UK will suffer under all likely Brexit outcomes
A new study from the American think tank, the RAND Corporation projects that the UK economy is likely to suffer under the most probable post-Brexit trade scenarios.
The study also highlights how little power the UK has in the Brexit talks compared to the EU due to the fact that the UK has much more to lose.
Leaving the EU with no deal and operating under World Trade Organization (WTO) rules would lead to the greatest economic loss for the UK, reducing GDP by nearly 5 percent, or $140 billion, 10 years after Brexit, compared with EU membership.
Researchers at RAND built an economic model to measure the percentage and monetary changes in GDP growth, GDP per capita, trade and foreign direct investment for the UK, EU and US across the eight trade scenarios.
The WTO outcome would likely move the UK further from EU standards and over time and significantly increase non-tariff barriers, harm the ability of UK businesses to sell goods and services to EU countries.
This is bad as the service sector dominates the UK economy, contributing to around 80 percent of GDP.
The EU would also lose out under the WTO scenario, but the effect is relatively minor—a 0.7 percent drop in GDP 10 years after Brexit.
Of the scenarios analysed, the most beneficial to the UK economy would be a trilateral UK-EU-US agreement, a TTIP-like agreement under which UK GDP would be 2.2 percent higher—or 7.1 percentage points better than under the WTO rules scenario. This is even slightly better than continued EU membership. The EU and US are also forecast to make significant economic gains under this trade scenario.
However, a TTIP-like arrangement is seen as very unlikely in the current political environment on both sides of the Atlantic.
Other trade scenarios could be better for the UK than WTO rules but still lead to economic losses compared with EU membership.
These include ‘hard Brexit’ scenarios, such as a UK-EU free trade agreement (net UK GDP decline of 1.9 percent 10 years after Brexit), UK-US free trade agreement (2.5 percent decline) or UK-EU transitional zero-tariff agreement (2.1 percent decline), and ‘soft Brexit’ scenarios, such as the Norway option (1.7 percent decline), Switzerland option (2.4 percent decline) or remaining part of the Customs Union (1.8 percent decline).
The analysis clearly shows that the UK will be economically worse-off outside of the EU under most trade scenarios. The key question for the UK is how much worse-off,
said Charles Ries, Vice President, International at RAND and lead author of the report.
It is in the best interests of the UK, and to a lesser extent the EU, to achieve some sort of open trading and investment relationship post-Brexit.
The study used game theory insights to create a better understanding of how a wide variety of factors might affect the outcome of the Brexit negotiations between the UK and EU.
Based on these insights, the report recommends that the UK seek to move away from a ‘zero-sum game’ and towards a ‘positive sum game’ as negotiations proceed, to ensure the best possible deal for all parties. A UK strategy of trying to pick apart European unity would be unlikely to work since it is in the best interests of all EU member states to work together.
The EU is likely to engage with the UK during Brexit negotiations, but may see the benefit in adopting a ‘zero sum game’ approach. Europe’s top political priority is to discourage other member states from withdrawing.
Ries explains:
Based on our insights, it is in the best interests of the UK to cooperate with its EU partners to find a new relationship with Europe. This would preserve economic benefits for both sides, but also give the UK the freedom from EU rules which it seeks. However, the EU is likely to want to ensure that it does not give too much away to the UK during negotiations, and may seek to adopt a ‘zero sum game’ approach to preserve the union.
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