If the UK were to leave the European Union, its trade relations with the EU and the rest of the world would be affected.
How trade relations would be affected would depend upon what agreements the UK could reach to replace existing (and in-train) arrangements and when those would come into force.
Leaving the EU would have significant implications for British trade, because the EU is, among other things, a customs union and a “single” market. Being a customs union means that the member states do not impose tariffs or quantitative restrictions on goods traded among themselves and that they conduct a common trade policy with the rest of the world.
Being a single market means that common rules facilitate the circulation of goods, services, capital, and people among the member states. Thus leaving the EU would have implications for UK trade not only with other EU member states, but with the rest of the world as well. Rather than speculate about the possible economic effects of the UK’s exit, I will focus here on the key trading relationships that would be affected.
The UK’s key trade relationships
Exports of goods and services are equivalent to about 30 percent of the UK’s economic activity. In 2014 half of UK goods exports and about a third of services exports went to other EU member states, although three of the UK’s top ten export markets – the U.S., Switzerland, and China – are not EU members (see table). As access to the EU’s market matters to foreign firms investing in the UK, leaving the EU would have implications for investment into the UK, as well as for exports from it.
The EU is also the most important source of UK imports, accounting for slightly over half of goods exports and just under half of services imports. Three non-EU countries, China, the U.S., and Norway, however, rank among the UK’s most important suppliers.
UK’s main goods trade partners (2014)
|Exports£ million||Imports£ million|
Source: HM Customs and Revenue
Trade arrangements after exit
Leaving the EU would return control of trade policy to London. This would mean that the UK could choose to liberalize imports unilaterally. As the vast majority of products from the vast majority of countries in the world currently enter the UK duty free as the result of the UK’s membership in the EU and its existing preferential arrangements, this new authority could bring additional liberalization relative to the current situation in only a few cases. Some of these – notably China, Japan, and the U.S. – are, however, significant suppliers.
Alternatively, the UK could choose to increase its restrictions on imports from countries that currently have preferential access. Any increases in tariffs would likely be disciplined by the commitments made by the UK in the World Trade Organization (WTO) when a member of the EU.
Increasing tariffs would raise prices, but could offer protection to some UK industries. Increasing protection, however, would be contrary to the thrust of British trade policy for the past several decades.
Access to other countries’ markets rests on cooperation. As the UK is a member of the WTO, the default position if it left the EU would be that its goods would face the export market’s most favored nation tariffs.
Most developed countries, including the EU, have relatively low tariffs on industrial goods, but there are some tariff peaks (much higher tariffs) on certain products, and tariffs on agricultural goods are higher. The integration in services – within the EU and internationally – has not generally proceeded as far as in goods, so the loss of preferential access would have less significance, although financial services is one area were cooperation has gone further.
The expectation is that the UK and the EU would reach an arrangement granting each other preferential market access. The EU already has a variety of such arrangements with neighboring countries. For example, the European Economic Area is not a customs union, but extends EU single market rules to non-EU members: Iceland, Lichtenstein, and Norway.
The EU has a free trade agreement with Switzerland, which is supplemented by about 100 bilateral arrangements that extend EU rules in specific areas. The EU has a customs union with Turkey. Each of these arrangements has different implications for trade and for trade policy. The exact nature of a future arrangement between the UK and EU would depend on the outcome of negotiations between the two.
Leaving the EU would also affect the UK’s trade relations with other countries. The EU has a web of trade agreements that grant enhanced market access. Many of these agreements involve former colonies of the EU’s member states, and the UK would have to consider whether it wishes to continue to provide preferential access to its market in order to promote their development.
The EU also has preferential arrangements with some important UK export markets: Switzerland (4), South Korea (15), and Russia (18). Additionally, the EU has concluded a preferential trade agreement with Canada (17) and is negotiating such agreements with the U.S. (1) and Japan (14).
If it left the EU, the UK would have to negotiate preferential trade agreements with these countries or its firms would lose (or not gain) privileged access to their markets. This would put British firms at a disadvantage relative to their EU competitors.
The trade implications of leaving the EU will depend on what types of arrangements the UK would be able to conclude with its key trading partners, including the EU. Upon leaving the EU, the UK would be able to pursue its own trade agreements without having to compromise with other EU member states.
It might, therefore, prioritize different countries; for instance, pursuing an agreement with China. It could also pursue negotiating positions closer to its economic interests.
As trade agreements hinge on exchanges of granting greater access to one’s own market in exchange for access to the partner’s market, bargaining leverage hinges on how protected a market is and how valuable to others it is. The more protected your market and the larger your market, the more leverage you have and the better terms you are able to secure.
The UK would go from being part of the world’s largest market to being the fifth largest – one sixth the size of the EU. That suggests a significant reduction in negotiating leverage.
The UK on its own, therefore, might well not be able to secure access comparable to what it would get as a member of the EU.
Moreover, it is possible that by itself the UK’s market would not be sufficiently important to its trade partners for them to invest the effort to reach an agreement with it. U.S. Trade Representative Michael Froman indicated as much in October.
The trade consequences of the UK leaving the EU thus go far beyond the terms of access to the EU’s important market. The exact consequences would depend in large part on what arrangements the UK could come to with its key export markets, including the EU.