Brexit: market access issues EUI-NOMICS 2016: DEBATING THE ECONOMIC CONDITIONS IN THE EURO AREA AND BEYOND Lionel Fontagné 29 April 2016
Focus Market access after Brexit UK member of the SEM Free movement of goods, services, people, capital Acquis communautaire, incl.: competition policy agricultural policy regional policy (external) trade policy After Brexit what would be the alternatives?
Alternatives to the SEM Isolation? NAFTA? Bilateral treaty with each Member State (=Switz)? Join the European Economic Area (=Norway)? Important: Leaving the EU does not mean leaving Europe: If we leave the EU, we cannot of course leave Europe. It will remain for many years our biggest market, and forever our geographical neighborhood (Cameron 2013). In all cases (potential) gains of future completion of the SEM would be missed: issue of the counterfactual
The fundamental trade offs UK is small in a large world: Curb policies of a large area (in) Sovereignty and questionable influence (out) Redesigning policies comes at a cost: Keep the ball rolling or bear the cost of: renegotiating market access designing alternative regional, competition and agricultural policies Geography of trade has fundamentals: SEM is natural trade and investment anchor Any shift from gravity forces will come at a cost
EFTA - EEA Norway, Switzerland, Iceland, Lichtenstein + 28: EFTA Zero tariff and quotas limited to manufacturing Bilateral trade agreements with each MS Limited access to the SEM in specific areas like services and agro-food products when Switzerland decides not to apply EU regulations Swiss still has to contribute to the EU budget (53 pc in 2011) Norway, Iceland, Lichtenstein + 28 : EEA Zero tariffs and quotas Free movement of goods, services, people and capital. Norwegian exports to the EU still subject to customs requirements and RoO. Possibly antidumping (e.g. 2006 salmon) Norway not represented in the Council of Ministers, in the European Parliament or in the European Commission: no input into the making of EU legislation. Norway still has to contribute to the EU budget (EEA enlargement agreement: 106 per cap in 2011. To be compared with UK 128 per cap).
Limited direct costs Large gains missed BIS (Department for Business Innovation & Skills) study: The economic benefits for the UK and the EU of completing the Single Market Aussilloux, Boumelassa, Emlinger & Fontagné (2010) Dynamic CGE, horizon: 10 years. NTM from KNO (EJ, 2009) 3 options: full implementation of the Single Market within 10 years and stay in UK opting out additional EU integration steps and Swiss model UK adopts the Swiss model and ties up with NAFTA (FTA, not of a TTIP type) Interpretation last column: -7.3% of income but most of it due to missed SEM completion gains (little action on tariffs and NTMs) Opting out: Opting out: Completion SEM % dev from b.a.u. Swiss model Swiss model + NAFTA UK national income 7.1-0.3-0.2
Limited direct costs Large gains missed CEP (Center for Economic Performance) The Costs and Benefits of Leaving the EU: Trade Effects, Dhingra, Huang, Ottaviano, Pessoa (2016) Static NQTM à la & Rodriguez-Clare (2014)**. Horizon: 10 years. NTM from Francois et al. (actionable US EU NTMs, based on surveys) Scenario optimistic : UK goes for the Swiss solution. NTM increase (1/4 of those faced by the US) Scenario pessimistic : UK leaves the SEM and faces MFN tariffs. NTM increase (3/4 of those faced by the US) Baseline (close to our scenario 1 above): within EU NTM decrease over time, although not to zero. Dynamic optimistic Optimistic Pessimistic % dev from b.a.u. (simple gravity) UK national income -1.3-2.6-6.3 **class of trade model where W change is f of trade elasticity and share of domestic expenditure. Close to structural gravity.
Conclusion UK to join EFTA and sign FTA with each MS (would be difficult to enter the EEA after exiting the EU) Keep free market access subject to RoO Dynamic losses: 6% to 7% of UK GDP Majority of the losses: dynamic missed opportunities associated with achievement of the SEM UK bet: without UK impulse, limited progress in terms of completion of the SEM or worse: any further progress even within the EU is now at risk hence counterfactual much less favourable than expected in quanti studies Not taken into account: possible internal consequences (Scotland to go for new independence referendum, stay in the EU and adopt ) impact of increase uncertainty on already sluggish growth in the EU impact on FDI