On 23 June 2016 the United Kingdom voted to leave the European Union. The Prime Minister, Theresa May, triggered Article 50 of the Treaty on European Union on 29 March 2017 to begin the process of exit. In this revision webinar we will be providing an update on developments in the debate over the direction the UK economy may take after the country leaves the European Union. In particular, our focus is on synoptic economics i.e. in identifying some of the micro and macroeconomic effects of leaving the customs union and the single market.
The EU, taken as a whole is the UK’s largest trading partner. In 2016, UK exports to the EU were £236 billion (43% of all UK exports). UK imports from the EU were £318 billion (54% of all UK imports).
The UK had an overall trade deficit of £82 billion with the EU in 2016. A surplus of £14 billion on trade in services was outweighed by a deficit of £96 billion on trade in goods.
The EU single market is built upon four key freedoms: Free Trade in Goods: Businesses can sell their products anywhere in the EU’s member states and consumers can buy where they want with no penalty Mobility of Labour: Citizens of EU member states can live, study and work in any other country. The aim is to improve the mobility of labour. Free Movement of Capital: Financial capital can flow freely between member states and EU citizens can use financial services such as insurance in any EU state. Free Trade in Services: Professional services such as pensions, architecture, telecoms and advertising can be offered in any member state.
Hard Brexit and soft Brexit are overall approaches, but the details matter a lot—for example the shape of deals made about specific industries or the eventual settlement regarding Northern Ireland. EU Brexit negotiator Michel Barnier said warned of “unavoidable” barriers to trade in goods and services if the U.K. leaves the customs union.
Norway is outside the customs union. Implements EU laws and directives and pays into EU budget but does not participate in EU legislation. Not party to FTAs with other countries via EU. The Norway option is highly unlikely because the UK government’s policy is not to have a soft Brexit
The European Free Trade Association (EFTA) is an intergovernmental group of countries that seeks to promote free trade and economic integration between its members. EFTA has four members: Iceland, Liechtenstein, Norway and Switzerland. Iceland, Liechtenstein and Norway are also members of the European Economic Area (EEA), along with all members of the European Union. Switzerland is unique because it is a member of the EFTA but not a member of the EEA.
EFTA (free trade agreement) – the Swiss model - a number of bilateral agreements on free trade for specific industries including much of the service sector. Free movement of labour still applies which is unpalatable for hard-liner Brexiteers in the Conservative Party. Financial services ‘pass-porting’ is not part of the Swiss agreement, partly because of an initial Swiss desire to retain their banking secrecy rules
Comprehensive Economic and Trade Agreement (CETA) - the Canadian model – free trade agreement for most areas notably excluding financial services.
WTO option Default option. Average EU tariff on UK exports of 3.2%. EU tariffs are generally low but are high on some goods, especially agricultural products. Members of the WTO have agreed to a shared set of rules and procedures to be followed in the trading relationships between members. This includes rules and procedures on the establishment of FTAs and customs unions. Under WTO agreements, members cannot normally discriminate between their trading partners
Key industries that many students might focus on are: agriculture, pharmaceuticals, chemicals, aviation, cars and universities Three sectors most reliant on the EU market for their revenues are mining and quarrying (think oil and gas) at 43% of the sector’s total revenues, manufacturing at 21%, and financial services at 10% Three sectors most reliant on the EU market for their inputs are manufacturing at 20% of total non-staff production costs, health services (mostly the NHS) and social care at 18%, and accommodation and food services at 15%.
Without a free-trade deal following Brexit, dairy products would experience the highest average import tariff rates of 42.1 percent, with a potential maximum rate of 122 percent.
Financial services is a key sector potentially affected by Brexit but a mass exodus from UK is most unlikely. Frankfurt and Dublin seem to be emerging as the main destinations for the relocation out of London, along with Paris, Luxembourg, Brussels Consultancy firm Oliver Wyman estimated in August 2017 that a hard Brexit could drive 31,000 to 35,000 jobs out of the UK across all financial services.
The divorce settlement: The UK and EU have agreed of the methodology for calculating the financial settlement, but a precise amount isn’t written in the agreement. However, while addressing Parliament, the PM confirmed this would be in the region of £35-39bn.
New UK-EU trade agreement likely to be based on ensuring market access for key industries which have already invested heavily in UK (e.g. cars, financial sector)
Economics of Brexit
The European Union and Brexit
The Edge – Economics Revision Webinar – February 2018
Section 1: The UK and the EU - Trade Patterns, Trade
Balances, Customs Unions and Single Market
Major Export Markets for UK Goods and Services
Country Value % of Total Cumulative
£ bn UK Exports Percentage (%)
1 United States 99.6 19.4 19.4
2 Germany 49.1 9.6 29.0
3 France 33.8 6.6 35.6
4 Netherlands 31.0 6.0 41.6
5 Irish Republic 26.7 5.2 46.8
6 Switzerland 21.0 4.1 50.9
Nearly a quarter of total UK overseas trade in goods and services is
done with the United States and Germany. Seven of the top ten
export markets for Britain are with European Union countries. This
emphasises the importance of a trade agreement after Brexit.
UK Trade Balance in Goods and Services with the EU
The UK runs a trade surplus with Ireland but large trade deficits
with countries such as Germany and Spain.
Source: Office for National Statistics
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK trade in goods and services balance with selected EU countries,
2003 to 2014, annual balance, £ billion
France Germany Ireland Netherlands Spain Rest of EU
Enlargement of the European Union
• Since 1957 then there have been six main waves of
enlargement of the European Union
• 1973 (UK, Ireland and Denmark)
• 1981 (Greece)
• 1986 (Portugal and Spain)
• 1995 (Austria, Finland and Sweden)
• 2004 (Latvia, Lithuania, Cyprus, Malta, Slovenia, Slovakia,
Estonia, Hungary, Czech Republic, Poland)
• 2007 (Bulgaria and Romania)
• 2013: (Croatia)
• In June 2016 the UK became the first member nation to
vote to leave the European Union
• Article 50 was pressed in March 2017
Revision on Customs Unions
European Union Southern African
A customs union comprises a group of countries that agree to:
1. Abolish tariffs and quotas between member nations to
encourage free movement of goods and services.
2. Adopt a common external tariff (CET) on imports from non-
members countries. In the case of the EU, the tariff imposed on,
say, imports of South Korean TV screens will be the same in the UK
as in any other EU country
Revision on Single Markets
Free movement of
Free trade in goods
Free trade in services
Free movement of
Section 2: Brexit Negotiations – Options for the UK
once it leaves the European Union
There are many ways to leave the European Union!
A Future Outside of the EU – the Norway Option
• The so-called Norway option allows for the free
movement of goods, services, capital, and people
• But Norway has no formal input into shaping the rules of
the single market although all new rules must be adopted
• Annual fee is paid by Norway to access EU single market
• Under the Norway option, all UK banking and financial
service regulation would be ‘mutually recognised’ as good
enough, and thus all EU members would have to
automatically grant full access to UK-based firms
• Norway option does not include free trade in food, or
participation in EU agriculture subsidies (CAP) or in the
EU’s regional policy, and nor does it require Norway to
adopt EU trade policies with respect to non-EU nations.
A Future Outside of the EU – Joining EFTA
• EFTA is the European Free Trade Area
• Financial services are not included in the Swiss option
• Switzerland is the most prominent EFTA member and is
required to strike bilateral treaties with the EU to secure
access to the Single Market for specific services only.
• In 2014 the Swiss voted in favour of restricting migration.
The EU has made it clear that this is incompatible with
access to the Single Market.
• Switzerland makes a smaller per capita contribution to the
EU budget than Norway in the EEA, to reflect the lower
level of market access.
A Future Outside of the EU – A Canada Option
• Is the recent Canada-EU trade deal an option for the UK?
• EU-Canada Comprehensive Economic and Trade
Agreement (CETA) was (finally) signed in autumn 2016
• Covers mainly free-trade in goods rather than services
• Canada has no say in in setting EU regulations or formulating
• Canadian banks have no access to the EU banking passport
system that would have allowed its banks and financial services
to trade freely.
• Freedom of movement clauses in CETA are primarily focused
• CETA does not oblige Canada to pay anything into the EU
budget, sign up to the bloc's four freedoms (such as free
movement), or abide by European Court of Justice (ECJ) rulings
Outside of the EU – WTO Option
• WTO is the World Trade Organisation
• UK will be completely out of the EU single market.
• It will face the EU’s external tariff on goods and services in the
absence of a comprehensive free trade agreement
• Gains in having more control over migration policy and freedom
to trade with rest of the world including establishing free trade
agreements with emerging countries
• As of 29 July 2016, there are 164 member countries of the
• Members of the WTO have agreed to a shared set of rules
and procedures to be followed in the trading relationships
Section 3: Micro and Macroeconomic Impact of the UK
leaving the European Union
Micro & Macro impact of decision to leave single market
Micro aspects of the UK’s exit from the EU
Macro aspects of the UK’s exit from the EU
Trade patterns &
Public services Tax systems
Micro: Food and Farming in the UK Post Brexit
• Food and drink manufacturing:
• Largest manufacturing sector in the UK, with a 16 percent
share of total manufacturing
• Industry fears disruptions to the supply chain and the cost of
accessing imported food & drink manufacturing technologies
• Only 60% of UK-grown food is consumed in the UK and the EU
is the UK's largest trading partner
• Industry fears not being able to replace thousands of
employees who work as farm labourers
• EU's Common Agricultural Policy (CAP) makes up to 60% of UK
farm incomes through EU subsidies. The government has
promised to match these direct payments at least until 2020.
But future scale of farm income support remains uncertain.
Food import tariffs from the EU without a trade deal
Average import tariff rate and maximum rate of EU Common Customs Tariff (CCT) applied
rates for food to the United Kingdom (UK) in 2016, by product category
Animal products Dairy products Sugars and
Average import tariff rate Max rate in category
EU-born workers in the UK farming industry
Number of EU-born individuals employed in agriculture in the UK from 2011 to 2015
2011 2012 2013 2014 2015
Net inward migration for the UK economy
Migration figures of the United Kingdom from 2012 to 2017 (in 1,000)
-352 -318 -316 -308 -311 -342
2012 2013 2014 2015 2016* 2017*
Inflow Outflow Net migration
Will London retain competitive advantage in services?
• Pre-referendum, many argued that London’s pre-
eminence as a global / EU centre for financial and related
business services could be threatened by Brexit
• Impact depends crucially on the Brexit deal that is
eventually negotiated especially with passport rights
• Passport for banks and financial firms allows firms authorized by
any EU Member State (MS) to establish branches or provide
cross-border financial services in other MS
• London retains many strengths:
1. Large pool of highly skilled labour including critical mass
of knowledge on financial services, accounting and law
(comparative advantage based on strong human capital)
2. Language, strengths of the UK legal system and a highly
Brexit – UK’s Net Contribution to the EU Budget
Forecasted net UK contributions to EU budget from 2014/15 to 2019/2020 (in £m)
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Impact of Brexit on Developing Countries
Brexit is likely to have effects on developing countries over time. Much depends on
the nature of the Brexit deals that the UK makes with the EU and other nations +
the impact of Brexit on UK growth and government finances.
“The UK’s vote to leave the EU comes at a time when many developing economies
are already facing multiple shocks: lower oil and commodity prices, a stronger US
dollar and a slowing Chinese economy.” Source: UK ODI Report, July 2016
Brexit: Some “it depends on” evaluation points
Post Brexit Depends on scope / scale / timing of trade deals with EU and other
countries. How strong will the UK’s bargaining power be in
complicated discussions with EU27?
Depends on whether UK can keep significant numbers of highly-
skilled EU workers post Brexit in those industries in which the UK has
comparative advantage + staffing the NHS / social care
Depends on the impact of Brexit on UK universities - in 2012,
universities generated an annual output of £73 billion, contributed
2.8% of GDP and supported over 750,000 jobs
Depends on the ability of UK manufacturing businesses to modify
their existing supply-chains and their success in pivoting export sales
to non-EU countries including far-east Asia
Depends on the the impact of higher trade costs from being outside
the EU on UK productivity and innovation - the long-run dynamic
effects might be bigger than the static effects e.g. on consumer prices
European Union and Brexit
Economics Revision Webinar – February 2018