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The headline figures of Open Europe’s Brexit report have attracted a lot of attention. But what lies behind them? Open Europe’s Raoul Ruparel explains.
26 March 2015
As has been widely covered, our Brexit report found that, if the UK left the EU, its GDP could be hit by a permanent loss of up to 2.2% in a worst case scenario or, depending on certain choices, a permanent boost of up to 1.6%. Within this the most likely range is between -0.8% and +0.6% GDP impact. But what underlies these figures?
In the worst case Brexit scenario the relationship between the UK and EU reverts to WTO most favoured nation tariffs. While the EU’s applied MFN tariffs are generally low, the introduction of tariffs on the significant volume of trade between the UK and REU results in a fairly sizeable cost of -0.95% GDP.
Non-tariff barriers (NTBs)
Foreign Direct Investment (FDI)
The result of our model in FDI terms is quite surprising. In the medium and long run there is little distortion or FDI as it is replaced by domestic and other foreign investment. The cost is negligible. Whether this will happen to an extent depends on what capacity the economy has to replace lost investment and the political decisions the UK makes. There will surely be some short term uncertainty and disruption but in the longer run, the long-term attractiveness of the UK is likely to depend on whether it adopts pro-competitiveness policies and markets itself as a free-trading economy.
Striking a comprehensive FTA with the EU
An important component of the UK prospering outside the EU is striking a comprehensive FTA which maintains liberal access to the single market and limits the impact of NTBs and the border costs as far as possible. Under our analysis this delivers a 1.2% GDP boost relative to the worst case WTO scenario.
Opening up to global trade
So, again, one of the central messages of the report is that the costs and benefits will depend on political decisions taken both in the UK and Europe – if the latter wants to help avoid Brexit then it should look to maximise trade benefits and deregulate.