11 May 2017

VoxEU: Options for a ‘Global Britain’ after Brexit

Brexit scenarios

The benchmark for the alternative scenarios is Brexit itself. The trade effects on the global economy in the case of a hard Brexit – that is, the UK leaves the EU and all trade agreements that the EU has with the rest of the world – are depicted in Figure 1. On the horizontal axis, countries are ranked according to their GDP per capita, and on the vertical axis the percentage change in value-added exports (VAX).[3]

As Figure 1 shows, a hard Brexit scenario has a strong negative impact on the value-added exports of the UK, decreasing these exports by almost 18%, mainly because trade with the (remainder of the) EU becomes more expensive.  So what about the alternatives, such as a US-UK trade deal or a trade deal between the UK and the rest of the world? Figures 2 and 3 give the answer.

The main effect of the trade agreement between the UK and the US is that it increases the value-added exports for both countries by approximately 2%. For the UK, this implies that the negative impact of Brexit is only marginally offset by a bilateral trade agreement with the US (compare the -18% in Figure 1 with the -16% in Figure 2).  Easier access to the US market compensates the trade loss of Brexit to some extent, but within the logic of the gravity model the US is further away and thereby less attractive and relevant as a trade partner.

What happens if the UK goes for a hard Brexit but at the same time manages to strike a trade agreement with all other countries outside the EU in our sample? As Figure 3 shows, this scenario would indeed provide a boost for the value-added exports of the UK and many other countries.  For the UK, it is still the case that the impact of a combination of hard Brexit with a true Global Britain scenario is negative to the extent that its value-added exports fall by more than 6%.  The main reason is distance – although the ‘rest of the world’ is large, it is also distant to the UK, not just in the sense of actual distance (compared to the EU) but also with respect to cultural, institutional, legal, and other differences that act as impediments to trade. The net effect of more access to the rest of the world and a hard Brexit is such that it is hard to see how Global Britain can be a viable alternative to or substitute for the UK’s current EU membership.

Figures 2 and 3 still describe relatively optimistic scenarios, where it is possible to negotiate new trade deals. However, it is not impossible that the Brexit will be part of larger anti-EU wave that possibly results in the dissolution of the EU itself.  Many current national elections offer voters the option to cast an anti-EU vote. In some EU countries, these parties are popular, increasing the likelihood of another exit. The trade effects of such an extreme situation are much more dramatic than those depicted in Figure 1; it is not only the UK that would experience a significant reduction of international trade, but all other countries as well (see Brakman et al. 2017 for these additional scenarios).

Conclusion

The UK government states that it is aiming to replace the UK’s membership of the EU by other, broad trade agreements. However, at this stage it is not clear what these new trade agreements will look like and which countries could be involved. What are the alternatives for the UK government? A US-UK trade deal? A more extreme worldwide trade deal? If the UK government aims to compensate for the large negative trade shock of Brexit, the options seem limited. Based on existing empirical evidence on trade agreements, our conclusion is simple. If the UK wants to limit the negative trade effects of Brexit, the UK has no trade-enhancing alternative to an agreement with the EU that essentially mimics the situation in which the UK is a member of the EU.

Full article on VoxEU

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