Tariffs and employment A report for Britain Stronger in Europe June 2016
2 Disclaimer Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor the report s authors will be liable for any loss or damages incurred through the use of the report. Authorship and acknowledgements This report has been produced by Cebr, an independent economics and business research consultancy established in 1992. The views expressed herein are those of the authors only and are based upon independent research by them. The report does not necessarily reflect the views of Britain Stronger in Europe. London, June 2016
3 Contents 1 Introduction 4 2 Overview of the existing evidence 5 3 Impact on jobs 9
4 1 Introduction This report for Britain Stronger in Europe examines the linkages between exports and employment within the UK. In particular, it aims to understand the extent to which higher trade tariffs and a consequent reduction in exports could lead to lower levels of employment in the UK. British exit from the European Union ( Brexit ), if it were to occur, could potentially lead to higher tariffs if the UK is unable to negotiate a new trading arrangement with the EU. Furthermore, EU membership grants the UK additional easing of restrictions when it comes to trade with markets that lie outside the EU but with which the EU has negotiated a trade treaty. There are currently 68 countries with which the EU has such free trade agreements ( FTAs ). While it is impossible to know for certain what would happen to these trade arrangements in the event of a UK exit from the EU, for the purposes of this report we focus on a situation where the UK would cease to have access to these arrangements in the event of Brexit and would instead treat and be treated by its trade partners under the Most Favoured Nation (MFN) principle of the World Trade Organisation (WTO). This counterfactual scenario is also commonly referred to as the WTO option for the UK. MFN is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must receive equal trade advantages as the "most favoured nation" by the country granting such treatment. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. Critically, as far as the Brexit debate is concerned, regional free trade areas and customs unions are exceptions where preferential treatment is allowed under the WTO rules. The higher tariffs that are associated with the WTO scenario would be associated with a significant reduction in exports. When higher non-tariff barriers and the impacts on services and other products is considered, the job losses due to lower exports could be between a range of 487,000 to 794,000. It is important to note that these reductions in employment arise due to the impact on exports and are therefore an underestimation of the total impact on employment, which would be impacted by wider economic factors. This is in line with other studies that have been made, notably the PWC s assessment of Brexit on the UK economy.
5 2 Overview of the existing evidence A number of studies, including recently Cebr studies, have been produced that consider the linkages between EU membership and UK exports. Below, we provide a brief overview of some of these studies, including their key findings. HM Treasury Impact Asssessment The HM Trasury Impact Assessment for the UK s membership of the EU estimates that 3.3 million jobs are linked to exports from the UK to other EU countries. The Impact Assessment states that the EU has supported UK exports by making trade easier: Trade with the EU has been made easier because of the unique way the Single Market reduces barriers and costs to trade. It removes tariffs and quotas, creates a customs union which reduces cross-border costs, and creates a level playing field, for example, by reducing non-tariff barriers (such as regulations, standards or specifications required to trade). Increasingly in today s global economy, these non-tariff barriers are the most significant impediment to trade, particularly for advanced economies like the UK. Estimates indicate that on average they can add 2 or 3 times as much to the cost of traded goods as tariffs. The Single Market has done more to reduce such barriers than any other trade agreement. Furthermore, the Impact Assessment emphasises that the UK gains access to the benefits of a significant amount of trade deals by being a member of the EU: Increased trade with the EU has not come at the expense of trade with the rest of the world. With an economic weight 5 times the size of the UK, the EU has been able to negotiate access to global markets through multilateral trade agreements and, increasingly, bilateral agreements with other countries. Once current bilateral negotiations are completed over 80% of UK trade will be with either the EU or through EU Free Trade Agreements (FTAs). Past Cebr research Cebr has produced a number of studies over the past year examining the linkages between EU membership and UK exports, including an assessment of the linkage between exports and jobs. Our January 2016 research for Britain Stronger in Europe considered the extent to which UK trade with non-eu countries, with which the EU has a free trade agreement, could be impacted by Brexit. In particular, we considered the impact of a reversion to WTO Most Favoured Nation tariffs on UK exports and imports. We found that exporters stand to lose 267 million in annual export revenue from the change in trading regime with these countries. This figure does not consider the potential impact of Brexit on trade with the EU itself, which would be much larger in magnitude. In addition, Cebr has produced research estimated the breakdown of the 3.3 million jobs linked to UK exports to the EU, split by industry. These estimates are outlined in the table below. Direct employment refers to jobs directly linked to exports to the EU, while indirect employment captures second round economic effects, such as jobs supported along the supply chains of exporting companies.
6 Table 1: Jobs linked to UK exports to EU countries, by sector Source: HM Treasury, Cebr analysis
7 PwC/CBI Research Leaving the EU: Implications for the UK economy In February 2016, the Confederation of British Industry (CBI) commissioned PricewaterhouseCoopers LLP (PwC) to provide a detailed quantitative assessment of the possible implications for the United Kingdom (UK) economy as a result of leaving the European Union (EU). PwC used a computable general equilibrium (CGE) model to estimate the impacts on the UK economy in two EU exit scenarios relative to an alternative or counterfactual scenario in which UK citizens voted to remain part of the EU. The two scenarios considered were: 1. FTA scenario: The UK exits and negotiates a free trade agreement (FTA) with the EU, based on tariff-free trade in goods (but not services). The UK would have to implement EU standards on goods supplied to the EU, but otherwise would not be bound by the four freedoms of the Single Market. The UK grandfathers all existing FTAs that the EU has with thirdparty countries after it leaves the EU. It also uses its freedom to pursue its external trade policy by negotiating an FTA with the US. However, there could also be some regulatory divergence between the UK and EU over time, leading to an increase in non-tariff barriers. 2. WTO scenario: The UK exits the EU and then trades with the EU on the World Trade Organisation s (WTO) most favoured nation (MFN) basis, which means that the UK would no longer enjoy tariff-free trade in goods with the EU. There could also be some regulatory divergence between the UK and EU over time, leading to an increase in non-tariff barriers. PwC also assumes that current FTAs between the EU and third-party countries no longer apply to the UK once it exits the EU, and trade with those countries reverts to a WTO MFN basis between 2020 and 2026 until new arrangements are put in place. The UK could use its freedom to pursue its external trade policy by negotiating an FTA with the US, but PwC assumes this takes longer than in the FTA scenario to come into force. The estimated economic impacts of these scenarios are outlined in the table below. It is estimated that the WTO scenario would leave exports 9.8% lower than under a stay in scenario by 2020. Table 2 PwC estimates of the impact of Brexit on exports and GDP, compared with status quo scenario FTA scenario WTO scenario 2020 2025 2030 2020 2025 2030 Exports -3.6% 0.4% 0.7% -9.8% -8.4% -6.0% Total impact on GDP -3.1% -1.1% - 1.2% -5.5% -4.1% -3.5% Source: PwC
8 Euler Hermes research The economic research team of Euler Hermes, the credit insurance company, produced its own estiamtes of the impact of Brexit on the UK economy in November 2015 1. Euler Hermes modelled two different Brexit scenarios: 1. A soft leave scenario - an exit with a Free Trade Agreement (FTA) with the EU post-2019. 2. A hard leave scenario with no FTA with the EU and no FTA with the non-eu markets currently under FTAs. The impacts they estimate are outlined in the table below. Table 3 Euler Hermes estimates of the impact of Brexit 2019 Stay Soft leave Hard leave Real GDP growth 1.7% 0.2% -1.3% Goods export gains ( bn) 20-9 -30 Services export gains ( bn) 14-5 -11 Source: Euler Hermes Cumulatively, over the years to 2019, a hard leave scenario would lead to a 60bn decline in goods exports. In addition, Euler Hermes estimate a cumulative 37bn decline in services exports implying a 97bn aggregate reduction in exports by 2019. World Trade Organisation The World Trade Organisation has warned that leaving the European Union would cost British consumers 9 billion pounds in annual additional import tariff. In addition, UK exports would also face 5.5 billion of new tariffs in overseas markets 2. 1 http://www.eulerhermes.com/mediacenter/lists/mediacenter-documents/economic-insight-what-brexit-means-for-europe- May2016.pdf 2 http://www.reuters.com/article/us-britain-eu-wto-iduskcn0yg1c8
9 3 Impact on jobs Here, we provide an estimate of the impact of reduced levels of exports under a WTO scenario on employment in the UK. Note that, here, we strictly look at the change in employment related to lower levels of exports. We do not consider, for example, the extent to which investment and consumer spending might decline (or indeed increase) following a UK exit from the European Union. This means our estimates are an underestimation of the overall impact of Brexit on employment. As well as our own estimate of the likely decline in exports that would occur, we have considered the estimates of PwC and Euler Hermes, translating their employment declines into a jobs estimate based on the predictions of Cebr s UK Model for the associated declines in exports. Table 4 Impact of a WTO MFN scenario on exports and employment 2019/20 Source Euler Hermes study Brexit: What does it mean for Europe PwC study for the CBI Estimated decline in exports compared with status quo 97bn decline in goods and services exports in 2019, compared with counterfactual scenario. A 9.8% reduction in exports in its WTO scenario for 2020. Cebr estimate of reduction in employment due to decline in exports 794,000 goods and services jobs 487,000 goods and services jobs NB: ROW HERE HAS BEEN DELETED Our conclusion, therefore, is that the job losses due to lower exports that would arise from the UK leaving the EU and adopting the WTO model could be between a range of 487,000 to 794,000.