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Economics of Brexit


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These are the slides from a February 2018 revision webinar for A level economics on issues relating to the UK's exit from the European Union.

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Economics of Brexit

  1. 1. The European Union and Brexit The Edge – Economics Revision Webinar – February 2018
  2. 2. Section 1: The UK and the EU - Trade Patterns, Trade Balances, Customs Unions and Single Market
  3. 3. Major Export Markets for UK Goods and Services Export Sources 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.
  4. 4. 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 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 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
  5. 5. 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
  6. 6. Revision on Customs Unions European Union Southern African Customs Union Eurasian Customs Union 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
  7. 7. Revision on Single Markets Free movement of labour Free trade in goods Free trade in services Free movement of capital
  8. 8. Section 2: Brexit Negotiations – Options for the UK once it leaves the European Union
  9. 9. There are many ways to leave the European Union!
  10. 10. 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.
  11. 11. 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.
  12. 12. 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 product standards • 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 on business-people. • 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
  13. 13. 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 WTO • Members of the WTO have agreed to a shared set of rules and procedures to be followed in the trading relationships between members.
  14. 14. Section 3: Micro and Macroeconomic Impact of the UK leaving the European Union
  15. 15. Micro & Macro impact of decision to leave single market
  16. 16. Micro aspects of the UK’s exit from the EU Labour market Prices for consumers Market competition Business profits Individual sector effects Environmental policies
  17. 17. Macro aspects of the UK’s exit from the EU Unemployment Trade patterns & trade balances Inflation and interest rates Real living standards Public services Tax systems Developing countries impact Competitiveness and growth
  18. 18. 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 • Farming: • 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.
  19. 19. 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 10.9% 6.8% 20.7% 17.7% 42.1% 25.2% 14.9% 182% 176% 166% 138% 122% 81% 52% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 200.0% Fruit, vegetables, plants Oilseeds, fats and oils Beverages and tobacco Animal products Dairy products Sugars and confectionery Cereals and preparations Importtariffrate Average import tariff rate Max rate in category
  20. 20. EU-born workers in the UK farming industry Number of EU-born individuals employed in agriculture in the UK from 2011 to 2015 15,957 19,138 18,784 22,371 22,517 0 5000 10000 15000 20000 25000 2011 2012 2013 2014 2015 Numberofindividuals
  21. 21. Net inward migration for the UK economy Migration figures of the United Kingdom from 2012 to 2017 (in 1,000) 536 493 552 644 638 588 -352 -318 -316 -308 -311 -342 184 175 236 336 327 246 -600 -400 -200 0 200 400 600 800 2012 2013 2014 2015 2016* 2017* Migrationinthousands Inflow Outflow Net migration
  22. 22. 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 convenient time-zone
  23. 23. Brexit – UK’s Net Contribution to the EU Budget Forecasted net UK contributions to EU budget from 2014/15 to 2019/2020 (in £m) 9,054 8,385 10,178 8,049 8,908 9,374 0 2000 4000 6000 8000 10000 12000 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 NetcontributionsinmillionGBP
  24. 24. Impact of Brexit on Developing Countries Trade Foreign investment Economic growth Aid Migration and remittances Global collaboration 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
  25. 25. 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
  26. 26. European Union and Brexit Economics Revision Webinar – February 2018