in trade and investment, under either Conservative or Labour plans, are likely to have a large and long-lasting impact on the British economy. Neither of the manifestos addresses this point, though it casts doubt on the ability to deliver on many of the pledges they make.

By Dr Swati Dhingra, lecturer in economics at LSE.


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